Companies in free zones are subject to new tax exemption regulations.

The Federal Tax Authority (FTA) has released a guide that states that businesses operating in free zones in the United Arab Emirates need to meet certain requirements in order to be eligible to become qualified free zone persons (QFZPs) and get a zero percent corporate income tax on their operations.
 

Thomas Vanhee said:

“Possession of audited financial statements, having substance, and earning income from qualifying activities”, partner at Aurifer Middle East Tax Consultancy, adding that it is important to know that save for the cases of permanent establishments, the regime is largely an all-in or all-out regime.

Vanhee said:

 “If a free zone entity earns non-qualifying income which crosses the threshold of Dh5 million or 5 per cent of its overall income, then the free zone entity’s income is entirely disqualified.”

According to Nimish Goel, a partner at WTS Dhruva, the new FTA guide addresses a variety of gray areas, such as the investment in cryptocurrencies, the possibility of a zero percent corporate tax benefit on high sea sales, and domestic bills for export outside the UAE mainland.

“Free Zone businesses must note that interest income from surplus funds is unqualifying. Free zone holding companies with no employees can now clearly meet the substance test based on director decisions - a big win!”, he said.


 

Free zone vs designated zone

In order to find out if they are regarded as a free zone or designated zone for corporate income tax reasons, Thomas Vanhee recommended taxpayers to check with their free zones.

 

Vanhee said:

“For the distribution of goods from a designated zone to constitute a qualifying activity, there is no need for the goods to physically come to the UAE with third country trading (high sea sales). Equally, if purchases are made by a free zone company in a designated zone, the goods can come from the mainland and be exported and still conduct a qualifying activity. Even if goods go from mainland to mainland, the activity will qualify. Equally so, goods imported into the designated zone and subsequently imported would constitute qualifying activity,”
 

He clarified that the term "goods processing" refers to more than just manufacturing.

“Important for commodities traders is that there is no need for the goods to be actually traded on a commodity exchange, it’s sufficient that they may be tradable. This is important for oil and gas, gold, and agricultural products. If a free zone person does not earn any qualifying income in a certain period because it has not started to derive income yet, it doesn’t disqualify them immediately from the qualifying free zone person status.”

As a free zone individual, he continued, investing for oneself (e.g. excess cash) qualifies as financing to "related parties" According to Vanhee, a qualifying free zone person is exempt from having to prepare separate financial statements for their other income and qualifying income.