Introduction

The UAE has established itself as a vibrant commercial center, drawing a large number of foreign investors and businesses. To further attract businesses, the UAE government granted preferential tax treatment for enterprises operating within designated free zones. Among these advantages is the ability for Qualifying Free Zone Residents to pay 0% corporate tax on their “Qualifying Income.” This article dives into the specifics and standards that must be completed in order to be eligible for this preferential tax rate.

Eligibility Requirements for Qualifying Free Zone Residents

Several requirements must be completed in order to be recognized as a Qualifying Free Zone Person and benefit from the preferential corporation tax rate:

1. Establishing and Maintaining a Substantial Presence in the UAE: A Qualifying Free Zone Person must develop and maintain a substantial presence and activities in the UAE. This indicates that the corporation must have a physical presence inside the designated free zone, including office space, personnel, and tangible assets.
2. Generating “Qualifying Income”: The business must earn money that qualifies for the preferential tax rate. The precise meaning of “Qualifying Income” may differ based on the UAE government’s rules. Businesses must contact with the appropriate authorities or tax consultants to determine the specific type of income that fits inside the desired tax category.
3. Choosing Not to Be Subject to Standard corporation Tax Rates: A Qualifying Free Zone Person must not have elected to be subject to regular corporation tax rates. Companies that want to stay in the preferential tax system can benefit from a 0% corporate tax rate on Qualifying Income.
4. Transfer Pricing Compliance: Transfer pricing relates to the price of commodities, services, and intangible assets between related companies. A Qualifying Free Zone Person must follow the transfer pricing conditions established in the Corporate Tax Law in order to qualify for the preferential tax rate. Compliance will ensure that related-party transactions are handled at arm’s length, reflecting fair market value and preventing any undue profit shifting.

Additional Conditions and Ministerial Decisions

In addition to the four major conditions listed above, the Ministry may impose other requirements on Qualifying Free Zone Persons. These extra criteria may differ based on the free zone and industry sector in which the firm operates. Companies must be updated about any modifications or changes to the required requirements in order to maintain their eligibility for the preferential tax rate.

Noncompliance or Election to Standard Corporate Tax system: If a Qualifying Free Zone Person fails to fulfill any of the statutory requirements or voluntarily elects to be subject to the standard corporate tax system, they will become liable for the normal corporation tax rates. In such circumstances, regular tax rates will apply beginning with the tax period in which the requirements were not satisfied or the election was made.

Conclusion

The establishment of favourable tax rates for Qualifying Free Zone Persons in the UAE has provided another layer for enterprises looking to set up business in the country. Companies can benefit from a 0% corporate tax rate if they fulfill the prerequisites of maintaining substance, generating Qualifying Income, not electing ordinary tax rates, and complying with transfer pricing laws. Businesses must be attentive about changing legislation and seek professional guidance to maintain continued compliance and eligibility for these tax breaks.