Qualified Free Zone Person Regime – Is it Beneficial than Normal Corporate Tax Regime?

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The Corporate Tax Law of the UAE provides that when a Free Zone Person meets certain conditions, it will be considered as a Qualifying Free Zone Person and is eligible for a 0% Corporate Tax rate on its Qualifying Income. This law came into effect on June 1, 2023. It is pertinent to note that a Qualifying Free Zone Person may lose some important tax benefits which are otherwise available to a Taxable Person under the general provisions of Corporate Tax Law. They are enumerated below.

1.    Small Business Relief

Small Business Relief is available to a UAE Resident Person whose Revenue does not exceed AED 3,000,000 for the relevant Tax Period and all previous Tax Periods. Such taxpayers do not pay any corporate tax. Free Zone Persons may be eligible for Small Business Relief if the above conditions are met. However, Qualifying Free Zone Persons are not eligible for Small Business Relief.

2.    Formation of a Tax Group

Two or more Taxable Persons who meet the following conditions can apply to form a “Tax Group” and be treated as a single Taxable Person for Corporate Tax purposes:

-      Both, the parent company and its subsidiaries must be resident in the UAE, have the same financial year and prepare their financial statements using the same accounting standards;

-      parent company must:

o   own at least 95% of the share capital of the subsidiary;

o   hold at least 95% of the voting rights in the subsidiary; and

o   is entitled to at least 95% of the subsidiary’s profits and net assets.

However, a Tax Group cannot include a Qualifying Free Zone Person.

3.    Transfer of Tax Losses

Tax Losses may be transferred between Taxable Persons that are Resident juridical persons if certain conditions are met. Transferred Tax Losses can reduce the recipient’s Taxable Income by at least 75% of its Taxable Income in that Tax Period. However, this benefit is not available if any of the Taxable Person is a Qualifying Free Zone Persons.

4.    Transfers within a Qualifying Group

Closely related businesses often transfer assets and liabilities between each other for operational reasons. Ordinarily, there would be a taxable gain or loss where an asset or liability is transferred for an amount different than its net book value. However, Corporate Tax relief is available where an asset or liability is transferred between members of a Qualifying Group which allows the transfer to take place without giving rise to a Corporate Tax liability. This benefit is not available if any member of the Qualifying Group is a Qualifying Free Zone Person.

5.    Business restructuring relief

In certain circumstances, where an entire Business or an independent part of a Business is transferred in exchange for shares or other ownership interests, business restructuring relief may apply to eliminate the Corporate Tax impact of these transactions. Under this relief, no gains or losses need to be taken into account when calculating the Taxable Income for either party. This benefit is not available if any member of Persons are a Qualifying Free Zone Person.

Conclusion

As one can observe, a Qualifying Free Zone Person may lose some important tax benefits under the normal Corporate Tax Law. Such a person may however, elect to be taxed at the general rates of Corporate Tax if the tax benefits under the normal regime is more beneficial.

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