Qualifying Free Zone Persons: Navigating Tax Benefits
In the dynamic landscape of the United Arab Emirates (UAE), Free Zone entities have a golden opportunity to harness significant tax advantages. When certain criteria are met, they can qualify as a "Qualifying Free Zone Person" and relish the extraordinary perk of a 0% Corporate Tax rate on their Qualifying Income. This distinct tax incentive, provided under the legislation of the respective Free Zone, is available for a stipulated tax incentive period (subject to renewal).

Key Conditions for Qualification
Becoming a Qualifying Free Zone Person comes with specific requirements:
Deriving Qualifying Income: The crux of tax benefits lies in deriving income from transactions that meet the prescribed criteria.
Maintaining Adequate Substance: Essential income-generating activities should predominantly occur within the Free Zone. These activities can be managed in-house or outsourced to a Related Party or a third party within the Free Zone. Adequate staff, assets, and operating expenditures must be present within the Free Zone.
Meeting De Minimis Requirement:This requirement ensures that non-qualifying Revenue in a Tax Period does not exceed the lower of AED 5,000,000 or 5% of the total Revenue. This permits Qualifying Free Zone Persons to earn a small amount of non-qualifying Income without losing their tax benefits.
Unlike regular Taxable Persons, Qualifying Free Zone Persons do not receive a 0% rate on their first AED 375,000 of Taxable Income, which is not considered as Qualifying Income. Any Taxable Income that doesn't fall into the Qualifying Income category is taxed at the general rate of 9%.

What are Qualifying Income?
• Income from transactions with other Free Zone Persons, excluding income from Excluded Activities.
• Income from transactions with Non-Free Zone Persons, both domestic and foreign, solely concerning Qualifying Activities that are not Excluded Activities.
• Any other income satisfying the de minimis requirement.

Excluded Activities:
Qualifying Income does not encompass revenue derived from Excluded Activities, which include:
• Transactions with natural persons, except for specific Qualifying Activities.
• Banking, insurance, finance, and leasing activities subject to the relevant regulatory oversight of the UAE's competent authority, except for certain exceptions.
• Ownership or exploitation of UAE immovable property, excluding Commercial Property within a Free Zone (unless it involves other Free Zone Persons).
• Ownership or exploitation of intellectual property assets.
• Activities ancillary to the aforementioned activities.
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Qualifying Activities
Qualifying Income includes income derived from transactions with Non-Free Zone Persons only in respect of Qualifying Activities and include:
a) Manufacturing of goods or materials;
b) Processing of goods or materials;
c) Holding of shares and other securities;
d) Ownership, management and operation of Ships;
e) Reinsurance services subject to the regulatory oversight of the relevant competent authority in the UAE;
f) Fund management services subject to the regulatory oversight by the relevant competent authority in the UAE;
g) Wealth and investment management services subject to the regulatory oversight by the relevant competent authority in the UAE;
h) Headquarter services to Related Parties;
i) Treasury and financing services to Related Parties;
j) Financing and leasing of Aircraft, including engines and rotable components;
k) Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale;
l) Logistics services;
m) Any ancillary activities (which serve no independent function) to the above activities.

Satisfying Adequate Substance Requirements
Meeting the adequate substance requirements is crucial. For this, a Free Zone Person must ensure that core-income generating activities, central to their operations, take place within the Free Zone. These activities can be conducted by the Free Zone Person or outsourced to a Related Party or third party located in a Free Zone. The Qualifying Free Zone Person must also exhibit ample supervision over outsourced activities. Adequate staff, assets, and operating expenditures within the Free Zone are essential components. As "adequate substance" varies depending on the nature of businesses, the assessment is done case by case. It considers factors like the number of full-time employees, operating expenditures, physical assets, the nature and extent of activities performed, and other relevant circumstances.

De Minimis Requirement
The de minimis requirement if met, it allows a Qualifying Free Zone Person to earn a minor amount of non-qualifying Income without jeopardizing the tax regime. The requirement is satisfied if the non-qualifying Revenue in a Tax Period does not exceed the lower of AED 5,000,000 or 5% of the total Revenue.

Election for General Corporate Tax Rates
In certain scenarios, a Qualifying Free Zone Person can opt to be taxed at the general Corporate Tax rates. This election can be effective from either the start of the Tax Period in which it's made or the next Tax Period. It remains in place for four subsequent Tax Periods. If a Qualifying Free Zone Person falls short of meeting the specified conditions during a Tax Period, they will lose the 0% Corporate Tax rate from the beginning of that Tax Period. Consequently, they will be taxed at 9% for the total income without basic exemption of AED 375,000 for five Tax Periods, starting from the first non-compliant Tax Period. It's important to note that making an election to be taxed at general rates may cause an entity to forfeit Qualifying Free Zone Person status, which, in turn, affects its ability to utilize certain provisions of the Corporate Tax Law. In the UAE's Free Zones, making the most of these tax benefits can be a game-changer for businesses. By carefully adhering to the specified conditions, entities can unlock these unique tax incentives and enhance their financial prospects. For more information on taxation of freezones, please contact us at finance@hicuae.com