The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses discusses the concept of Qualifying Free Zone Persons (QFZPs), who are eligible for a corporate tax rate of zero percent on Qualifying Income generated from Qualifying Activities. For this reason, businesses operating in free zones must comply with and comprehend the concept of excluded and qualifying activity.
What is Qualifying Free Zone Person (QFZP)?
A Free Zone Person that meets the conditions of Article 18 of the Corporate Tax Law and is subject to Corporate Tax under Article 3(2) of the Corporate Tax Law is considered a Qualifying Free Zone Person (QFZP).
Qualifying Activities
Any activities determined in accordance with Article 2 of Ministerial Decision No. 265 of 2023 and conducted by a QFZP from which Qualifying Income is generated.
If a QFZP sells services or goods to Non-Free Zone Persons, the QFZP can benefit from the 0% Corporate Tax and if it derives Qualifying Income from the transactions in respect of the following Qualifying Activities:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of Qualifying commodities
- Holding of shares and other securities for investment purposes
- Ownership, management, and operation of ships
- Reinsurance services that are subject to regulatory control in the UAE by the appropriate responsible body
- Fund management services in the UAE that are regulated by the relevant authority
- Wealth and investment management services that are subject to regulatory oversight by the relevant competent authority in the UAE
- Headquarters services to related parties
- Treasury and financing services to related parties
- Financing and leasing of aircraft, including engines and rotating components
- Distribution of goods or materials in or from a Designated Zone
- Logistics services
- Any ancillary activities (which serve no independent function) to the above activities. Ancillary activities are those that are closely related to their main activity but do not contribute significantly enough to be considered independent.
Scope of Qualifying Activity (and associated ancillary activities)
Determining when a Qualifying Activity and associated ancillary activities end and a separate, potentially non-Qualifying Activity begins is crucial for calculating the de minimis requirements and determining a Free Zone Person’s eligibility as a QFZP.
Ancillary activities will be determined on a case-by-case basis based on the Free Zone Person’s main qualifying activity.
Requirements for carrying out the main activity
Ancillary activities that are required for a major Qualifying Activity include the following features:
(i) Ancillary activity: An activity is considered ancillary if it supports the main operation of the business rather than being a core activity or function on its own.
(ii) Seamlessly integrated: An activity is considered supplementary if its absence disrupts the main process.
Excluded Activities
1. Any transactions with natural persons, except transactions in relation to:
- Ownership, management, and operation of ships
- Fund management services that are subject to the regulatory oversight of the Competent Authority in the UAE
- Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE
- Financing and leasing of aircraft, including engines and rotable parts
2. Banking activities
3. Insurance activities, other than reinsurance services, and captive insurance-related activities form part of headquarter services to Related Parties.
4. Finance and leasing activities, other than:
- Ownership, management, and operation of ships
- Treasury and financing services to related parties
- Financing and leasing of aircraft, including engines and rotable parts
5. Ownership or exploitation of Immovable Property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
Excluded Activities also include ancillary activities that are integral to or closely connected to each Excluded Activity. Understanding the differences between Qualifying and Excluded Activities is critical for free zone enterprises seeking to maximize tax benefits and maintain compliance. Gatestone Group, with its extensive knowledge of the UAE’s business tax situation, can offer important advice in this area.
How the Gatestone Group Can Help?
- Comprehensive tax assessment: Our experts undertake a full examination of your business activities to determine your QFZP status and evaluate Qualifying and Excluded Activities.
- Tax structure optimisation: We assist in company structuring to maximise Qualifying Income while minimising Non-Qualifying Income to get optimal tax benefit.
- Documentation and compliance: We assist in keeping complete records and documentation to support your QFZP status and demonstrate compliance with tax legislation.
- Ongoing advisory services: Our team provides ongoing support to meet the changing tax landscape and ensure the company remains compliant with the most recent legislation.
Partnering with Gatestone Group allows you to obtain clear guidance and comply with the legislation for conducting business in the country while focusing on expanding your business. Contact Gatestone Group and book a free consultation with our tax experts via email at [email protected] or call +971 52 410 0849 or +971 4 450 1023.
