Companies doing businesses in free zones in the UAE need to meet certain criteria to be eligible for zero per cent corporate income tax on their activities and become a qualifying free zone person (QFZP), according to the latest guide issued by the Federal Tax Authority (FTA).
Among the conditions include “possession of audited financial statements, having substance, and earning income from qualifying activities”, said Thomas Vanhee, partner at Aurifer Middle East Tax Consultancy, adding that It is important to know that save for the cases of permanent establishments, the regime is largely an all-in or all-out regime.
Outlining the condition for disqualification, Vanhee said: “If a free zone entity earns non-qualifying income which crosses the threshold of Dh5 million or 5 per cent of its overall income, then the free zone entity’s income is entirely disqualified.”
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Nimish Goel, partner at WTS Dhruva, said FTA’s new guide addresses several grey areas like the availability of zero per cent corporate tax benefit on high sea sales, domestic bills to export outside the UAE mainland, and investment in cryptocurrencies.
“Free Zone businesses must note that interest income from surplus funds is non-qualifying. Free zone holding companies with no employees can now clearly meet the substance test based on director decisions – a big win!”, he said.
Free zone vs designated zone
Thomas Vanhee advised taxpayers to verify with their free zones if they’re considered a free zone or designated zone for corporate income tax purposes.
“For the distribution of goods from a designated zone to constitute a qualifying activity, there is no need for the goods to physically come to the UAE with third country trading (high sea sales). Equally, if purchases are made by a free zone company in a designated zone, the goods can come from the mainland and be exported and still conduct a qualifying activity. Even if goods go from mainland to mainland, the activity would qualify. Equally so, goods imported into the designated zone and subsequently imported would constitute qualifying activity,” said Vanhee.
He elaborated that the processing of goods is defined as a wider concept than just manufacturing.
“Important for commodities traders is that there is no need for the goods to be actually traded on a commodity exchange, it’s sufficient that they may be tradable. This is important for oil and gas, gold, and agricultural products. If a free zone person does not earn any qualifying income in a certain period because it has not started to derive income yet, it doesn’t disqualify them immediately from the qualifying free zone person status.”
He added that investing for yourself (e.g. excess cash) as a free zone person is considered financing to “related parties” and therefore a qualifying activity.
A qualifying free zone person is not required to prepare separate financial statements for its qualifying income and its other income, added Vanhee.