OVERVIEW OF CORPORATE TAX LAW FOR FREE ZONE COMPANIES

In accordance with the article 3 of the Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone, the Qualifying Income includes:

• Income derived from transactions with a Free Zone Person, except for income derived from Excluded Activities;
• Income derived from transactions with any Non-Free Zone Person (in the current version of the legislation includes overseas companies), but only in respect of Qualifying Activities that are not Excluded Activities.
• Income derived from the ownership or exploitation of Qualifying Intellectual Property,
• Any other income where the de minimis requirement is satisfied.

The list of Qualifying Activities is defined by the Ministerial Decision No. (265) of 2023 in the article 2 and includes following activities:

a) Manufacturing of goods or materials.

b) Processing of goods or materials.

c) Trading of Qualifying Commodities.

d) Holding of shares and other securities for investment purposes.

e) Ownership, management and operation of Ships.

f)  Reinsurance services.

g) Fund management services.

h) Wealth and investment management services.

i) Headquarter services to Related Parties.

j) Treasury and financing services to Related Parties.

k) Financing and leasing of Aircrafts.

l) Distribution of goods or materials in or from a Designated Zone.

m) Logistics services.

Any activities that are ancillary to the Qualifying Activities specified in paragraphs (a) to (m).

To meet the adequate substance requirements, a free zone company shall:

• undertake its core income-generating activities in a free Zone or a Designated Zone,
• have adequate assets, an adequate number of qualified full-time employees in a Free Zone or a Designated Zone
• incur an adequate amount of operating expenditures in relation to each activity.

If the Qualifying Free Zone Person has adequate supervision of the outsourced activity, it is allowed to outsource core income-generating activities to another person registered in a free zone or a designated zone depending on where such activities are required to be conducted.

Core income-generating activities may vary according to the specific activity but mainly consist of those significant functions that drive the business value for each activity carried out by a Qualifying Free Zone Person and are not exclusively or mostly support activities.

The de minimis requirement allows a Qualifying Free Zone Person to earn small or incidental amount of non-qualifying Income without being disqualified from the Free Zone Corporate Tax regime.

The de minimis requirements are met where the non-qualifying revenue in a tax period does not exceed the lower of:

• AED 5,000,000;
• 5% of total Revenue (calculated as total amount of non-qualifying Revenue total Revenue).

Where the requirement has been met, income that does not fulfil the first two categories of Qualifying Income will be treated as Qualifying Income.

A Qualifying Free Zone Person can elect to be taxed at general rates of Corporate Tax.

The selection can be beneficial for companies, which want to be a part of a tax group or elect for the small business relief subject to meeting the relevant conditions.

To prevent manipulations of taxable income, transactions between related parties and connected persons are controlled by federal tax authorities.

To qualify for 0% tax rate, it is mandatory to keep required documentation and make sure all transactions between related parties and connected persons are on “arm’s length” terms.

This means that prices of the transactions should be the same as if the transaction had taken place between two unrelated independent parties.