In June 2023, UAE implemented its federal corporate tax system, and this has brought significant change in the taxation that existed. For VAT, the general rate is at 9% applied to all taxable income exceeding AED 375,000. Free Zone companies on the other hand receive a relief of getting such taxation cut by half if they qualify for Qualifying Income under UAE Corporate Taxation capped at zero percent. This is a benefit that keeps the UAE as a world’s business point of interest, especially Free Zone related entities.
It is essential for Free Zone businesses to understand what Qualifying Income means in relation to UAE corporate tax if they wish to achieve tax-efficiency. This blog explores the definition and qualifying income, requirements of the qualify, rules and conditions of tax relief and incentives, what are implications for the UAE corporate tax filing.
Defining Qualifying Income
In accordance with the UAE Corporate Tax Law, a certain type of income namely Qualifying Income can potentially be subject to a 0% corporate tax rate for Free Zone Persons if they satisfy the requirements prescribed under the UAE Corporate Tax Law.
Not all money made by a business is eligible for more favorable tax status. Other income which does not fit the definition is treated as non-qualifying income, and typically subject to full corporate tax.
In summary, the current regime of qualifying income corporate tax rules shelters such income in the UAE if it is used to drive real economic activity in jurisdiction and not simply a vehicle for accessing Free Zone benefits.
Criteria for Qualifying Income
Businesses must have qualifying income to take advantage of the 0% tax rate, and it has stringent requirements for what qualifies. These requirements help to ensure that tax breaks flow only to compliant, substance-driven business efforts.
Key criteria include:
Free Zone Status
The entity must be a registered Free Zone Person and licensed to carry out business.
Nature of Income
Qualifying income typically includes:
Revenues from sales to other Free Zone Persons
Revenue generated from the allowed operations in the Free Zone
Some foreign sourced income conditions apply.
Substance Requirements
The company must have economic substances in the UAE including workers, assets, and business activities.
Compliance with Transfer Pricing Rules
Unrelated transactions need to be on an arm’s length basis and documented.
No Electing for Standard Taxation
The company should not have made an election taxed at the regular Corporate Tax rate of UAE.
There is maintenance of any of these requirements, which will cause the income to be considered non-qualifying.
Tax Credits and Incentives
The 0% Corporate Tax rate on eligible income for QFZPs is the most significant incentive that makes Free Zones very appealing for international trading, holding and intellectual property (IP) driven operations.
Some of the other tax credits and incentives under the larger regime are:
- Tax credits for foreign taxes to prevent double taxation.
- Deductions for qualified dividends, gains from shareholding and group-internal transfers.
- Small business relief (for sales under AED 3 million, through 2026).
- Unlimited loss carries forward (75% of future taxable income).
For Free Zone entities, preserving QFZP status sustains the primary advantage of zero taxation of Qualifying Income for UAE corporate tax purposes, coupled with no withholding tax on outbound distributions promoting cross-border efficiency.
UAE Corporate Tax Filing for Free Zone Entities
Though 0% tax applies on qualifying income for corporate tax, compliance is compulsory. All Free Zone persons must:
We assist with corporate tax registration at FTA.
File annual tax returns within nine months of the tax period.
Keep up to date audited accounts and Transfer Pricing documentation!
While simplified filing may be available to QFZPs with qualifying income only, correct classification of income is necessary. Sanctions for non-observance, late submission, or errors can be high.
Free Zone companies are encouraged to continuously evaluate their operations considering the qualifying income standards to remain eligible for treatment as a Free Zone company.
How CBM Consultants help Qualifying Income in UAE?
CBM Consultants has a very useful role in ensuring that businesses are correctly calculated the qualifying income for corporate tax in UAE. We help to look further into the nature of business activities, investigating whether the income actually qualifies as qualifying income and if it’s prescribed under Free Zone or UAE Corporate Tax rules. Our company deducts qualifying and non-qualifying income, books for proper accounting treatment, ensures requirements in relation to transfer pricing and substance are met and finds out possible tax credits and incitements. We also enable accurate UAE Corporate Tax filing while reducing the risk of being non-compliant, as well as allowing companies to legally manage their taxes and avail of 0% tax benefit on Qualifying Activities.
Conclusion
Qualifying income under the UAE Corporate Tax is a fairer approach to taxation and gives attractive incentives but still requires substance and transparency. Exception for Free Zone entities gaining and maintaining QFZP status is critically important for free zone entities to mitigate tax exposure, although the application of QFZP depends on satisfied conditions around Qualifying Income and sound UAE Corporate tax filing processing.
Companies will need to consider seeking tax advice on classifications, structuring alternatives, and compliance. Keeping informed, as the regime develops, is crucial to exploiting these opportunities in the UAE’s vibrant economy.
