The QFZP Guide Explained (Part 1)

Here is a more detailed summary of the key points from the UAE Corporate Tax Guide for Free Zone Persons:

1. Scope and purpose: The guide provides an overview of the UAE's Corporate Tax regime for Free Zone Persons, effective from 1 June 2023, focusing on the conditions for a Free Zone Person to be considered a Qualifying Free Zone Person (QFZP) and benefit from the 0% Corporate Tax rate on Qualifying Income.

2. QFZP definition: A QFZP is a Free Zone Person that meets all the required conditions to benefit from the 0% Corporate Tax rate on Qualifying Income.

3. Conditions for QFZP status:

a. The Free Zone Person must be incorporated, established, or registered in a Free Zone.

b. Maintain adequate substance in the Free Zone, including core income-generating activities, assets, employees, and expenditures.

c. Derive Qualifying Income from transactions with Free Zone Persons or Qualifying Activities.

d. Not elect to be subject to standard Corporate Tax rules and rates.

e. Comply with the arm's length principle and maintain transfer pricing documentation.

f. Prepare and maintain audited financial statements.

g. Meet de minimis requirements for non-qualifying income.

4. Corporate Tax rates for QFZPs:

a. 0% on Qualifying Income

b. 9% on Taxable Income that is not Qualifying Income (QFZPs are not eligible for the 0% rate on the first AED 375,000 of Taxable Income)

5. Qualifying Income sources:

a. Transactions with Free Zone Persons who are Beneficial Recipients

b. Qualifying Activities not considered Excluded Activities

c. Qualifying Income from Qualifying Intellectual Property

d. Other income meeting de minimis requirements

6. Adequate substance requirements:

a. Core income-generating activities performed in the Free Zone

b. Sufficient assets, employees, and expenditures in the Free Zone

c. Outsourcing of core income-generating activities to other Free Zone Persons or for R&D purposes

7. Permanent Establishments (PE):

a. Foreign PE: Place of business or presence outside the UAE

b. Domestic PE: Place of business or presence of a QFZP outside the Free Zone in the UAE

c. Consequences of having a PE on QFZP status and income attribution

8. Immovable Property treatment:

a. Income from Commercial Property in a Free Zone transacted with Free Zone Persons is Qualifying Income

b. Other Immovable Property income is treated as Taxable Income and disregarded for de minimis purposes

9. Intellectual Property (IP):

a. Qualifying IP includes patents, copyrighted software, and functionally equivalent rights

b. Qualifying Income from IP determined using a nexus approach and formula

c. Tracking and documentation requirements for IP income and expenditures

10. Qualifying Activities:

a. Manufacturing, processing, trading of commodities, holding shares, ship and aircraft management, reinsurance, fund management, headquarter services, treasury services, and logistics

b. Specific conditions and scope for each Qualifying Activity

c. Ancillary activities closely related to and necessary for the main Qualifying Activity

11. Excluded Activities:

a. Transactions with natural persons (with some exceptions)

b. Banking activities

c. Insurance activities (excluding reinsurance and captive insurance)

d. Finance and leasing activities (with some exceptions)

e. Ownership or exploitation of Immovable Property (except Commercial Property in a Free Zone transacted with Free Zone Persons)

12. Compliance requirements:

a. Record-keeping for 7 years

b. Tax registration with the Federal Tax Authority (FTA)

c. Application of accepted accounting standards (IFRS or IFRS for SMEs)

d. Preparation of audited financial statements

e. Filing of tax returns and payment of Corporate Tax within 9 months of the end of the Tax Period

13. Beneficial Recipient concept:

a. For transactions between Free Zone Persons to qualify for the 0% Corporate Tax rate, the recipient must be the Beneficial Recipient of the services or goods.

b. The Beneficial Recipient has the right to use and enjoy the services or goods without a contractual or legal obligation to supply them to another person.

14. De minimis requirements for non-qualifying income:

a. Non-qualifying revenue should not exceed the lower of 5% of total revenue or AED 5 million.

b. Calculation of total revenue and non-qualifying revenue for de minimis purposes excludes certain income sources.

15. Losses and tax relief:

a. Losses incurred on the Taxable Income component can be carried forward and offset against future Taxable Income, subject to conditions.

b. Losses incurred on the Qualifying Income component cannot be offset, transferred, or carried forward.

c. QFZPs are not eligible for tax relief, such as small business relief, qualifying group relief, or business restructuring relief.

16. Arm's length principle and transfer pricing:

a. Related party transactions must comply with the arm's length principle.

b. QFZPs must maintain transfer pricing documentation, including a master file, local file, and disclosure form, if thresholds are met.

c. Documentation should demonstrate the arm's length nature of transactions and the attribution of profits between the Free Zone parent and its PEs.

17. Mixed-use property:

a. Income from mixed-use property in a Free Zone is subject to Corporate Tax at 0% or 9%, depending on the use of the respective components.

b. Allocation of income between commercial and non-commercial units should be based on appropriate methods, such as land registry records or rental/property value.

18. Outsourcing of core income-generating activities:

a. Outsourced activities are treated as performed by the QFZP if conducted in the Free Zone and adequately supervised.

b. For Qualifying Intellectual Property, R&D activities can be outsourced to any person in the UAE or a non-related party outside the UAE.

19. Qualifying Commodities:

a. Metals, minerals, energy, and agriculture commodities traded on a Recognised Commodities Exchange Market in raw form are considered Qualifying Commodities.

b. Some processing may be allowed to meet trading standards while still being considered "raw form."

20. Regulation of Qualifying Activities:

a. Certain Qualifying Activities, such as reinsurance, fund management, and wealth and investment management services, must be subject to regulatory oversight by the relevant Competent Authority in the UAE.

21. Transactions with natural persons:

a. Transactions with natural persons in relation to the ownership, management, and operation of ships; fund management; wealth and investment management; and financing and leasing of aircraft are not considered Excluded Activities.

These additional points provide further clarity on specific aspects of the UAE's Corporate Tax regime for Free Zone Persons. As we study this further, I will be writing more on the subject.