Any income earned by a Qualifying Free Zone Person that is eligible for a 0% corporate tax rate is considered Qualifying Income. This Qualifying Income is determined by business activities or transactions conducted within the Qualifying Free Zone.

Free Zone businesses can benefit from a 0% corporate tax rate. However, to qualify as a Qualifying Free Zone Person (QFZP), certain criteria must be met according to the federal decree law on corporate tax. Specifically, a QFZP must generate revenue categorized as Qualifying Income.

In summary, a 0% corporate tax rate applies to Qualifying Free Zone Persons (QFZP) if their revenue meets the Qualifying Income regulations outlined in the Corporate Tax Law. If these conditions are not met, the entity will be subject to a 9% corporate tax and will not be classified as a Qualifying Free Zone Person.

According to the Cabinet Decision No. 55 of 2023, The following criteria determine the qualifying income for the qualifying free zone person. 

1. Income from Transactions with Free Zone Persons: This excludes income from Excluded Activities.

Applicable when the Free Zone Person is the Beneficial Recipient of the relevant goods or services. A Beneficial Recipient is defined as a person with the right to use and enjoy the goods or services without a contractual obligation to supply them to another party. The term "Good" includes both tangible and intangible property with economic value.

     2.Income from Transactions with Non-Free Zone Persons: Only applicable to Qualifying Activities that are not Excluded Activities.

     3.Income from Qualifying Intellectual Property: This pertains to ownership or exploitation of such intellectual property.These include;

1. Qualifying Income from the ownership or exploitation of Qualifying Intellectual Property is calculated based on a Ministerial decision.
2. Income from non-qualifying intellectual property or exceeding the Qualifying Income is classified as Taxable Income under Article 3

        4. Income Satisfying De Minimis Requirements

1. The de minimis requirements are met if non-qualifying revenue does not exceed a percentage or specific amount of total revenue for the Tax Period, as determined by the Minister.
2. Non-qualifying Revenue includes:
   • Revenue from Excluded Activities.
   • Revenue from non-qualifying activities with Non-Free Zone Persons.
   • Transactions with Free Zone Persons where they are not the Beneficial Recipient.
3. Total Revenue encompasses all revenue from the Qualifying Free Zone Person within the Tax Period.
4. Certain revenue types are excluded from non-qualifying and total revenue calculations, including:
   • Revenue from transactions regarding immovable property in a Free Zone, specifically:
     • Transactions involving Non-Free Zone Persons concerning commercial property.
     • Transactions involving any party regarding non-commercial property.
   • Revenue tied to a Domestic or Foreign Permanent Establishment.
   • Revenue from the ownership or exploitation of intellectual property unless it realtes to qualifying income.

               5. Income from Domestic and Foreign Permanent Establishments

1. 1. 1. Income attributed to a Domestic or Foreign Permanent Establishment is considered Taxable Income and will be taxed.
      2. Taxable Income for a Tax Period is calculated as if each establishment were an independent Related Party.
          

         6. Income from Immovable Property in a Free Zone

          

         1. Income derived from immovable property transactions in a Free Zone is considered Taxable Income, specifically:
            • Transactions with Non-Free Zone Persons involving commercial property.
            • Transactions concerning any party regarding non-commercial property.
         2. The Taxable Income for a Tax Period is calculated based on these transactions as per the Corporate Tax Law.

         1.  

         7. Maintaining Substance and Outsourcing in a Free Zone

          

         1. A Qualifying Free Zone Person must conduct core income-generating activities within a Free Zone or Designated Zone, maintaining adequate assets, qualified employees, and operating expenditures relative to these activities.
         2. Core activities may be outsourced within a Free Zone or Designated Zone, provided there is adequate supervision.
         3. For Qualifying Intellectual Property, core activities can be outsourced to any non-Related Party within the State or outside it, with appropriate supervision.
         4. Core income-generating activities may vary by function but should primarily drive business value, not just support activities.
          

Contact ZIDINI for Assistance

Should you require any further assistance or clarification regarding the process of qualifying Income of a Free Zone entity for the 0% corporate tax rate or need help with any other related matters reach out to us. Our team is available to guide you through the requirements, answer any questions, and provide the necessary support to ensure compliance with the UAE Corporate Tax Law.