Qualifying Activities for Free Zone Companies
are specific types of business operations that enable a Qualifying Free Zone Person (QFZP) to benefit from a 0% corporate tax rate on the income derived from these activities.
These activities are defined under the UAE Corporate Tax rules and are designed to support and incentivize businesses operating within Free Zones.
- If a Qualifying Free Zone Person (QFZP) sells services or goods (excluding Excluded Activities) to other Free Zone Persons who benefit from these services and goods, they can enjoy a 0% Corporate Tax rate on the income from those transactions.
- Additionally, if a QFZP sells services or goods to Non-Free Zone Persons, they can still benefit from the 0% Corporate Tax rate, provided the INCOME IS DERIVED FROM SPECIFIC QUALIFYING ACTIVITIES.
Which Transactions Fall Under Qualifying Activities for the 0% Corporate Tax Rate?
If a Qualifying Free Zone Person (QFZP) sells services or goods to Non-Free Zone Persons, the QFZP can benefit from the 0% Corporate Tax if it derives Qualifying Income from 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
- Fund management services
- Wealth and investment management services
- Headquarter services to related parties
- Treasury and financing services to related parties
- Financing and leasing of aircraft
- Distribution of goods or materials in or from a Designated Zone
Logistics services
Qualifying Activities also include ancillary activities, which are activities that are necessary for the performance of the main Qualifying Activity or that make a minor contribution to the main Qualifying Activity and are so closely related to the main Qualifying Activity that it should not be regarded as a separate activity.
Practical Case Study
Let’s look at an example to make this clearer.
Case Study: Company P
Company P is a QFZP involved in manufacturing and logistics. Here’s how they benefit from the 0% tax rate:
Manufacturing Segment: They manufacture electronic goods, a Qualifying Activity. The income from this segment is subject to a 0% tax rate.
Logistics Segment: They provide logistics services in a designated zone. This too qualifies for the 0% tax rate.
Additionally, Company P performs some ancillary activities, like maintaining an IT support team to ensure smooth operations of their logistics and manufacturing segments.
These activities are necessary and seamlessly integrated into the main operations, qualifying them as ancillary activities.
How Can Free Zone Companies Benefit from Qualifying Activities?
Free Zone companies in the UAE can significantly benefit from engaging in Qualifying Activities to enjoy a 0% Corporate Tax rate. Here’s how they can leverage these activities:
- Identify and Engage in Qualifying Activities :- Free Zone Companies need to ensure their business operations align with the qualifying activities defined under the UAE Corporate Tax rules.
- Maintain Adequate Substance in the Free Zone :- To benefit from the 0% Corporate Tax rate, Free Zone Companies must maintain adequate substance within the Free Zone. This involves:
- Core Activities: Ensuring primary business operations and income-generating activities are conducted within the Free Zone.
- Physical Presence: Maintaining offices or facilities in the Free Zone.
- Assets: Keeping sufficient assets in the Free Zone to support business activities.
- Full-Time Employees: Employing a reasonable number of full-time employees based in the Free Zone.
- Operational Expenditures: Spending a substantial portion of the operational budget within the Free Zone.
- Comply with Financial Reporting Requirements:- Free Zone Companies must also adhere to financial reporting standards to demonstrate compliance:
- Separate Revenue Streams: Clearly separate revenue from Qualifying Income and Non-Qualifying Income in financial statements.
- Allocate Expenses: Reasonably allocate expenses to each revenue stream according to the arm’s length principle.
- Audited Financial Statements: Prepare and maintain audited financial statements to ensure transparency and compliance.
- Monitor Non-Qualifying Revenue :- Non-Qualifying revenue must not exceed the de minimis thresholds to maintain the 0% tax rate:
- De Minimis Thresholds: Non-Qualifying revenue should not exceed the lower of AED 5,000,000 or 5% of total revenue.
By strategically engaging in Qualifying Activities and maintaining compliance with the UAE Corporate Tax rules, Free Zone Companies can maximize their tax benefits and enhance their profitability.
