Determining Qualifying Income for Qualifying Free Zone Persons

Tax regulations in free zones are crucial in attracting businesses and fostering economic growth. This article aims to shed light on the key provisions outlined in a recent decision, highlighting the scope of application, qualifying income, de minimis requirements, income attribution to permanent establishments, income attributable to immovable property, maintaining substance n the freezone, and the role of implementing decisions.

Scope of Application: Article 2

1. The provisions outlined in this Decision apply to Qualifying Free Zone Persons.

Qualifying Income: Article 3

1. Qualifying Income for a Qualifying Free Zone Person, as per the Corporate Tax Law Article (18), includes the following categories of income:
   1. Income derived from transactions with other Free Zone Persons, except for income derived from Excluded Activities.
   2. Income is derived from transactions with a Non-Free Zone Person, but only for Qualifying Activities that are not Excluded Activities.
   3. Any other income provided that the Qualifying Free Zone Person meets the de minimis requirements as stated in this Decision
2. Income will be considered as derived from transactions with a Free Zone Person if that person is the Beneficial Recipient of the relevant services or goods.
3. The term "Beneficial Recipient" refers to a person who has the right to use and enjoy the service or goods without the obligation to pass them on to another person. "Good" encompasses tangible or intangible property with economic value, including movable and immovable property.
4. Qualifying Income also includes income derived from any person if such income is incidental to the income under paragraph (a) or (b) of Clause (1) of this Article.
5. To determine if a Qualifying Free Zone Person has a Domestic Permanent Establishment, the provisions of Article (14) of the Corporate Tax Law apply. The term "Qualifying Free Zone Person" replaces the term "Non-Resident Person" in that Article, and the term "geographical areas outside the Free Zones in the State" replaces the term "State" wherever used.

De minimis Requirements: Article 4

1. The de minimis requirements are considered fulfilled if the non-qualifying revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed a percentage of the total revenue of the Qualifying Free Zone Person in that Tax Period, as specified by the Minister or an amount specified by the Minister, whichever is lower.
2. Non-qualifying revenue includes revenue derived from Excluded Activities or activities that are not Qualifying Activities when the other party involved is a Non-Free Zone Person.
3. Total revenue encompasses all revenue derived by a Qualifying Free Zone Person in a Tax Period.
4. Revenue attributable to immovable property located in a Free Zone from specific transactions is excluded from the calculation of non-qualifying revenue and total revenue.
5. Revenue attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person is also excluded from the calculation.

Income Attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment: Article 5

1. Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person is considered Taxable Income and subject to taxation in accordance with paragraph (b) of Clause (2) of Article (3) of the Corporate Tax Law.
2. The income attributable to such establishments for a Tax Period is calculated as if the establishment were a separate and independent person related to the Qualifying Free Zone Person.

Income Attributable to Immovable Property Located in a Free Zone: Article 6

1. Income derived from specific transactions related to immovable property located in a Free Zone, such as transactions with Non-Free Zone Persons in respect of Commercial Property or transactions with any person regarding immovable property that is not Commercial Property, is considered Taxable Income. It is subject to taxation in accordance with paragraph (b) of Clause (2) of Article (3) of the Corporate Tax Law.
2. In this context, the Taxable Income for a Tax Period refers to the income attributable to the mentioned immovable property, calculated according to the relevant provisions of the Corporate Tax Law.

Maintaining Adequate Substance in a Free Zone and Outsourcing: Article 7

1. A Qualifying Free Zone Person is required to conduct its core income-generating activities within a Free Zone. Additionally, considering the level of activities carried out, they must have adequate assets, a sufficient number of qualified employees, and incur an adequate amount of operating expenditures.
2. Activities can be outsourced to a Related Party or a third party in a Free Zone as long as the Qualifying Free Zone Person maintains adequate supervision over the outsourced activity.

Understanding the provisions outlined in the recent tax decision in Free Zones is crucial for businesses operating within these zones. By clarifying the scope of the application, qualifying income, de minimis requirements, income attribution to permanent establishments and immovable property, maintaining substance, and the role of implementing decisions, this article aims to provide an overview of the critical elements involved

• Read More: Corporate Tax Federal-Decree-Law-No.-On 47-of-2022

• Read More: Impact of UAE corporate tax reform on businesses in free zones

• Read More: Corporate Tax in the UAE: Frequently Asked Questions