Corporate Tax In The Free Zones - New Guidelines 2024

 Some new guidelines were released in May 2024 regarding corporate tax in Free Zones. Here's a quick rundown:

·       The Federal Tax Authority (FTA) issued a guide on how Corporate Tax applies to businesses operating in Free Zones [UAE corporate tax guide for freezones]. This guide clarifies the process for Qualifying Free Zone Persons (QFZPs) to benefit from the 0% corporate tax rate on their Qualifying Income.

·       The guide also details what constitutes Qualifying Activities, Excluded Activities, and the compliance requirements for QFZPs [UAE corporate tax guide for freezones].

Some important points to remember:

·       The 0% tax rate applies to Qualifying Income earned by QFZPs.

·       Not all Free Zone businesses automatically qualify as QFZPs. There are specific requirements to meet.

·       The guide offers details on what happens if a QFZP operates outside the Free Zone in a Permanent Establishment (PE). In that case, the income from the PE would be taxed at the standard 9% corporate tax rate.

If you're looking for the official guide, you can find it on the UAE government's tax authority website: [UAE corporate tax guide for freezones].

Not all Free Zone businesses automatically qualify as QFZPs.

Here's a breakdown of what a Free Zone business needs to do to qualify as a Qualifying Free Zone Person (QFZP) and enjoy the 0% corporate tax rate on its Qualifying Income:

Maximize Your Tax Benefits with the latest updates on qualifying income and activities for the 0% corporate tax rate in UAE Free Zones.

The Ministry of Finance has released crucial information for companies operating in these zones. Here's a breakdown:

• Qualifying Income:
• Transactions with other Free Zone entities.
• Income derived from conducting approved activities (both domestically and internationally).
• Excluded Activities (No 0% Tax Rate):
• Transactions with individual consumers.
• Banking, insurance, financing, and specific leasing activities.
• Owning/using intellectual property assets or UAE real estate.

Important Note: Generating income from excluded activities or non-qualifying sources can disqualify your company from the 0% tax benefit, with some exceptions based on "de minimis requirements."

Stay Compliant, Stay Competitive:

By understanding these guidelines, you can ensure your Free Zone business continues to enjoy the benefits of the 0% corporate tax rate.

Substance Requirements:

• Adequate economic activity: The company's core income-generating activities must be physically located within the Free Zone. This translates to having an adequate number of qualified employees, appropriate assets, and incurring operational expenditure within the Free Zone, commensurate with the level of its activities. Outsourcing is allowed, but only with proper supervision within the Free Zone.
• Demonstrate economic substance: This means the company should be a genuine business operation and not just a shell company set up to avoid taxes.

Income Requirements:

• Qualifying Income: The company's income must come from activities listed as "Qualifying Activities" by the UAE authorities. These are generally activities that contribute to the development of the UAE economy, such as manufacturing, technology, and logistics. Excluded Activities, like banking and insurance, typically don't qualify for the 0% tax rate.

Compliance Requirements:

• Maintain proper records: The company must maintain detailed records of its income, expenses, employees, and assets to demonstrate compliance with QFZP criteria.
• Transfer Pricing: Companies with related party transactions (e.g., with subsidiaries or parent companies) need to comply with transfer pricing rules to ensure arm's length pricing is followed.
• Tax filings: Even with a 0% tax rate, QFZPs are still required to file tax returns with the FTA.

Additional factors to consider:

• New businesses: A new company in its setup phase may still need to generate income, but as long as it meets the other requirements and intends to conduct Qualifying Activities within the Free Zone, it can still qualify as a QFZP.
• Operating outside the Free Zone: If a QFZP establishes a Permanent Establishment (PE) outside the Free Zone, the income generated through that PE will be subject to the standard 9% corporate tax rate.

By meeting these requirements, a Free Zone business can leverage the benefits of being a QFZP, including the significant advantage of a 0% corporate tax rate on its Qualifying Income. It's important to consult with a tax advisor to ensure your specific business activities and structure align with the QFZP criteria.