UAE: Impact of corporate tax on free zone entities

Generally all free zone entities will be taxed at nine per cent over and above profits of Dh375,000. However, if the free zone person is a qualifying free zone person earning qualifying income and is satisfying the conditions of De Minimis then the free zone person can claim the benefit of zero per cent corporate tax.

Conditions to be a qualifying free zone person: The free zone entity maintaining adequate substance; deriving qualifying income; not electing for normal rate of corporate tax; satisfying the de minimis requirements; maintaining audited financial statements and; complying with the transfer pricing rules will be considered as a qualifying free zone person.

Understanding the definition of adequate substance is of utmost importance. Cabinet decision No. 55/2023, Article 7 pens down adequate substance as having, core income generating activities ; adequate assets; adequate number of qualified employees and adequate operating expenditure in that free zone.

However, qualifying free zone person will lose the following benefits; the free zone entity cannot avail certain benefits which are extended to normal entities i.e. business restructuring relief; being a member of qualifying group; transfer of tax losses; and taking benefits of small business relief.

Qualifying free zone person earning qualifying income will be eligible for zero per cent corporate tax. ‘Qualifying income’ includes three categories of income according to Cabinet Decision No 55 of 2023, namely: a) income derived from transactions with a non-free zone person, but only in respect of qualifying activities that are not excluded activities; b) income derived from transactions with other free zone persons, provided these are not excluded activities (income will be considered as derived from transactions with a free zone person where that freezing person is the beneficial recipient of the relevant goods or services); and c) any other income, provided the qualifying free zone person satisfies the de minimis requirement.

Qualifying activities include: Manufacturing / processing of goods or materials; logistics services; holding of shares or securities; fund management, wealth management, investment management services subject to regulatory oversight; headquartered, treasury and financing services; ownership, management and operation of ships; distribution of goods/materials in or from a designated free zone for further sale / resale; financing or leasing of aircraft, and reinsurance services subject to regulatory oversight.

Excluded activities include: Banking activities; finance leasing activities except provided to related parties; insurance activities except reinsurance activities; certain transactions with natural persons; ownership or exploitation of intellectual property rights and; ownership or exploitation of immovable property other than commercial property located in free zones.

The writer is Partner - MI Capital Services.