Qualifying Free Zone Persons (QFZPs): navigating Corporate Tax in the UAE

The UAE introduced a Corporate Tax (CT) framework for the first time as of 1 June 2023, marking a significant shift in its economic policy.

The UAE remains committed to maintaining its status as a business-friendly hub by implementing a competitive tax regime while adhering to global tax transparency and anti-base erosion initiatives, such as those outlined by the Organisation for Economic Co-operation and Development (OECD).

The tax applies to the profits of businesses operating in the UAE as follows:

• 9% CT rate for taxable profits above AED375,000 (c. USD100,000)
• Profits below this threshold are taxed at 0%
• Applicable to UAE mainland/onshore entities
• Free Zone businesses may still enjoy certain exemptions, provided they meet specific criteria.

This guide simplifies the key points about Qualifying Free Zone Persons (QFZPs), the tax advantages and the compliance requirements.

What is a Qualifying Free Zone Person (QFZP)?

A QFZP is a business entity (juridical person) registered in a Free Zone that qualifies for a 0% corporate tax rate on its qualifying income. This tax benefit applies only to income derived from specific activities (defined below) within the Free Zone.

To qualify as a QFZP, a business must meet the following conditions:

1. Be a juridical person registered in a Free Zone (including branches).
2. Maintain adequate substance in the UAE.
3. Earn qualifying income (defined below).
4. Not elect to be taxed under the UAE standard corporate tax regime.
5. Have audited financial statements.
6. Comply with transfer pricing rules and documentation.
7. Fulfil any additional conditions set by the Ministry of Finance (MoF).

Losing QFZP Status

Failing to meet any of the above criteria or choosing to be taxed under the UAE standard corporate tax rules can result in QFZP status being withdrawn. Once withdrawn, the business cannot regain QFZP status for four subsequent tax periods.

What is Qualifying Income?

A QFZP benefits from a 0% tax rate on income generated from qualifying activities, such as:

• Transactions with other Free Zone Persons.
• Transactions with mainland businesses, subject to specific conditions and thresholds.
• Activities that meet de minimis requirements – non-qualifying revenue must not exceed 5% of total revenue or AED5 million, whichever is lower. Exceeding this threshold will taint the QFZP status for the current tax year and next four tax years.Example: If a Free Zone logistics company earns 4% of its revenue from mainland transactions, it remains a QFZP. But if that figure rises to 6%, it will lose its QFZP status.

Qualifying and Excluded Activities

Qualifying Activities:

1. Manufacturing and processing goods.
2. Holding shares and securities.
3. Ownership and operation of ships.
4. Regulated fund and wealth management.
5. Headquarters and financing services for related parties.
6. Aircraft leasing and logistics.
7. Distribution of goods within a Free Zone.

Excluded Activities:

1. Transactions with individuals (except in certain cases, such as shipping or fund management).
2. Banking, finance, leasing and insurance (these are ‘Regulated’ activities).
3. Ownership or use of intellectual property (IP) assets.
4. Transactions involving immovable property, except for commercial property within Free Zones.

How Sovereign can assist

Determining applicability under the CT regime, identifying qualifying income, maintaining adequate substance, and complying with the registration, reporting and filing, audit and transfer pricing rules can be a complex and ongoing exercise in the UAE’s numerous Free Zones.

Sovereign PPG offers tailored support to ensure your Free Zone business remains compliant while maximising the considerable tax benefits that are available. Our services in this area include:

• Comprehensive analysis of your business activities to determine QFZP eligibility.
• Preparing and filing corporate tax returns.
• Assisting with external audits, a mandatory requirement for QFZPs.
• Advising on transfer pricing and de minimis thresholds.