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Corporate Tax Guide on Free Zone Persons

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Introduction

The UAE Federal Tax Authority (FTA) has released a comprehensive Corporate Tax Guide for Free Zone Persons (FZPs), shedding light on the intricacies of the UAE Corporate Tax Law and its application to businesses operating within Free Zones. This guide aims to clarify the requirements and benefits for Free Zone Persons to qualify for the 0% Corporate Tax rate.

Understanding Free Zone Persons (FZPs)

Free Zone Persons are entities established in designated Free Zones that enjoy specific tax benefits. To qualify for a 0% Corporate Tax rate, FZPs must meet certain criteria set out in the UAE Corporate Tax Law.

Criteria for Qualifying Free Zone Person (QFZP) Status

For a Free Zone Person to be considered a Qualifying Free Zone Person (QFZP), the following conditions must be satisfied:

  1. Adequate Substance: Maintaining adequate substance within the Free Zone, which includes having sufficient assets, full-time employees, and operational expenses.
  2. Qualifying Income: Deriving income that qualifies under the UAE Corporate Tax Law.
  3. Non-Election for Standard CT: Not opting to be subject to the standard Corporate Tax rate.
  4. Transfer Pricing Compliance: Adhering to arm’s length principles in transfer pricing and maintaining related documentation.
  5. Audited Financial Statements: Keeping audited financial statements to support the QFZP status.
  6. De-minimis Threshold: Ensuring non-qualifying revenue does not exceed the de-minimis threshold.

Key Insights from the FTA Corporate Tax Guide

Adequate Substance

  • FZPs must conduct core income-generating activities within the Free Zone.
  • The scale of substance required depends on the nature and size of the business.
  • Adequate supervision of outsourced activities must be documented and maintained.

Qualifying Activities (QA)

  • Manufacturing and Processing: Involves tangible goods and may include contract or toll manufacturing.
  • Trading: Includes trading in raw and minimally processed commodities.
  • Investment: Holding shares and other securities, including cryptocurrencies, for investment purposes.
  • Fund Management: Encompasses wealth and investment management services.
  • Headquarter Services: Providing strategic and management services to related parties.
  • Treasury and Financing: Centralized cash management and financing services for related parties.
  • Distribution and Logistics: Distribution of goods or materials and logistics services within and outside the Free Zone.

Transfer Pricing

  • Profit allocation must follow OECD guidelines and BEPS Action Plan 7.
  • Documentation for transfer pricing compliance is mandatory.

Additional Considerations

  • De-minimis Requirement: Revenue allocation must adhere to arm’s length principles.
  • Audited Financials: Mandatory for QFZPs.
  • Registration: FZPs must register for Corporate Tax within specified timelines.
  • Domestic/Foreign PE: Guidance on the constitution of permanent establishments within Free Zones.
  • Loss Set-off: Tax losses can be set off against future taxable income.

Conclusion

The FTA’s Corporate Tax Guide provides essential clarity on the requirements for FZPs to benefit from a 0% Corporate Tax rate. FZPs must carefully evaluate their compliance with these conditions to ensure they can fully benefit from the tax advantages available.

FAQs

What is a Free Zone Person (FZP)?

An entity established in a designated Free Zone that can benefit from specific tax advantages.

What is the de-minimis threshold for FZPs?

It is the maximum limit of non-qualifying revenue an FZP can earn without losing QFZP status.

What constitutes adequate substance for an FZP?

Sufficient assets, full-time employees, and operational expenses within the Free Zone.

Are cryptocurrencies included in the qualifying activities for investment purposes?

Yes, holding cryptocurrencies for investment purposes is included.

Do FZPs need to maintain audited financial statements?

Yes, it is mandatory for QFZPs to maintain audited financial statements.

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