Compliance Corner: Free zone’s Qualifying Commodities Traders can enjoy 0% tax

The UAE corporate tax law applies to Qualifying Commodities Traders (QCT), unless they qualify for exemptions based on the legal structure, nature of business, annual business revenue etc.

The QCT means the trading businesses that deal with the qualifying commodities; and qualifying commodities are metals, minerals, energy, and agricultural commodities that are traded in their raw form on a recognised commodities exchange market. Trading of qualifying commodities means the physical trading activities of qualifying commodities and associated derivative like futures, options etc. to hedge the risk.

The term recognised commodities exchange market refers to a commodities exchange market established in the UAE that is licensed and overseen by regulatory authorities, or a commodities exchange market established and acknowledged outside the UAE that holds equivalent status.

Based on the legal status, we can classify QCT into juridical persons and natural persons. The QCT that are juridical person and incorporated in free zones are deemed Qualifying Free Zone Persons (QFZPs). We can differentiate the juridical persons registered in the UAE mainland and those in free zones, further classifying them into free zone-based juridical persons as either QFZPs (who met the six conditions) or non-QFZPs.

The QCT as a natural person, includes sole establishments, unincorporated partnerships, and freelancers operating in the UAE, and they are subject to same corporate tax treatment whether they operate within or outside free zones. However, if their gross revenue does not exceed one million dirhams in a Gregorian calendar year, they are exempt from corporate tax. Those with revenue up to Dh3 million can benefit from a corporate tax exemption for the tax years ending on or before December 31, 2026. In cases where their income exceeds Dh3 million in a the current and any previous tax period, a zero percent corporate tax rate applies to taxable income up to Dh375,000, with a nine percent tax rate applicable to any income exceeding this threshold.

The QCT classified as juridical persons incorporated in the UAE mainland or in a free zone with non-QFZP status are required to pay corporate tax, even if they have no transactions throughout the year. They must register and file returns. Like natural persons, they can benefit from small business relief if their gross revenue does not exceed Dh3 million in a the current and any previous tax period. For revenues exceeding Dh3 million in a tax period, a zero percent corporate tax rate applies to taxable income up to Dh375,000, with a nine percent tax rate imposed on any income beyond this limit.

The QCT holding QFZP status can benefit from a 0% corporate tax rate when conducting transactions with other free zone persons who are the ultimate recipients, provided that the activities undertaken are not excluded activities. When engaging with non-free zone persons, QCTs with QFZP status can also enjoy a 0% tax rate if they trade in qualifying commodities and associated derivatives, unless fall under excluded activities.

The qualifying commodity must be in a form suitable for trading on a recognized commodities exchange market. Metals, minerals, energy, and agricultural commodities are considered to be in raw form when they satisfy the criteria for trading on the specified exchange (such as gold meeting a purity level of 99.4% in bullion form). The actual trading activity does not necessarily have to take place through the exchange itself. For instance, if gold meets the requirements for trading on a recognized commodities exchange market, it can be classified as a qualifying commodity, irrespective of whether trades involving gold occur on or off the exchange market.

Raw form refers to commodities in their natural and unprocessed state, without any value addition since their growth/extraction/mining, or with minimal processing (like separation of sand, water and other impurities from crude oil) to meet the requirements for trading on a recognized stock exchange. For instance, agricultural commodities like wheat, corn, or soybeans, energy commodities usually refer to crude oil or natural gas, and metal commodities are often gold or silver bars etc.