Qualifying Income for Freezone Persons under UAE Corporate Tax

Understanding Qualifying Income

Qualifying Income refers to the earnings of a Qualifying Free Zone Person that are not subject to any Corporate Tax, resulting in a 0% tax rate. This type of income is determined by engaging in approved business activities or transactions within the designated Qualifying Free Zone. In short, if you meet the criteria and conduct business within the Qualifying Free Zone, any income you generate will be considered Qualifying Income and will not be subject to UAE Corporate Tax. That’s how Qualifying Income for Free Zones works.

Qualifying Income under UAE Corporate Tax

Free Zone Businesses in the UAE can benefit from a 0% corporate tax rate. However, certain criteria must be met to obtain the status of a Qualifying Free Zone Person (QFZP). The federal decree law of corporate tax outlines these conditions, which include generating revenue that falls within the category of Qualifying Income.

In a nutshell, a 0% corporate tax rate applies to individuals who meet the criteria as a Qualifying Free Zone Person (QFZP) by earning revenue that qualifies under the regulations of Qualifying Income in the corporate tax law. Those who do not fulfill the requirements for Qualifying Income will be subject to a 9% corporate tax rate and will not be considered a qualifying free zone person.

Qualifying Income for Freezone Persons under UAE Corporate Tax

As per the regulations outlined in Cabinet Decision No. 55 of 2023, the qualifying income for a qualifying free zone person is determined based on the following criteria.

  • Qualifying income for a qualifying free zone person encompasses revenue generated from transactions with individuals inside the free zone, specifically related to qualifying activities that are not classified as excluded activities.
  • The income for a qualifying free zone person is derived from transactions conducted with non-Free Zone Persons, excluding income generated from excluded activities. These excluded activities are determined by a decision made by the Minister and pertain to activities that result in non-qualifying income for the individual operating within the qualifying free zone.
  • Additional income falls under the qualifying category when the Qualifying Free Zone individual meets the De Minimis requirements.
  • If the Free Zone Person is the recipient of the services or goods, the income will be deemed as originating from transactions with that Free Zone Person.

 

Determining Qualifying Income for Domestic or Foreign Permanent Establishments

  • If a Qualifying Free Zone individual has a domestic or foreign Permanent Establishment, the income payable to that establishment will be regarded as Taxable Income and subjected to a 9% Corporate Tax for the free zone business.
  • When a Qualifying Free Zone Person possesses a Domestic or foreign permanent establishment and generates income within a designated tax period, the taxable earnings accumulated during that specific timeframe will be treated as if they belong to a distinct and autonomous entity, which is considered related to the Qualifying Free Zone Person.

 To know more about Qualifying Income for Free Zone Persons, check out here.

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