From core to complementary: Ancillary to qualifying activities enjoy 0% tax benefits too

In the evolving framework of corporate taxation in the UAE, a Free Zone Person (FZP) has a unique opportunity to benefit from a 0% Corporate Tax rate, provided they qualify as a ‘Qualifying Free Zone Person’ (‘QFZP’). This special status is governed by stringent criteria outlined in the Corporate Tax Law, ensuring that only those entities that meet all specified conditions can avail of these benefits.

To attain and maintain QFZP status, a FZP must fulfill several key requirements. Among these conditions is the necessity for the FZP to maintain adequate substance within a Free Zone, derive qualifying income, and avoid electing to be subject to the standard corporate tax rules and rates. Additionally, they must comply with the arm’s length principle, maintain audited financial statements, and ensure that their non-qualifying revenue meets the de minimis requirements. Qualifying income for a QFZP encompasses a variety of activities, provided these are conducted with certain beneficiaries and under specific circumstances. The law provides that a QFZP selling goods or services (excluding those related to Excluded Activities) to other Free Zone Persons who are the beneficial recipients, can avail the benefit from the 0% corporate tax rate on the income derived from these transactions. In a case where services or goods are sold to non-Free Zone Persons, the QFZP can still benefit from the 0% corporate tax if the income is derived from transactions related to certain Qualifying Activities. These activities, inter alia, include the manufacturing and processing of goods or materials, trading of qualifying commodities, holding shares and other securities for investment purposes, ownership and management of ships, and a range of financial and logistical services among others.

A significant aspect of the qualifying income criteria involves ancillary activities. These are activities that, while not the main activity, are essential for or closely tied to the main qualifying activity. An activity is considered ancillary if it is necessary for the performance of the main activity or makes a minor contribution to it and is so closely related that it should not be regarded as a separate activity.

The recently released Corporate Tax Guide issued by the Federal Tax Authority on Free Zone Persons has placed special focus on ‘ancillary activities’ and key features for an activity to be ancillary to the main activity along with several examples covering for each of the qualifying activity. At the outset, they must support the main activity of the business, serving as a necessary function rather than being a core activity themselves. For example, administrative support services that facilitate the main business operations could be deemed ancillary. Secondly, these activities should be seamlessly integrated into the business's operations. Their absence would disrupt the main activities, highlighting their necessity.

To assess whether an activity is ancillary, one must consider its financial contribution relative to the total revenue of the business. This evaluation depends on whether the activity’s contribution is minor and how closely it is related to the main activity. For instance, if a car manufacturer includes automotive accessories in its primary production and sales processes, these could be considered ancillary. However, if the same manufacturer sells accessories as a separate, sidelined venture, this would not typically meet the ancillary criteria.

In the case of manufacturing and processing of goods or materials, activities that might be treated as ancillary to qualifying activities include post-sale activities and customer support. Similarly, in the case of trading of qualifying commodities ancillary activities would include warehousing and delivery.

Similarly, where the main activity is ownership, management, and operation of ships ancillary activities would include ship broking i.e. buying, selling, or chartering ships (subject to meeting the primary conditions) and organizing and overseeing voyages including logistics.

In case where main activity is providing reinsurance services, investing and actuarial services, as well as risk management would be classified as ancillary. For entities which are providing headquarter services to related parties, providing training and development is specifically classified as ancillary when one company is providing.