The FTA’s Corporate Tax Guide for Free Zone Persons is a crucial resource for businesses in UAE free zones. It not only outlines the qualifications and requirements for the 0 percent Corporate Tax rate but also provides detailed instructions on managing and reporting income to maximize tax benefits.
UAE Corporate Tax Guide
The UAE’s Federal Tax Authority (FTA) has published a comprehensive guide detailing how corporate tax regulations apply to businesses operating within the country’s free zones. This guide clarifies the conditions companies must meet to qualify for the 0 percent corporate tax rate on certain income streams.
Qualifying Free Zone Person (QFZP) Criteria
At the heart of the new regulations is the concept of a “Qualifying Free Zone Person” (QFZP). To achieve QFZP status, a free zone business must meet specific substance, reporting, and operational requirements. The guide outlines that a QFZP must derive income solely from activities classified as “qualifying” under the law. These activities include manufacturing, trading, and services. Additionally, the business must maintain adequate assets, employ sufficient staff, and incur operating expenditures proportional to its activities.
Additionally, the business must comply with transfer pricing regulations and have its financial statements audited. According to the guide, "The Free Zone Person must carry out its primary income-generating activities related to transactions and operations that qualify for the 0 percent corporate tax rate within a free zone (for distribution activities, this must occur within a designated zone)."
For research and development (R&D) activities, a QFZP can outsource its core income-generating tasks to any entities within the UAE or non-related parties outside the UAE, provided it maintains adequate supervision over the outsourced activities. This flexibility is crucial for businesses focusing on developing intellectual property.
The guide provides detailed instructions on how to apply the 0 percent tax rate to qualifying income streams while subjecting non-qualifying income to the standard 9 percent corporate tax rate. Qualifying income includes revenue from manufacturing, commodities trading, and certain services. Income from foreign operations outside the UAE is generally exempt from tax, whereas domestic operations outside the free zone are taxed at 9 percent.
The document specifies the approved “Qualifying Activities” list, covering various sectors like manufacturing, holding intellectual property, and reinsurance services. Each category has defined criteria, scope, and potential ancillary activities, ensuring clarity for businesses aiming to qualify for the 0 percent tax rate.
Particular attention is given to income from intellectual property and immovable property. For instance, the guide includes formulas to calculate the portion of intellectual property income eligible for the 0 percent tax rate based on associated expenditures. Real estate income may also qualify if it is linked to commercial properties within the free zone.
With the UAE Corporate Tax now fully effective after a grace period, the guide provides essential information for the numerous companies operating in the country’s free zones. These zones offer incentives such as foreign ownership allowances and streamlined processes, making them attractive to businesses.
The 134-page guide delves into significant detail on various aspects of the tax regulations, offering a clear roadmap for free zone businesses to navigate the new tax landscape. By meeting the QFZP criteria and adhering to the specified guidelines, companies can benefit from substantial tax savings, thereby enhancing their competitive edge in the UAE’s dynamic business environment.
This guidance ensures that businesses can effectively leverage the incentives offered by the UAE’s free zones while complying with the federal tax laws.
