What is a Qualifying Free Zone Person (QFZP) in UAE?
A Qualifying Free Zone Persons (QFZP) is a business entity established in a UAE Free Zone that meets specific conditions to benefit from a 0% Corporate Tax rate on its Qualifying Income. This tax incentive is designed to promote economic activity within Free Zones while ensuring compliance with the UAE’s corporate tax laws.
Qualifying Free Zone Person (QFZP) Criteria
To be considered a Qualifying Free Zone Person (QFZP) and benefit from a 0% corporate tax rate, a business must meet the following conditions as outlined in Article 18 of the UAE Corporate Tax Law:
- Registration with a Free Zone Authority
- The business must be legally registered within a UAE Free Zone and have a substantial presence in the country.
- Participation in Qualifying Activities and Earning Qualifying Income
- The business must engage in qualifying activities as per UAE Corporate Tax Law and generate income from these activities.
- The company must not opt to be taxed under UAE Corporate Tax (as per Article 19 of the decree law).
- Compliance with UAE’s Transfer Pricing Regulations
- All transactions between related entities must follow the arm’s length principle to prevent tax evasion.
- Compliance with Articles 34 and 55 of Federal Decree Law No. 47 of 2022 is mandatory.
- Meeting the De Minimis Threshold
- If a QFZP earns some income from non-qualifying activities, it must remain below a set threshold to retain its special tax status.
- The threshold is either 5% of total revenue or AED 5 million, whichever is lower.
Note: If a company fails to meet any of these conditions, it will lose its QFZP status and become subject to 9% corporate tax from the start of that tax period.
Qualifying Income for QFZPs
The UAE Cabinet Decision No. 55 of 2023 defines qualifying income as follows:
1. Transactions with Other Free Zone Persons
- Income earned from dealings with businesses within the Free Zone qualifies for the 0% tax rate.
- Certain activities (designated by the Minister) may be excluded from this exemption.
2. Transactions with Mainland Companies
- Income from mainland businesses may qualify if it meets set criteria and is not an excluded activity.
- A de minimis threshold applies to ensure non-qualifying income remains a minor part of total earnings.
3. Permanent Establishments (PEs)
- If a QFZP has an operational presence outside the Free Zone (e.g., a mainland warehouse), this income is subject to 9% corporate tax.
4. Income from Immovable Property
- Income from leasing commercial properties within the Free Zone qualifies for 0% tax.
- However, rental income from non-Free Zone businesses does not qualify.
Qualifying Activities Under UAE Corporate Tax Law
As per Article 18 of the UAE Corporate Tax Law, the following activities qualify for the 0% corporate tax rate:
- Manufacturing & Processing: Producing or processing goods and materials.
- Insurance & Finance: Reinsurance, fund management, and investment management (regulated).
- Securities & Shipping: Stock ownership, securities management, and ship operations.
- Aircraft Leasing & Logistics: Financing, leasing, and logistics services.
- Distribution & Treasury Services: Headquarters operations, treasury management, and financial services.
- Supporting Services: Activities directly supporting the above-listed services.
The De Minimis Rule
Since some Free Zone businesses may generate non-qualifying income, the De Minimis Rule allows QFZPs to retain their 0% corporate tax rate if their non-qualifying income remains below a specific threshold:
- The total non-qualifying income must be below:
- 5% of total revenue, OR
- AED 5 million (whichever is lower).
If non-qualifying income exceeds this limit, the company loses QFZP status and becomes subject to 9% corporate tax.
Conclusion
The UAE Corporate Tax framework marks a major shift in the country’s business environment. While mainland businesses are subject to 9% corporate tax, Free Zone businesses can maintain their 0% tax status if they qualify as QFZPs.
Understanding the conditions for QFZP status, qualifying income, and compliance with transfer pricing regulations is essential for businesses operating in the UAE. Audit firms in UAE play a crucial role in helping businesses handle the complexities of corporate tax compliance. They assist in evaluating QFZP eligibility, structuring operations to maximize tax benefits, and ensuring adherence to transfer pricing regulations.
Need expert guidance on UAE Corporate Tax compliance? Partner with a trusted audit firm to streamline tax planning, ensure compliance, and optimize your business structure. Contact today to safeguard your Free Zone tax advantages and stay ahead of regulatory changes!