The Federal Tax Authority (FTA) has published a detailed guide that clarifies important points for businesses in UAE free zones, especially those that deal with the question of whether they are eligible for a corporate income tax rate of zero percent.
A New FTA Guide Addresses Grey Areas in Free Zone Taxation
A comprehensive guide issued by the Federal Tax Authority (FTA) sheds light on key considerations for companies operating in free zones within the UAE, particularly concerning eligibility for zero percent corporate income tax. Experts emphasize the importance of meeting specific criteria to qualify as a Free Zone Person (FZP) and avail of tax benefits, as outlined in the latest guidance.
Tax Zone Classification
Thomas Vanhee, a partner at Aurifer Middle East Tax Consultancy, underscores the necessity for free zone entities to possess audited financial statements, demonstrate substance, and generate income from qualifying activities to attain FZP status. Notably, Vanhee clarifies that the tax regime operates on a binary basis, where entities either fully qualify or are entirely disqualified, except in cases involving permanent establishments.
Highlighting disqualification conditions, Vanhee points out that if a free zone entity earns non-qualifying income surpassing either Dh5 million or 5 percent of its total income, the entity's income becomes entirely disqualified. Nimish Goel, a partner at WTS Dhruva, commends the FTA's new guide for addressing several ambiguities, including the eligibility of zero percent corporate tax benefits on high sea sales, domestic bills for exports outside the UAE mainland, and cryptocurrency investments.
Moreover, Goel emphasizes that interest income from surplus funds is considered non-qualifying and underscores the significance of director decisions for free zone holding companies without employees to meet substance test requirements. Vanhee advises taxpayers to verify with their free zones whether they are classified as free zones or designated zones for corporate income tax purposes.
He elucidates that the distribution of goods from a designated zone to qualify as a qualifying activity does not mandate physical entry into the UAE, allowing for third-country trading (high sea sales). Vanhee further clarifies that even if goods are traded between mainland locations, they can still constitute qualifying activities if they are imported and subsequently exported from a designated zone.
The processing of goods encompasses a broader scope than mere manufacturing, benefiting commodities traders who are not required to trade goods on a commodity exchange to qualify. Vanhee underscores that investing excess cash as a free zone person qualifies as financing for related parties, thereby constituting a qualifying activity. Moreover, he highlights that a person in a qualifying free zone need not prepare separate financial statements for qualifying income and other income.
