QUALIFYING FREE ZONE PERSONS

A Qualifying Free Zone Person (QFZP) is a special designation under the UAE Corporate Tax Law that allows businesses operating in UAE Free Zones to benefit from a 0% corporate tax rate on certain qualifying income, provided they meet specific conditions.

Key Conditions to Be a QFZP

To be considered a QFZP, a Free Zone entity must meet the following conditions:

Maintain Adequate Substance in the UAE

-The entity must conduct substantial business operations within the UAE.

-It must have sufficient staff, assets, and operations in the UAE.

Earn Qualifying Income

The 0% tax rate applies to “Qualifying Income”, which generally includes the following major groups:

-Income from other Free Zone entities except from specifically excluded income.

-Income from transactions with businesses outside the UAE Free Zones but only from conducting the Qualifying Activities.

– Income from Qualifying IP Assets which is calculated under a formula which main criteria is the nexus with the UAE.

Meet the De Minimis Threshold

-If a Free Zone entity earns non-qualifying income, it must not exceed the minimis limit (typically 5% of total revenue or AED 5 million, whichever is lower).

-Exceeding this limit disqualifies the entity from the 0% tax benefit.

Comply with Transfer Pricing Rules

-Transactions must be at arm’s length and properly documented.

Not Elect to Be Taxed at 9%

-A Free Zone entity may voluntarily elect to be taxed at 9% instead of benefiting from the QFZP regime.

Prepare Audited Financial Statements

-A Free Zone entity, to retain a QFZP status, must prepare audited financial statements for each tax period.

Tax Implications for a QFZP

-0% Corporate Tax on qualifying income.

-9% Corporate Tax on excluded (taxable) income.

List of Qualifying Activities

A Free Zone entity must generate income from one or more of the following activities to qualify:

-Manufacturing of Goods or Materials: Includes industrial production, assembly, and processing within a Free Zone.

-Processing of Goods or Materials: Transforming raw materials into finished products.

-Holding Shares and Other Securities: Owning shares in subsidiaries or other businesses (passive investment).

-Ownership, Management, and Operation of Ships: Maritime activities such as leasing, chartering, and ship management.

-Reinsurance Services: Providing insurance coverage to other insurance companies (not direct insurance).

-Fund Management Services: Managing investment funds, provided the fund is regulated under UAE laws.

-Wealth and Investment Management Services: Managing assets and investments for clients.

-Headquarters Services to Related Parties: Providing management, control, and administrative services to group companies.

-Treasury and Financing Services to Related Parties: Intra-group lending, cash pooling, and financial risk management within a group.

-Financing and Leasing of Aircraft: Owning, leasing, or financing aircraft registered in the UAE.

-Logistics Services: Warehousing, transportation, and distribution services.

-Distribution of Goods in or from a Designated Zone: Selling goods from a Designated Free Zone (e.g., Jebel Ali Free Zone) with direct export or resale outside the UAE.

-Any Activities that Support the Above: Ancillary activities that enable or facilitate the core Qualifying Activities.

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