The Federal Tax Authority (FTA) has introduced a Corporate Tax (CT) Guide focused on Free Zone (FZ) Persons, a key component of the new UAE corporate tax framework. This guide clarifies the qualifying activities that benefit from a 0% corporate tax rate and the conditions under which businesses operating in Free Zones can retain their tax incentives. Below is a comprehensive breakdown of the qualifying activities and related aspects of UAE corporate tax.
Qualifying Income in the UAE Free Zones
The UAE has approximately 44 Free Zones, where businesses can operate with various tax incentives. To maintain the 0% corporate tax rate, Free Zone Persons (FZPs) must generate qualifying income. This income is derived from specific business activities recognized by the UAE government as “qualifying activities.” However, income generated from excluded activities, such as banking, insurance, and finance leasing, does not qualify for tax exemptions.
De Minimis Requirement
FZPs can earn a small percentage of non-qualifying income without losing their tax benefits. The de minimis rule allows for:
- A maximum of AED 5 million in non-qualifying income.
- Non-qualifying income must not exceed 5% of the total income. If these thresholds are maintained, FZPs continue to benefit from the 0% tax rate.
Qualifying Activities
1. Manufacturing of Goods or Materials
- Includes contract manufacturing, full-fledged production, and assembly.
- Encompasses all processes from raw materials to finished goods.
- Embedded software within hardware is also considered part of this activity.
- Main activities include production planning, actual production, and quality control.
2. Processing of Goods or Materials
- Involves the transformation of materials while keeping them in the same fundamental state.
- Includes activities such as assembly, machining, chemical processing, and packaging.
3. Trading of Qualifying Commodities
- Includes metals, minerals, energy, and agricultural commodities.
- Must be tradable on a Recognized Commodities Exchange Market.
- Commodities undergoing minimal processing (cleaning, sorting, grading) qualify.
4. Holding of Shares and Other Securities for Investment Purposes
- Covers ownership of shares, bonds, capital contributions, and cryptocurrency.
- Includes activities such as investment planning and portfolio management.
- Capital gains, dividends, and bond interest qualify as income.
- Must have an intention to hold investments for at least 12 months.
5. Ownership, Management, and Operation of Ships
- Includes tugboats, barges, and offshore oilfield service vessels.
- International transportation qualifies, including shipping between UAE ports as part of an international itinerary.
6. Reinsurance Services
- Includes underwriting, salvage recoveries, and claims management.
- Ancillary activities include investment of premiums in financial instruments.
7. Fund Management Services
- Involves managing portfolios for mutual funds, hedge funds, and pension funds.
- Includes investment planning, diversification, asset allocation, and performance monitoring.
8. Wealth and Investment Management Services
- Encompasses financial planning, estate planning, tax planning, and asset allocation.
- Ancillary activities include risk management and investment research.
9. Headquarter Services to Related Parties (RPs)
- Includes strategic planning, senior management, and corporate governance.
- Key functions involve financial management, HR services, legal compliance, and intellectual property management.
10. Treasury and Financing Services to RPs
- Includes majority-owned subsidiaries and branches.
- Activities include financing, cash management, and self-investment by the FZP.
Additional Considerations
- R&D and Innovation: Companies engaged in research and development (R&D) for technological advancement may also be eligible for tax benefits if aligned with the qualifying activities.
- Compliance & Reporting: FZPs must ensure compliance with corporate tax laws, maintain accurate financial records, and submit timely tax filings to retain tax advantages.
- Future Regulations: The UAE government may update the list of qualifying activities, requiring businesses to stay informed about regulatory changes.
Excluded Activities (EA)
Revenue from EA is to be treated as non-qualifying revenue while computing the de minimis requirements, unless the revenue is attributable to a FZ Person’s FPE/DPE or pertains to immovable property in a FZ that does not generate QI.
All transactions with individuals are considered EA, with the exception of transactions in relation to:
- Ownership, administration, and operation of ships
- Regulated fund management, wealth and investment management services
- Aircraft financing and leasing
Banking activities are the specified regulated financial activities. These do not encompass fund management services, wealth and investment management services, or treasury and financing services provided to RPs if they form a distinct and separate business conducted by a FZ Person.
Insurance activities do not encompass reinsurance activities. Reinsurance activities and captive insurance falling under the QA of “reinsurance services” or “headquarter services to RPs” are expressly excluded from the purview of this EA.
Financing and leasing activities are regulated ones and refer to providing credit or financing for any form of compensation (including digital and cryptocurrency), as well as leasing, renting, or otherwise authorizing the use of an asset in exchange for rent or other consideration under a finance lease, operating lease, or similar arrangement. They do not include financing and leasing of ships, financing services to RPs, and financing and leasing of aircraft.
The ownership or exploitation of Immovable Property, other than Commercial Property located in a FZ where the transaction in respect of such Commercial Property is conducted with other FZ Persons, is EA.
How an Audit Firm Can Help
An audit firm in Dubai plays a crucial role in ensuring compliance with Free Zone tax regulations and optimizing tax efficiency for businesses. By conducting thorough assessments, an audit firm can help businesses:
- Identify and classify qualifying and non-qualifying income streams.
- Ensure proper documentation and reporting to meet de minimis requirements.
- Provide strategic tax planning to maximize tax benefits under the Free Zone regime.
- Assist in risk assessment and compliance with relevant financial regulations.
- Offer expert guidance on structuring transactions to maintain Free Zone benefits.
Engaging a professional audit firm ensures that businesses remain compliant while leveraging tax incentives effectively.
Conclusion
Free Zone businesses must ensure compliance with the guidelines on qualifying activities to retain their tax benefits. The de minimis rule provides flexibility, but companies must be mindful of non-qualifying income thresholds. Understanding and adhering to the Corporate Tax Guide is essential for maintaining the 0% tax advantage and operating efficiently within UAE Free Zones.