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Tax Implications on Freezones

Tax Implications on Freezones as per UAE Corporate Tax Law

The corporate tax implications on Free zone companies are different from those of mainland companies. However, in order for a freezone company to avail the benefits of the corporate tax law, they should be eligible for the same.

A freezone company should be a “Qualifying Freezone Person” (QFZP) to be eligible for the same as per Article 18, Federal Decree law no. 47. It mentions that a QFZP is a freezone person that meets the below conditions: –

  1. a) Maintain Adequate substance in the State.
  2. b) Derives Qualifying Income
  3. c) Has not elected to be subject to corporate tax
  4. d) Maintains Transfer Pricing documentation including a master file and a local file and a disclosure containing all information regarding the Taxable Person’s transactions and arrangements with its Related Parties and Connected Persons. Also, on request by the authority, the taxable person will also have to submit all information to support the arm’s length nature of the transactions with related parties and connected persons.
  5. e) Every transaction or arrangement with Related parties or Connected person must meet the arm’s length principles as mentioned in the Article 34, Federal Decree law no. 47 which will be explained in the coming articles.
  6. f) Any other condition as specified by the Minister.

A qualifying freezone person that meets the above conditions will be subject to 0% taxation and will be taxed only on the excluded income based on the availing corporate tax rates.

A Qualifying freezone person that fails to meet any of the conditions above at any time during a tax period will cease to be a qualifying freezone person from the beginning of that tax period.

A 0% tax rate will be applicable to Qualifying Free Zone Person shall apply for the remainder of the tax incentive period stipulated in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered, which period may be extended in accordance with any conditions as may be determined in a decision issued by the Cabinet at the suggestion of the Minister, but any one period shall not exceed 50 years.

Maintaining Adequate Substance

A Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone and have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures.

Activities can be outsourced to a Related Party or a third party in a Free Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.

Qualifying Income

Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income, provided that such income is not attributable to a Domestic or a Foreign Permanent Establishment or to the ownership or exploitation of immovable property : –

  1. a. Income derived from transactions with other Free Zone Persons where that freezone person is the Beneficial Recipient of the relevant services or Goods, except for income derived from Excluded Activities.
  2. b. Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
  3. c. Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements under Article (4) of this Decision

Qualifying Activities

The following activities conducted by a Qualifying Free Zone Person shall be considered Qualifying Activities: –

  1. (a) Manufacturing of goods or materials.
  2. (b) Processing of goods or materials.
  3. (c) Holding of shares and other securities.
  4. (d) Ownership, management and operation of Ships.
  5. (e) Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
  6. (f) Fund management services that are subject to the regulatory oversight of the competent authority in the State.
  7. (g) Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
  8. (h) Headquarter services to Related Parties.
  9. (i) Treasury and financing services to Related Parties.
  10. (j) Financing and leasing of Aircraft, including engines and rotable components.
  11. (k) Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
  12. (l) Logistics services.
  13. (m) Any activities that are ancillary to the activities listed above. An activity is considered ancillary where it serves no independent function but is necessary for the performance of the above activities

* The activity of distributing goods or materials must be undertaken in or from a Designated Zone and the goods or materials entering the State must be imported through the Designated Zone.

Excluded activities

The below activities are considered as excluded activities and any income derived by a Qualifying freezone person from the below will be taxable whether it is performed with another freezone person or not: –

  1. a) Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under (d), (f), (g) and (j).
  2. b) Banking activities.
  3. c) Insurance activities other than (e) mentioned above.
  4. d) Finance and leasing activities other than those mentioned in (i) and (j) mentioned above.
  5. e) Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
  6. f) Ownership or exploitation of intellectual property assets.
  7. g) Any activities that are ancillary to the activities mentioned above.

De minimis Requirements

The de minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed lower of 5% of the total Revenue of the Qualifying Free Zone Person in that Tax Period, or AED 5,000,000. The following conditions will apply when calculating Total revenue and non-qualifying revenue: –
  1. a) Non-qualifying Revenue is Revenue derived in a Tax Period from any of the following: –
    1. a. Excluded Activities.
    2. b. Non qualifying activities (as mentioned above) from non freezone persons.
  2. b) Total Revenue is all Revenue derived by a Qualifying Free Zone Person in a Tax Period.
The following revenue will not be included in calculating non qualifying revenue or total revenue:-
  1. a) Revenue attributable to immovable property located in a Free Zone derived from the following transactions:
    1. i. Transactions with Non-Free Zone Persons in respect of Commercial Property.
    2. ii. Transactions with any Person in respect of immovable property that is not Commercial Property.
  2. b) Revenue attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person

Income Attributable to a Domestic or a Foreign Permanent Establishment

Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person shall be considered Taxable Income and taxed at 9%.

Income Attributable to Immovable Property Located in a Free Zone

Income attributable to immovable property located in a Free Zone that is derived from the below transactions shall be considered Taxable Income and taxed at 9%: –
  1. a. Transactions with Non-Free Zone Persons in respect of Commercial Property.
  2. b. Transactions with any Person in respect of immovable property that is not Commercial Property.

How can Prema Consulting assist you in determining whether you are eligible for a QFZP status?

Our team of Qualified and experienced accountants who are well versed in UAE corporate tax law, will help you register with corporate tax and will assist in all compliance and documentation and will assist during tax assessment or any other representation before the FTA.

We will be analysing your company from a standalone point of view to find whether the company’s activities and compliance status are in line with the requirements mentioned by the Federal Tax Authority.

We will be providing recommendations based on the existing corporate law about the documentation to be maintained as a freezone company in order to be eligible for the same while ensuring that no anti-abuse rules are evoked.

We will provide a tax audit from our side internally before we file the tax returns to demonstrate that we are compliant with all the corporate tax laws to date.

We will also help train your staff and provide awareness on the existing corporate tax law and other compliance and documentation requirements.

We will provide long term assistance in Corporate Tax compliance, by advising on any change in Tax law, government policies and any other updates released by the FTA.