How to Claim 0% Corporate Tax Rate if you Are Based in a Free Zone, UAE

Corporate Tax Rate 0% for UAE - Freezone

Hey there! Ever wondered how some Free Zone companies in the UAE manage to keep their corporate tax rate at a whopping 0%?

It's not magic – it’s all about understanding the Qualifying Free Zone Person (QFZP) status. Whether you're a seasoned business owner or new to the UAE’s Free Zones, grasping this concept can significantly impact your bottom line.

In this article, we’ll dive into what it means to be a QFZP, the benefits it brings, and how your business can qualify for this substantial tax perk.

Let's get started and unravel the secrets behind the 0% corporate tax rate.

Key Takeaways 

  • To qualify for a 0% Corporate Tax rate, a Free Zone company must meet specific conditions and be recognized as a Qualifying Free Zone Person (QFZP).

  • A QFZP must have substantial operations in the Free Zone, maintain adequate assets and full-time employees, and derive income primarily from qualifying activities.

  • Regardless of revenue, QFZPs must prepare and maintain audited financial statements to ensure transparency and compliance.

  • Non-qualifying revenue for a QFZP must not exceed the lower of AED 5,000,000 or 5% of total revenue to benefit from the 0% Corporate Tax rate.

What’s a Qualifying Free Zone Person (QFZP)?

0% Corporate Tax UAE Freezone

A Qualifying Free Zone Person (QFZP) is a Free Zone company or branch in the UAE that meets specific conditions set by the UAE Corporate Tax rules. These rules are designed to recognize and support the significance of Free Zones by allowing eligible entities to benefit from a 0% Corporate Tax rate on certain qualifying activities. 


But what exactly does that mean, and what do you need to qualify?

Condition 1: You need to be a Free Zone Person
This means you're a juridical person (fancy term for a legal entity) incorporated, established, or registered in a Free Zone. This could include a branch of a Non-Resident Person or a UAE juridical person that’s registered in a Free Zone.

Condition 2: Substance in the Free Zone
Next, you need to maintain adequate substance in the Free Zone. In plain English, this means your core income-generating activities need to be based in the Free Zone. You should have enough assets, full-time employees, and spend enough on operations within the Free Zone to support these activities.

Condition 3: Deriving Qualifying Income
You must earn what’s called Qualifying Income.

This can come from:
 - Transactions with other Free Zone Persons (as long as they benefit from the transactions and these don't relate to Excluded Activities).
 - Transactions related to Qualifying Activities that aren’t Excluded Activities.
 - Income from owning or exploiting Qualifying Intellectual Property.
 - Other income, as long as it meets certain de minimis requirements.
 - Some types of income, like from foreign or domestic permanent establishments or certain types of property, won’t qualify for the 0% rate.

Qualifying Income, Corporate Tax, Freezone - UAE

Condition 4: No Election for Standard Corporate Tax

You shouldn’t have elected to be subject to the standard Corporate Tax rules and rates. Basically, you can't opt out of the Free Zone benefits and then change your mind.

Condition 5: Arm’s Length Principle
You must comply with the arm’s length principle. This means that transactions with related parties should be conducted as if they were between independent parties, ensuring fair pricing.

Condition 6: Audited Financial Statements
You need to prepare and maintain audited financial statements, regardless of how much revenue you earn. This keeps everything transparent and above board.

Condition 7: De Minimis Requirements
Finally, your non-qualifying revenue must meet de minimis requirements. This means it shouldn’t exceed the lower of AED 5,000,000 or 5% of your total revenue.
Corporate Tax, UAE - Freezone - Deminimis Requirement

Practical Example

Case Study 1: Tech Innovators Free Zone Ltd.

Tech Innovators Free Zone Ltd. is a software development company registered in a UAE Free Zone. They primarily develop software for other companies within the Free Zone.

To qualify as a QFZP, Tech Innovators must:
1. Ensure all core activities and substantial operations are within the Free Zone.
2. Earn income mainly from software development transactions with other Free Zone companies.
3. Maintain adequate assets, hire full-time employees, and incur operating expenditures within the Free Zone.
4. Keep audited financial statements.
5. Ensure any non-qualifying revenue stays below the de minimis thresholds.
By meeting these conditions, Tech Innovators benefits from a 0% Corporate Tax rate on their qualifying income, significantly boosting their profitability.


Conclusion

To benefit from a 0% corporate tax rate, ensure your business meets the Qualifying Free Zone Person (QFZP) requirements by being a juridical person registered in a Free Zone, maintaining substantial operations with adequate assets and full-time employees, preparing audited financial statements, and ensuring non-qualifying revenue does not exceed the lower of AED 5,000,000 or 5% of your total revenue.


How Fastlane Can Help

Fastlane Consultancy specializes in corporate tax strategy and compliance.

Our team of experts can assist you in understanding and meeting the QFZP conditions, ensuring your business maintains adequate substance in the Free Zone.We provide comprehensive support in preparing audited financial statements and managing non-qualifying revenue to keep your tax rate at 0%.
Let Fastlane guide you through the complexities of corporate tax to optimize your business's financial health.
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