Conditions for Qualifying Free Zone Person

To qualify as a Qualifying Free Zone Person (QFZP) under the Corporate Tax Law in the UAE, a Free Zone Person must meet several specific conditions. Below are the detailed requirements:

1. Derive Qualifying Income

• The entity must earn Qualifying Income from specific types of transactions, which can include:
  • Transactions with other Free Zone Persons, provided those are not related to Excluded Activities.
  • Transactions involving Qualifying Activities that are not Excluded Activities.
  • Income derived from Qualifying Intellectual Property.
  • Other income types, provided they meet the de minimis requirements.

2. Maintain Adequate Substance in the UAE

• The Free Zone Person is required to carry out its core income-generating activities in the Free Zone. Key elements include:
  • Adequate assets.
  • Full-time employees.
  • Sufficient operating expenditures.
• For distribution activities, this may extend to a Designated Zone.

3. De Minimis Requirement

• The total non-qualifying revenue for a tax period should not exceed:
  • AED 5,000,000, or
  • 5% of total revenue.
• A Free Zone Person that exceeds these thresholds may lose its QFZP status.

4. Election Not to be Subject to Corporate Tax

• The Free Zone Person must not have opted to be taxed at standard Corporate Tax rates. This election could disqualify it from the QFZP status.

5. Compliance with Transfer Pricing Rules

• The entity must adhere to transfer pricing rules and maintain proper documentation relating to transactions with related parties, ensuring they are conducted at arm's length.

6. Audited Financial Statements

• The Free Zone Person is obligated to prepare and maintain audited financial statements for compliance with corporate tax regulations.

7. Additional Conditions

• The Minister may prescribe more conditions that a Free Zone Person must meet to retain QFZP status.

By adhering to these conditions, a Free Zone Person can benefit from a 0% Corporate Tax rate on qualifying income, although it is subject to a 9% rate on any taxable income that does not qualify.

Summary

In summary, to maintain the status of a Qualifying Free Zone Person, compliance with these conditions is essential. Proper documentation, maintaining adequate operational substance, and deriving qualifying income are critical factors that the authorities will consider during evaluations.