Requirements to be a Qualifying Free Zone Person (QFZP)

In this detailed article, we will explore the essential requirements and criteria that a Free Zone Person (FZP) must meet to be recognized as a Qualifying Free Zone Person (QFZP) under the Corporate Tax Law. Understanding these requirements is crucial for businesses operating in free zones to ensure they benefit from favorable tax treatments. Let's dive into each section in detail.

Introduction

The Corporate Tax Law applies a 0% corporate tax rate to the qualifying income of a QFZP from transactions with other Free Zone Persons and certain activities performed within a free zone. This favorable tax treatment aims to attract businesses to operate in free zones and contribute to economic growth.

Being a Free Zone Person

A Free Zone Person is an entity established and operating within a designated free zone in the UAE. To be recognized as a QFZP, the entity must meet specific criteria and comply with the regulations set forth by the Corporate Tax Law. This includes maintaining adequate substance in the free zone and deriving qualifying income from permissible activities.

Scope of the Free Zone Corporate Tax Rules

The scope of the Free Zone Corporate Tax rules encompasses the income derived from transactions with other Free Zone Persons and specific qualifying activities. It is important to understand which activities and transactions fall within this scope to ensure compliance and benefit from the tax advantages.

Beneficial Recipient

To qualify for the 0% corporate tax rate, the Free Zone Person must ensure that the other party in the transaction is the beneficial recipient of the goods or services provided. This means the Free Zone Person must be directly involved in the economic activity generating the income, and not merely acting as an intermediary.

De Minimis Requirements

The de minimis requirements set thresholds for the amount of non-qualifying revenue that a Free Zone Person can earn while still maintaining its QFZP status. Non-qualifying revenue includes income from activities or transactions that do not fall within the scope of qualifying activities.

Applying the De Minimis Requirements

When applying the de minimis requirements, a Free Zone Person must ensure that its non-qualifying revenue does not exceed the specified threshold. This involves careful calculation and documentation of all revenue streams to ensure compliance. For instance, if a Free Zone Person earns AED 10,000,000 in total revenue, and AED 2,000,000 is from non-qualifying activities, the de minimis calculation would exclude the AED 2,000,000 to determine the qualifying income ratio.

Other Criteria to be a QFZP

Beyond the de minimis requirements, there are additional criteria that a Free Zone Person must meet to maintain its QFZP status.

Deriving Qualifying Income

A Free Zone Person must derive qualifying income from permissible activities as defined by the Corporate Tax Law. Qualifying income includes transactions with other Free Zone Persons and specific activities conducted within the free zone. If a Free Zone Person does not earn any qualifying income because it has not started operations, it may still meet the requirement if it can demonstrate that it is in the process of setting up its business.

Arm's Length Principle

The Free Zone Person must comply with the arm's length principle for transactions with related parties. This principle ensures that transactions are conducted on terms that would apply between unrelated parties, preventing profit shifting and ensuring fair taxation.

Transfer Pricing Documentation

Maintaining appropriate transfer pricing documentation is crucial for a Free Zone Person. This documentation should detail the pricing methods and transactions with related parties, demonstrating compliance with the arm's length principle and ensuring transparency in tax reporting.

Election Not to be a QFZP

A Free Zone Person has the option to elect not to be subject to the QFZP regime and instead be subject to the standard corporate tax rules and rates. This election can be beneficial in certain circumstances where the standard tax regime may offer better advantages.

Effect of an Election to be Subject to Standard Corporate Tax Rules and Rates

If a Free Zone Person elects to be subject to the standard corporate tax rules and rates, it will no longer benefit from the 0% tax rate on qualifying income. Instead, it will be taxed at the standard corporate tax rates on all its taxable income. This election is binding for a specified period, and the Free Zone Person must carefully consider the implications before making this choice.

Losing Status as a QFZP

A Free Zone Person can lose its QFZP status if it fails to meet the required criteria or violates the regulations. If a Free Zone Person loses its QFZP status, it will be subject to the standard corporate tax rules and rates for the tax period in which the non-compliance occurred and the subsequent four tax periods. Regaining QFZP status requires re-evaluation and compliance with all necessary requirements.

Conclusion

In this article, we have explored the detailed requirements and criteria for a Free Zone Person to qualify as a QFZP. Understanding these requirements is essential for businesses operating in free zones to benefit from the 0% corporate tax rate on qualifying income. In the next article, we will delve into the process of calculating corporate tax for a Free Zone Person, providing a comprehensive guide to ensure compliance and optimal tax planning. Stay tuned!

By ensuring compliance with these requirements, businesses can effectively navigate the free zone corporate tax regime and maximize their tax benefits, contributing to their overall growth and success.