UAE CT LAW - Qualifying Freezone person should opt 0% or 9% CT rate

A Freezone person and A Qualifying Freezone person

Every person who is conducting business in a Free Zone is automatically a Free Zone person. However, in order to be a qualified Free Zone Person, all the conditions below must be met. Even if one condition is not met, then the Free Zone Person will not qualify Free Zone Person.?

As per Article 18 of the CT law, in order to be considered a Qualifying Free Zone Person, the Free Zone Person must:

• maintain adequate substance in the UAE;
• derive ‘Qualifying Income’;
• not have made an election to be subject to Corporate Tax at the standard rates; and
• comply with the transfer pricing requirements under the Corporate Tax Law.
• Meet any other conditions as prescribed by the MoF

What does Qualifying Income mean?

As per CT law the term “qualifying income” means any income derived by a qualifying free zone person that is subject to CT at zero per cent.

The scope of the ‘qualifying income’ will be specified in an upcoming cabinet decision.

UAE corporate tax and free zones

Corporate Tax Rate on Qualifying and Non- Qualifying Income

The CT law suggest that Income of the free zone person can be classified into qualifying income and non-qualifying income.

Qualifying Free Zone Persons that meet prescribed conditions will have to pay tax at the following rates:

• 0% on qualifying income
• 9% on taxable income that does not meet the qualifying income definition.

Qualifying Income- 0% Corporate Tax

A Free Zone Person that is a Qualifying Free Zone Person can benefit from a preferential Corporate Tax rate of 0% on their?“Qualifying Income”?only.

Qualifying income is essential for the free zone person to qualify as a qualifying free zone person, and it will be subject to tax at zero per cent. If the qualifying free zone persons have only qualifying income, they will still be liable to submit the return by applying zero per cent CT on their qualifying income.

Income listed in the public consultation document (PCD) could be categorised as ‘qualifying income’ as per the decree.

• Income from transactions with businesses located outside of the UAE;
• Income from trading with businesses located in the same or any other free zone;
• Income from certain regulated financial services directed at foreign markets;
• Income from income the sale of goods by entities located in VAT designated zones to UAE mainland businesses, if the latter remains the importer-on-record.
• Income from transactions between free zone entities and their group companies located in mainland UAE and for the ‘passive’ income earned from the mainland. Such passive income could include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies.

Non -Qualifying Income- 9% Corporate Tax

The PCD provided a differential tax treatment for free zone entities that have a branch in the mainland UAE. A free zone entity having a mainland branch will be taxed at 9 per cent on its mainland sourced income.

If a Qualifying Free Zone Person fails to meet any of the conditions, or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.

UAE Tax Reliefs/ transfer losses for Qualifying free zones are not allowed

Article 26 –Transfers within a Qualifying Group

The UAE CT Law provides tax relief on intra-group transfer of assets or liabilities between Taxable Persons that are members of the same Qualifying Group subject to certain conditions.

Taxable Persons?are regarded as an Exempt Person or a "Qualifying Free Zone Person" are not allowed tax relief on intra-group transfer of assets or liabilities between Taxable Persons that are members of the same Qualifying Group.

Article 27-Business Restructuring Relief

UAE CT Law provides tax relief on mergers, spin-offs and other corporate restructuring transactions where whole or independent part of business is being transferred in exchange of shares or other ownership interest provided subject to certain conditions.

Taxable Persons?are regarded as an Exempt Person or a "Qualifying Free Zone Person" are not allowed Business Restructuring Relief

Article 37-40 Transfer of Losses/Tax Group Formation

As per article 40 a tax group can only be formed if neither the parent nor subsidiary is an exempt person or a Qualifying Free Zone Person. As per clause 1 of Article 38 states as one of the conditions on transfer tax losses that ‘neither is an exempt person nor qualifying free zone person’ .

In case the ‘free zone person’ satisfies required conditions and becomes a ‘qualifying free zone person’ (QFZP), then the income derived by QFZP is termed as ‘qualifying income’ and this is taxed at 0 per cent, then a free zone enterprise and a mainland company cannot transfer tax losses.

If a free zone enterprise elects to pay corporate tax at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary by forming a group or by way of transfer of losses, subject to conditions.

It is pertinent to note that as per Article 37 of UAE CT Law, losses prior to the effective date of the law on a particular entity will not be allowed to be adjusted. For example, a business with the tax year starting from January 2024 will not be able to offset losses prior to December 31, 2023.

Further, losses are allowed to be offset only up to 75% of taxable income of that relevant tax period in which these losses are being offset.

(For tax group formation and losses offset criteria click here )

Free zone businesses have to decide depending on the structure whether they should avail 0% exemption or to be taxed at 9 per cent.

Ministerial Decision No. 73 of 2023 on Small Business Relief

On 6th April 2023, Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses has been issued, prescribing conditions for Small Business Relief.

Any Taxable Person’s (being a Resident Person) having revenue for the relevant Tax Period and previous Tax Periods below AED 3 million can claim Small Business Relief envisaged in Article 21 of the Corporate Tax Law.

A "qualifying Free Zone Person" are not eligible for the Small Business Relief.