Federal Tax Authority releases much-anticipated free zone persons guide

The Federal Tax Authority (FTA) of the UAE has recently released the free zone persons’ guide, which greatly improves users’ understanding about the application of corporate tax on free zone businesses. This guide addresses multiple key points and incorporates a range of examples and illustrations.

Sections one, two, and three of the guide delve into the glossary, introduction, and overview, offering insights into the terms used, the guide’s objective, and its comprehensive content. Section 12 outlines the responsibilities of qualifying free zone persons (QFZPs), encompassing registration, financial statement preparation, auditing, tax return submission, payment, and the maintenance of records for seven years to prevent penalties. Section 13 is dedicated to the update and amendment history.

Section four outlines the criteria for becoming a QFZP, consisting of six specific requirements. A free zone person is considered a QFZP by default unless one of the conditions for QFZP status is not fulfilled, or if the QFZP chooses to be subject to tax.

Users were seeking clarification on the beneficial recipient criteria for transactions with other free zone persons to qualify for zero-rated status, which has been elaborated upon with detailed explanations and examples. Another key area of interest in this section is the categorization of revenue into out-of-scope, exempt, standard-rated (nine per cent), total revenue, non-qualifying revenue, and qualifying revenue, providing valuable guidance for calculating the de-minimus percentage.

Section five offers instructions on calculating corporate tax for QFZPs. Revenue earned by a QFZP can fall into different categories, as mentioned above. The guide emphasises that separate financial statements are not required for each revenue category. Instead, within a single financial statement, revenue should be segmented, expenses should be allocated using the appropriate allocation keys, and taxable income to be calculated following the general rules outlined in Article 20 of the law.

Section six addresses the adequate substance requirements for QFZPs conducting qualifying activities that generate qualifying income within the free zone or designated zone, particularly in distribution businesses. Core income-generating activities can be outsourced to other free zone persons, other designated zone persons in distribution businesses, any other person within the UAE, and unrelated parties outside the UAE for qualifying intellectual property businesses, provided there is adequate supervision. This requirement of adequate substance must be consistently upheld, and it has been explained with relevant examples.

Section seven elaborates on domestic and foreign permanent establishments (PE), clarifying that the income of both types of PE is directly taxed at nine per cent, and it should not be included in the de-minimum calculation. For foreign PEs, the QFZP may seek an exemption under Article 24 of the law, stating that the income and associated expenses of foreign PE should not be considered.

The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above article is not an official opinion of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.