Free zone companies need to comply with an array of UAE corporate tax requirements
Getting the 0% corporate tax rate requires extensive preparation and compliance
By offering a favorable tax environment for entities operating within designated free zones, the UAE's free zone specific corporate tax rules aim to stimulate economic growth. By offering a 0% tax rate on qualifying income, the rules provide a significant advantage.
In order to fully leverage the tax benefits, businesses must understand the distinction between qualifying and non-qualifying activities, the de minimis requirements, and the treatment of real estate.
Conditions to be a qualifying free zone person
The entity must be a juridical person incorporated, established, or registered in a free zone.
Adequate substance: The entity must maintain adequate assets, full-time employees, and operating expenditures in the free zone.
Qualifying income: Income must be derived from transactions with other free zone persons, activities within the scope of qualifying activities, or the ownership or exploitation of qualifying intellectual property.
Transactions with related parties must comply with the arm's length principle.
Proper documentation for transfer pricing must be maintained.
The entity must prepare and maintain audited financial statements.
De minimis requirements: Non-qualifying revenue should not exceed the lower of Dh5 million or 5 per cent of total revenue.
Identifying qualifying activities
Qualifying activities are essential for entities to benefit from the 0 per cent corporate tax rate. These include:
Production of goods within the free zone.
Trading in raw metals, minerals, energy, and agriculture commodities.
Ownership, management, and operation of ships.
Fund and wealth management services
Treasury and financing services to related parties
Distribution of goods from designated zones.
Logistics services
Categories of non-qualifying activities
Transactions with natural persons.
Banking and insurance activities.
Finance and leasing.
Ownership or exploitation of immovable property located outside the free zone.
De minimis requirements
Free zone entities can derive a certain amount of income from non-qualifying sources without losing their QFZP status through the de minimis requirement.
If a free zone entity generates Dh10 million in total revenue, of which Dh600,000 is derived from non-qualifying sources, the non-qualifying revenue represents 6 percent of total revenue. Since this does not meet the de minimis requirement, the entity will not be able to retain its QFZP status in the current and following four taxable years.
Treatment of real estate
Immovable property income outside a Free Zone is not taxable. However, commercial property transactions within a free zone with other free zone entities are eligible for the 0% corporate tax rate. Maintaining favorable tax treatment requires proper classification and compliance.
Regulatory provisions of GAAR
A key element of the UAE's tax system is the General Anti-Avoidance Rule (GAAR), which prevents tax evasion and ensures tax benefits are not obtained by abusive means.
A GAAR provision allows the Federal Tax Authority (FTA) to disregard or re-characterize transactions that lack commercial substance or are primarily aimed at gaining a tax advantage. To avoid penalties, companies should make sure their tax planning strategies are robust, commercially driven, and GAAR compliant.
In order to operate in a free zone, companies must comply with the regulations and requirements.
Conformity with substance requirements
Maintaining QFZP status requires adequate substance. Within the Free Zone, companies must ensure they have sufficient assets, employees, and operational expenditures.
Accurate transfer pricing
Maintaining comprehensive transfer pricing documentation and adhering to the arm's length principle is crucial. As a result, transactions involving related parties reflect fair market values and are able to withstand tax authorities' scrutiny.
Complying with de minimis requirements
In order to comply with the de minimis requirements, revenue sources should be monitored regularly. The loss of QFZP status and the associated tax benefits can result from exceeding these thresholds.
GAAR compliance through proactive measures
Companies should evaluate their tax arrangements to ensure they are commercially meaningful and not just designed for tax savings. A proactive approach to GAAR compliance reduces the risk of adverse tax assessments and penalties.
Contact Zyla Accountants today for support with Corporate Tax.