UAE Corporate Tax: Qualifying Free Zone Person (QFZP): Conditions, Income Scope and Key Updates

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Regulatory Background

The Cabinet of Ministers has issued Cabinet Decision No. 100 of 2023 (effective 1 June 2023) for determining Qualifying Income for Qualifying Free Zone Persons under Federal Decree Law No. 47 of 2022 (“CT Law”). This replaces the earlier Cabinet Decision No. 55 of 2023.

Further, Ministerial Decision No. 265 of 2023 defines qualifying activities and excluded activities while also prescribing procedural requirements. This replaces Ministerial Decision No. 139 of 2023.

These provisions apply uniformly across all UAE Free Zones, including

• Dubai Free Zones
• Abu Dhabi Free Zones
• Sharjah Free Zones
• Ras Al Khaimah Free Zones
• Fujairah Free Zones
• Ajman Free Zones
• Umm Al Quwain Free Zones.

A. Qualifying Free Zone Person (QFZP)

As per Article 18 of the CT Law, a qualifying free zone person is a free zone entity that satisfies all of the following conditions:

1. Maintains adequate substance in the UAE
2. Derives Qualifying Income
3. Has not elected to be subject to Corporate Tax at standard rates
4. Complies with transfer pricing requirements
5. Maintains audited financial statements (IFRS / IFRS for SMEs)
6. Ensures that non-qualifying revenue does not exceed the de minimis threshold:
   • 5% of total revenue; or
   • AED 5 million (whichever is lower)

Failure to meet any of the above conditions at any time during a tax period results in loss of QFZP status for that period and the subsequent four tax periods.

B. Key Updates Introduced by the Decisions

1. Introduction of Qualifying Intellectual Property (QIP): QIP includes patents, copyrighted software, and similar rights. Marketing-related IP such as trademarks is excluded.
2. Expansion of Qualifying Income:
   Income derived from QIP is now considered qualifying, subject to the OECD’s modified nexus approach.
3. Documentation Requirements:
   • Ownership and exploitation rights of QIP
   • Qualifying and overall expenditure
   • Income derived from QIP
   • Link between expenditure and income
4. Taxation of Non-Qualifying IP Income:
   Income from non-qualifying IP or excess income is subject to corporate tax at 9%.
5. Commodity Trading:
   Income from trading qualifying commodities (metals, minerals, energy, agriculture) is treated as Qualifying Income.

C. Expanded Scope of Qualifying Activities

1. Manufacturing and processing of goods
2. Trading of qualifying commodities
3. Holding of shares and securities (minimum 12 months)
4. Ownership and operation of ships
5. Fund management and treasury services
6. Headquarter services to related parties
7. Financing and leasing of aircraft
8. Logistics and distribution activities
9. Ancillary activities related to the above

D. Excluded Activities

1. Transactions with natural persons (subject to exceptions)
2. Banking and insurance activities
3. Non-qualifying financing and leasing activities
4. Ownership or exploitation of immovable property (with exceptions)
5. Ancillary activities related to excluded activities

E. Qualifying vs Non-Qualifying Income

Incomes Excluded:

• Income attributable to a Domestic or Foreign Permanent Establishment
• Income from immovable property (subject to conditions)
• Income derived from excluded activities
• Income from non-free zone persons (outside qualifying scope)

Incomes Included:

• Transactions with other Free Zone Persons (non-excluded)
• QIP-related income
• Commodity trading income
• Qualifying activities with non-free zone persons
• Other income within De Minimis limits

F. Domestic Permanent Establishment (PE)

A domestic PE refers to any business presence of a free zone entity outside the free zone within the UAE.

Income attributable to such PE is subject to corporate tax at 9%, without the benefit of the AED 375,000 threshold.

G. Income from Immovable Property

Income derived from immovable property in a Free Zone is taxable at 9%. where:

• Transactions are with non-free zone persons, or
• The property is non-commercial in nature

H. De Minimis Rule (Non-Qualifying Revenue)

Non-qualifying revenue includes the following:

• Revenue from excluded activities
• Revenue from non-free zone persons (non-qualifying)
• Transactions where the recipient is not the beneficial owner

Certain revenues are excluded from this calculation, including:

• Income attributable to PE
• Income from immovable property
• Non-qualifying IP income

Other Key Considerations

• Adequate substance requirements are not quantitatively defined but must be demonstrable
• Core income-generating activities may be outsourced, subject to supervision
• Failure to meet De Minimis thresholds results in loss of QFZP status for 5 years
• Domestic PE provisions significantly impact taxation for businesses operating outside Free Zones
• Ancillary activities must remain closely linked to qualifying activities