New Corporate Tax Guide 2024: Requirements For Free Zone Qualifying Person (QFZP) in Dubai, UAE

The United Arab Emirates (UAE) has introduced a brand new corporate tax system which took effect on June 1st, 2023. The framework has important implications for companies operating within Free Zones, especially those looking to get the tax-free corporate rate on income that qualifies for tax. In this blog, we’ll discuss the requirements of the definition of a free Zone Person (QFZP) in Dubai, UAE, as described in the latest corporate tax guide May 2024.  

Overview of the Corporate Tax Framework 

The UAE Corporate Tax Law, Federal Decree-Law No. 47 from 2022 establishes the legal basis to impose an income tax in the United States on corporations as well as business profits. The law will apply to tax periods that begin at or after the 1st of June 2023. The main elements of the framework are: 

• Taxable Income Threshold: A zero corporate tax rate is applicable to income taxable that exceeds AED 375,000 in companies who do not meet the requirements for qualifying Free Zone Persons (QFZPs). 

• The Qualifying free Zone Persons (QFZPs): Companies operating in Free Zones are entitled to an 0% tax rate on income qualifying for tax purposes provided they meet the specific requirements established by tax authorities. Income that is not qualifying is subject to the corporate tax rate of 9%. rate. 

Requirements to be a Qualifying Free Zone Person (QFZP) 

To be eligible for the corporate tax rate of 0% rate A Free Zone Person must satisfy the following corporate tax requirements: (see section 4.1) 

1. Maintain an appropriate Substance within the UAE : The company should be present in the UAE including physical facilities and employees. 

1. Earn Qualifying Income: The income must come from commercial activities that are conducted in the Free Zone or with international clients. 

1. Don’t Elect to be part of the Normal CT Rates: The company must not opt to be taxed in accordance with the normal corporate tax rates that apply to businesses that are not Free Zone companies. 

1. Non-Qualifying Revenue below De Minimis Criteria: Non-qualifying income must not exceed five percent of revenues or 5 million AED, whichever is less. 

1. Audited Financial Statements that are conforming to IFRS: A business must keep accurate financial documents and have them audited in accordance with International Financial Reporting Standards (IFRS). 

1. Make compliance with any other specific conditions outlined By the Free Zone Authority: Compliance with extra conditions imposed by the local Free Zone authorities is essential. 

Key Considerations for Free Zone Businesses 

Free Zone companies have to assure they meet the requirements in order to enjoy the tax rate of 0% for corporate income. rate on income that is qualified. Important considerations include: 

• Domestic Permanent Establishment: Income due to an Domestic Permanent Establishment is subject to the corporate tax UAE  rate unless it is exempted. This applies to income earned from a head office that is not located in of the Free Zone. 

• Transfer Pricing: The principle of arm’s length is a must to determine rates for transactions that are controlled. This includes the receipt or provision of services, goods or loans as well as intangibles. 

• Allocation of Expenses: The expenses must be split between income qualifying and non-qualifying parts together with the principle of arm’s length. 

Example Scenarios 

To illustrate the implementation of these requirements, think about these scenarios 

• Scenario 1: Company D: business with a headquarters outside the Free Zone in the UAE establishes a branch within the Free Zone to perform qualifying actions. If the company meets the criteria to be QFZP, it can benefit of the no-tax corporate rate on income that qualifies that comes from its branch. The income from the headquarters is subject to the corporate tax rate. 

• Scenario 2: Company J: corporation that has a Free Zone parent company and the designation of a Domestic Permanent Establishment (head office located outside of the Free Zone) produces income that is qualified in the Free Zone and taxable earnings from its head office. The company is taxed as a corporation on the income it qualifies for at 0%, and on its tax-deductible income at 9.9%. 

Conclusion 

The latest corporate tax guideline that is aimed at Free Zone Persons in Dubai, UAE, outlines the conditions for companies to be qualified to be Qualifying Free Zone Persons (QFZPs). If you are aware of these requirements and other important considerations, Free Zone businesses can warrant compliance and enjoy the tax-free corporate rate on income that qualifies for tax exemption. It is crucial for companies to read the guidelines carefully and speak with corporate tax  experts  in dubai to ensure they are in compliance with the standards and to optimize their tax strategies. 

Next Step 

As a corporate tax advisor in Dubai, ebs Chartered Accountants plays a crucial role in aiding Free Zone businesses navigate the new tax regulations for corporations and Free Zone Persons in Dubai, UAE. Our professionals focus on providing detailed information on the criteria to become a qualified Free Person (QFZP) from May 2024. They will also ensure that you are in compliance with tax authorities’ rules. They help in determining whether a person is entitled to qualifying income, identifying non-qualifying earnings and preparing certified financial statements. Their experience in taxes and tax compliance will ensure that companies maximize their tax benefits while minimizing obligations, ensuring seamless operation in the Free Zones. 

Contact us now! 

FAQs 

What are the main conditions to become Qualifying Free Zone Individual (QFZP) within Dubai, UAE?

To qualify as a QFZP, the Free Zone person must be able to maintain sufficient substance within the UAE in order to generate income qualifying for the Free Zone as well as comply with transfer price regulations and documentation requirements and create audited financial statements conformity with IFRS and also earn non-qualifying earnings that do not exceed the threshold of de-minimis. Furthermore, the entity has to satisfy any other requirements that are set by the Free Zone authority. 

What are the qualified activities that qualify as a possible candidate for the zero corporate tax rate?

The activities that qualify are the manufacturing and processing of products and/or materials. They also include holding shares or other securities, as well as owning and managing vessels, offering reinsurance services which are controlled through UAE authorities, providing fund management services that are under UAE regulatory oversight, providing investments and wealth management, supplying headquarter services to associated parties, offering treasury as well as financing services to the related parties, leasing and financing aircraft, and distributing items or products in a designated area to resellers, providing logistical services, and participating in any activity that is ancillary the above-mentioned. 

How can I determine if my income that is not considered to be qualifying income is higher than the de-minimis threshold?

Income that isn’t qualified for tax purposes is above the threshold for deminimis in the case that it exceeds AED 5 million or more than 5% total income, whichever is less. If the threshold is reached then the entire amount of income could lose eligibility for the zero tax rate of 1. 

Can I choose to be included in the standard corporate tax rate applicable to businesses that are not Free Zone firms?

No, since you are QFZPs, it is not possible to opt to be a part of the standard corporate tax rate that is applicable to non-Free Zone companies. You must abide with the conditions and regulations that are outlined in the Corporate tax Guide that applies to Free Zone Persons to maintain your QFZP status, and to get the benefit of a zero corporate tax rate for incomes that qualify.