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The Federal Tax Authority (FTA) has recently released a guideline on Free Zone Persons (FZPs), detailing the framework for their taxation under the UAE Corporate Tax Law. This guideline consolidates various provisions applicable to FZPs and offers clarity through detailed illustrations.
Key Highlights and Expert Insights
Rabih Karam, Regional Tax Leader at Baker Hughes, commented, “The new guide provides clear examples on the definition of 'distribution of goods or materials in or from a Designated Zone.'” He highlighted several key points:
- If a designated zone company performs its activities in or from a Designated Zone and the arrangements do not involve goods or materials entering the UAE, the company will be considered as performing Qualifying Activities.
- For the distribution of imported goods in the UAE, it is essential for the goods to be imported through the designated zone to be considered Qualifying Activities; otherwise, they would not be.
- For the distribution of goods from the UAE (export), goods purchased from the UAE do not need to pass through a Designated Zone when sold to a retailer/distributor outside the UAE.
- For the distribution of goods within the UAE, a designated zone company can purchase goods from a juridical person in the UAE (outside the Free Zone) without passing them through a Designated Zone when subsequently sold to a retailer/distributor within the UAE, and still be considered as performing Qualifying Activities.
Scope and Conditions for QFZP Status
A Free Zone Person (FZP) is considered a Qualifying Free Zone Person (QFZP) if it meets the following conditions:
- It must be a recognized FZP, conducting its primary income-generating activities within a Free Zone.
- The entity's non-qualifying revenue must adhere to de minimis requirements, ensuring it remains within specific thresholds.
- It must maintain adequate substance, including sufficient physical presence, employees, and operational expenditures in the Free Zone.
- It must generate income considered as Qualifying Income.
- It should not opt to be subject to standard corporate tax rules.
- It must adhere to the arm’s length principle for related party transactions and maintain comprehensive transfer pricing documentation along with audited financial statements.
Marwan Alnooryani, Tax Lawyer at Habib Al Mulla and Partners, emphasized, “Businesses should carefully review the concepts outlined in the guide to determine if they qualify for the 0% Corporate Tax rate as a Qualifying Free Zone Person. It is crucial for taxpayers to exercise caution in this assessment. Misinterpreting QFZP status can result in severe financial consequences, including substantial unpaid taxes and hefty administrative penalties.”
Beneficial Tax Regime
A QFZP benefits from a 0% corporate tax rate on its qualifying income. If the entity fails to meet any of the aforementioned conditions, it will lose its QFZP status and be subject to standard corporate tax rates.
George Hoyek, a seasoned Tax Professional in the advertising industry, shared his perspective: “I enjoyed reading the FZ to FZ transactions and especially the Beneficial Recipient section 4.3.1. I noticed that the Agency Model is adopted from the VAT laws. The reading is simple yet challenging. The matter is not black and white with many parameters and paperwork to consider before determining the tax treatment such as the right to use and enjoy, the recipient acting as a conduit or intermediary, and relying on a written statement or undertaking from the purchaser.”
Qualifying Activities
Qualifying activities eligible for the 0% tax rate include manufacturing, processing, trading of specific commodities, reinsurance, fund management, and logistics services, among others. Activities must be integral to the entity’s business operations within the Free Zone and clearly distinguished from excluded activities, which do not qualify for the preferential tax rate. Excluded activities include income from specific transactions with natural persons, banking and insurance activities, income attributable to a foreign or domestic permanent establishment (PE), income from immovable property, and income from the exploitation of intellectual property.
Adequate Substance Requirements
To maintain QFZP status, an entity must demonstrate adequate substance by performing core income-generating activities in the Free Zone. This includes maintaining adequate assets, a sufficient number of full-time employees, and operational expenditures relative to the scale of its qualifying activities. For example, a Free Zone Person engaged in reinsurance activities must be sufficiently capitalized in the Free Zone to support the level of risk it assumes from other insurers.
Calculating Corporate Tax for QFZPs
When calculating corporate tax, expenses must be allocated between qualifying and non-qualifying income using the arm’s length principle. This requires a detailed functional analysis to appropriately attribute income and expenses between the Free Zone parent and any domestic or foreign permanent establishments, treating them as independent entities.
Conclusion
The guideline on Free Zone Persons serves as an essential tool for entities operating within Free Zones, detailing the requirements to achieve and maintain QFZP status and benefit from preferential tax treatment. Amar Mehra, Tax Head at Kaplan, noted, “The guide confirms that Free Zone companies that meet specific conditions, such as maintaining adequate substance in the Free Zone and deriving qualifying income, can benefit from this preferential tax regime. The implications of the new guide for Free Zones are expected to boost the UAE's economic growth and attract more foreign investment to the country's thriving Free Zones, provided the strict criteria outlined in the law, and confirmed by the guide, are met."
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
