We are all familiar with the UAE corporate tax. A 0% or 9% corporate tax is subjected to Free Zone Businesses and Qualifying Free Zone persons. Also, it is based on their qualifying income. Mainland businesses face the 9% tax rate standard on their taxable income, which exceeds AED 375,000. The UAE has implemented this new tax policy, which is now effective from June 2023.
Moreover, there are certain types of income that are exempt from corporate tax, and these are referred to as “Qualifying Income.” So, in this blog, we will discuss what Qualifying income is, the different types of Qualifying Income, and how Qualifying income is taxed.
What is the Qualifying income in UAE?
Qualifying income is income that is exempt from corporate tax in UAE. Also, this includes dividends, capital, interest, rental income, and royalties. Furthermore, there are two main types of qualifying income in UAE: passive income and active income.
Passive income is earned without active involvement. So, examples of passive income are dividends, interest, capital gains, and royalties. Active income is earned from active involvement in a business. Examples of active income are rental income and income from the sale of goods or services.
Corporate tax in Free Zone
A free zone is a known geographic region within the state that is stated in the Cabinet decision. Also, the UAE has many free zones in Dubai and Abu Dhabi. Interestingly, most free zones attract many foreign investors. Also, it has many multinational and mid-sized companies. Moreover, these are registered with 100% foreign-owned subsidiaries.
Also, free zones enjoy 100% returns on capital and profits, 100% foreign ownership, VAT exemptions, 100% customs and corporate tax exemptions, etc. The new Corporate Tax law enables the UAE government to accomplish the economic growth agenda.
Tax rates for Free Zones
The Ministry of Finance has indicated that the new corporate tax would impact the businesses registered in Free Zones. The free zone businesses would enjoy the corporate tax benefits. Moreover, free zones can only enjoy corporate tax benefits if they comply with the regulatory requirements. Free zones are required to register and file for corporate tax returns and register themselves.
According to the Federal Decree Law on corporate income tax:
A qualifying free zone person should pay corporate tax at the following rates:
- 0% on qualifying income.
- 9% on taxable income that is not qualifying income.
The qualifying income for a free zone entity or free zone person entity is defined by the regulations of the FTA.
However, the corporate tax for businesses on the mainland is calculated on taxable income earned by the income.
Corporate tax rates for mainland and free zones:
| All companies other than free zone entities | Free zone entities |
| Nil for taxable income up to AED 375,000. | Nill on Qualifying Income. |
| 9% on taxable income exceeding AED 375,000. | 9% on non-qualifying income. |
Corporate tax for free zone person
The question that comes to mind is, who is the qualifying free zone person? Also, a qualifying free zone person is one who meets the conditions of a free zone person in this decree law. Also, it is liable to corporate tax of 0% taxable income. Let’s see the conditions for qualifying free zone persons.
Conditions for qualifying free zone persons
Let’s review Article 18 of corporate tax law, which states the conditions.
- A qualifying free zone person meets all of these conditions:
- Keeps adequate substance in the state.
- Derives qualifying income as specified in a decision by the Cabinet.
- Has not elected to be subject to UAE corporate tax.
- Complies with Arm’s length principle and transfer pricing documentation of the decision law.
Also, a qualifying free zone person who fails to fulfill any of the standards above ceases to be a qualifying free zone person as of the start of the ta period.
If the person fails to fulfill the preceding criteria, the Minister should prescribe the conditions under which a person may cease to be a qualifying free zone (QFZ) person.
The 9% taxable income shall apply for the remainder of the tax incentive period. Moreover, this should be stipulated in the applicable legislation of the free zone in which QFZs are registered. Also, the period can be extended with any conditions as determined in a decision issued by the Cabinet. However, every period shall be at most fifty years.
Qualifying activity
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Holding of shares and other securities.
- Ownership, operations, and management of ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarters services to related parties.
Conclusion
If you are considering setting up a business in UAE. Then, you should consider the benefits of free zones carefully. Moreover, Free zones can offer many advantages to businesses, including zero corporate tax, 100% foreign ownership, and no restrictions on profit repatriation.
ebs provides full legal, compliance, and tax advisory support for corporate tax. We offer reliable corporate tax solutions for businesses in UAE for the free zone businesses and mainland businesses. Also, our expert team will help you with any kind of corporate tax issue in the UAE. Our corporate tax services include:
- Corporate tax return filing
- Corporate tax assessment
- Corporate tax accounting
- Corporate tax audit
- Corporate tax compliance
- Corporate tax registration
- Corporate tax advisory
Moreover, we provide other services such as accounting and bookkeeping services, Auditing, Due Diligence audit services, and many more. So, you should get in touch with our experts to discuss our services and contact us today.
Faqs
What is a qualifying free zone?
A qualifying free zone is a designated area in UAE that offers many tax benefits to businesses. Also, QFZs are exempt from corporate tax on Qualifying income. So, it means that businesses operating in QFZs can enjoy zero corporate tax on their profits.
What is qualifying income?
Qualifying Income is income that is exempt from corporate ta in the UAE. So, it includes income from:
- Capital gains
- Dividends
- Interest
- Royalties
- Rental income
What type of businesses can operate in QFZs?
So, there are a wide range of businesses operating in QFZs. Therefore, these include:
- Holding companies
- Investment funds
- Trading companies
- Manufacturing companies
- Investment funds