Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (鈥楥T Law鈥�) provides, for Free Zone Persons (鈥楩ZP鈥�) that are Qualifying Free Zone Persons (鈥楺FZP鈥�), a Corporate Tax rate of 0% on 鈥楺ualifying Income鈥� and 9% on 鈥楾axable Income鈥� that is not 鈥楺ualifying Income鈥�.
To provide further clarity with regard to items/issues that were subject to further Guidance as per the CT Law provisions, Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023 were issued. These two Decisions dealt with topics such as 鈥楺ualifying Activities鈥�, 鈥楨xcluded Activities鈥�, 鈥楧e-minimis鈥� requirement test, preparation of audited financial statements etc.
While these Decisions provided additional guidance on the applicability of the Free Zone regime, various topics still needed more clarity and guidance as they were open/subject to interpretation. Now, the Federal Tax Authority (鈥楩TA鈥�) has released a much-awaited Corporate Tax Guide 鈥� CTGFZP1 on Free Zone Persons (鈥楩ZP Guide鈥� or 鈥榯he Guide鈥�) to provide general guidance on the application of CT Law to QFZP.
High-level summary of the FZP Guide
In the FZP Guide, the FTA, by way of multiple examples, has clarified the following matters:
- Substance-related requirements: To maintain adequate substance in a Free Zone/Designated Zone, the FZP is required to undertake its core income-generating activities for that business in the Free Zone/Designated Zone. In addition, it is required that the QFZP maintains adequate assets and qualified full-time employees and incurs an adequate amount of operating expenditure. In this regard, it should be noted that this has been illustrated in the FZP Guide with the help of examples. It is also specified that an evaluation needs to be conducted on a case-to-case basis for each situation, taking into account all facts and circumstances.
- Requirements to be a QFZP: The prescribed conditions such as being the 鈥楤eneficial recipient鈥�, how to segregate revenue to determine what is considered as 鈥楴on-qualifying Revenue鈥� for the 鈥楧e-minimis鈥� requirements, or the status during the startup phase, are discussed and clarified in detail.
- Permanent Establishment (鈥楶E鈥�): The FZP Guide also deals with segregation/separation of the Domestic PE and Foreign PE from the QFZP regarding the separation of activities, output transferred to Domestic PE etc. along with the conditions in which a QFZP creates a PE.
- Immovable property: The FZP Guide covers detailed examples of mixed-use immovable property located in the Free Zone for computing 鈥楺ualifying Income鈥� and 鈥楾axable Income鈥�.
- Qualifying Intellectual Property: To benefit from the 0% Corporate Tax Rate on the 鈥楺ualifying Income鈥� obtained from the exploitation or ownership of 鈥楺ualifying Intellectual Property鈥�, a QFZP must be able to demonstrate a nexus between 鈥楺ualifying Expenditures鈥� and the income from 鈥楺ualifying Intellectual Property鈥�. The FZP Guide provides the tracking systems to demonstrate nexus. In addition, clarity is provided on the calculation of 鈥楺ualifying Income鈥� from Intellectual Property with examples on uplift expenditures and the 鈥楺ualifying Intellectual Property鈥� formula.
- Qualifying Activities:
- The Guide has elaborated on the scope of each of the 鈥楺ualifying Activities鈥� and 鈥楨xcluded Activities鈥� as listed in the Ministerial Decision No. 265 of 2023 with detailed examples of each of the Activities.
- Major clarifications have been provided in connection to the physical entry of goods into the Designated Zones for Distribution activities. The requirement for distributed goods to enter a Designated Zone only applies to the distribution of foreign goods to customers located in the UAE and outside a Designated Zone. Further, it is clarified that the 鈥榟igh-sea sales model鈥� is also considered as meeting the conditions to be a distribution activity (for 鈥楺ualifying Activity鈥� purposes) even if the goods are not introduced into the UAE and are directly shipped from an overseas supplier to a client (reseller/distributor) that is also based in another jurisdiction.
- The scope of 鈥楢ncillary鈥� activities is defined in detail to cover activities that are there to support the core-income generating activity or it is an activity that makes a minor contribution to the main activity but is so closely related to the main one.
- Losing status of QFZP: In case the conditions are not fulfilled鈥攐r cease to be fulfilled during any relevant tax period, the QFZP person shall be considered as a QFZP that has failed to meet the criteria to benefit from the QFZP regime. It would cease to be a QFZP from the beginning of the relevant tax period in which the conditions are not cumulatively met and for the later four tax periods.
- Election period: The Guide provides clarity and comments for the effects of an election to be subject to standard Corporate Tax rules as the rest of Taxable Persons that are subject to the headline rate by an FZP that might qualify as a QFZP.
- Computation mechanism: Further, the Guide also provides clarity for the computation mechanism in order to determine the 鈥楾axable Income鈥� and tax liability of a QFZP. Compliance requirements to be met by a QFZP are noted in the FZP Guide.
It is important to note that this FZP Guide is not a legally binding document but is intended to assist in the understanding of the tax implications arising from the CT regime applicable to a QFZP.
A detailed Tax Flash will be released in due course covering major clarifications and will provide further insight .
Next steps
All FZPs should now ascertain in light of the additional guidance provided in the FZP Guide whether they can claim the benefit of the QFZP regime. This might require revisiting the existing positions adopted based on the Cabinet and Ministerial Decisions issued. In case of doubts or ambiguity regarding the business model or other activities performed, the FZP should identify potential measures that can be adopted to utilize the benefit of the FZP regime.
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