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UAE corporate tax: Free zone persons’ guide unlocks excluded activities

Non-qualifying revenue of a QFZP must not exceed 5% of the net revenue

In our previous article, we delved into the unveiling of the highly anticipated free zone persons’ guide by the Federal Tax Authority (FTA) of the UAE, comprising 13 sections. We presented a summary of each section except for section 10 concerning ‘qualified activities’ and section 11 pertaining to ‘excluded activities,’ which we have covered in this piece.

Juridical persons operating within free zones are assumed as qualifying free zone persons (QFZP), and their revenue can be classified as exempt, standard-rated, qualifying, or non-qualifying. The non-qualifying revenue of a QFZP must not exceed five per cent of the net revenue (total revenue minus exempt and standard-rated revenue) or Dh5 million, whichever is lower. If a QFZP fails to meet any of the six conditions to maintain its QFZP status or chooses to be taxed to benefit from certain reliefs, the juridical person will lose its QFZP designation for the current and the following four tax periods.

The QFZP’s revenue generated from excluded activities is classified as non-qualifying revenue and is considered for de-minimis purposes, unless the revenue is exempt or falls under four standard-rated revenue categories. The guide provides additional details along with examples related to the classification of revenue and de-minimus application.

The revenue derived by the QFZP from natural persons such as sole proprietors, unincorporated partnerships, freelancers, and individuals, regardless of their location, is classified as non-qualifying revenue. However, the regulated fund management, wealth management, and investment management services offered to any person regardless of their location are considered qualifying activities. Additionally, engaging in the ownership, management, and operation of ships, as well as providing financing and leasing services for aircraft, including engines and rotable components, provided to any person irrespective of their location, are also regarded as qualifying activities. Few of these activities have been illustrated with examples in the guide.

The revenue generated by the QFZP from the regulated financial activities (banking business), falls under the excluded activities, but the regulated fund, wealth and investment management services or treasury and financing services to related parties if performed on standalone basis, are considered qualifying activities, irrespective of the geographical location of the customers.

Regulated insurance services provided by the QFZP, involving the acceptance of risks through insurance contracts in both life and non-life sectors, excluding reinsurance and captive insurance, are considered excluded activities. On the other hand, reinsurance services and captive insurance activities, where headquarters services are offered to affiliated entities, are classified as qualifying activities. Captive insurance refers to a form of self-insurance in which a company (or group of companies) creates its own insurance company to provide coverage for its own risks; and the same has been explain along with example in the guide.

The regulated offering of credit or financing for any form of consideration as well as the leasing, renting, or granting of the right to use an asset in return for rent or other consideration, are classified as excluded activities. However, financing and leasing of ships, financing services provided to related parties (as related party financing is not considered a regulated activity in the UAE), and financing and leasing of aircraft, including engines and rotables are qualifying activities. These distinctions are detailed in the Guide, accompanied by examples.

Revenue derived from immovable commercial property located in the free zone, not used for accommodation purposes, and involving transactions with free zone persons, is considered a qualifying activity. However, revenue from any other immovable property is deemed non-qualifying revenue and will be taxed at nine percent without being factored into the de minimis calculation. Revenue from hotels, serviced apartments, and residential properties will be classified as standard-rated non-qualifying revenue.

Except for the qualifying revenue of QFZP derived from qualifying intellectual property and computed using a specific formula, all other revenue arising from intellectual property assets will be categorized as standard rated excluded activities. Section nine of the Guide addresses this matter.

If the QFZP participates in any ancillary activities to bolster the primary activities (dependent activities), any revenue from these activities will be treated in the same manner as the primary activity.

Every section of the guide offers a range of examples to facilitate a comprehensive understanding. Additionally, it is advisable to confirm with your relevant free zone authority to determine whether you are operating in a free zone or designated zone for corporate tax purposes.

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.