The UAE is already a world-class business destination due to its prime geographical location, first-rate infrastructure and favorable Free Zone jurisdictions. But things have changed due to financial Corporate Tax law effective from June 2023. Free Zone firms can continue to benefit from generous tax credits and incentives, but the door to the 0% corporate tax rate depends on one simple idea, Qualifying Income.
Here in this blog, we will have a closer look towards the importance of qualifying income for Free Zone entities while discussing on qualifying Income Tax in UAE Free Zone and much more including tax credit and incentives as well as qualifying immovable property.
What Is Qualifying Income?
Qualifying Income means certain categories of income derived by a Qualifying Free Zone Person (QFZP) which is zero-rated under UAE Corporate Tax Law. A QFZP is a juristic person registered in the free zone under which there are stringent conditions including substance requirements, qualifying income generation, transfer pricing regulations and staying within de minimis thresholds for non-qualifying revenue.
Broadly, Qualifying Income includes:
- Revenues from services to other Free Zone Persons (other than designated activities).
- Income derived from eligible activity (e.g., manufacturing, logistics, distribution of eligible goods, holding in shares for investment purposes, ship ownership or management) with non-Free Zone Persons (mainland or foreign).
- Income from Qualifying Intellectual Property (subject to nexus under the OECD model inspired regime).
- Any income from Qualifying Immovable Property (e.g., commercial aspect of the property in Free Zones).
- Other income, if non-qualifying revenue does not exceed the following threshold (minimum value is selected: either 5% of total revenue or AED 5 million).
Non-qualifying is taxed at the general 9% rate, for example income derived from excluded activities (e.g. banking, insurance, certain transactions within the mainland).
Why Is Qualifying Income Important?
Free Zone businesses must specify as Qualified Income cannot be over-emphasized. Here’s why:
Access to 0% Tax Rate:
The main advantage of Free Zones is the 0% Corporate Tax on Qualifying Income. This keeps the UAE’s international competitiveness in mind as a low tax jurisdiction promotes compliance with international standards and respects existing incentives. Lack of required Qualifying Income causes a complete or partial loss of this benefit for businesses.
Tax-Efficient and Cost-Effective:
We believe that the top percentage income paid by the Fund is less than you may pay on your own tax return. Income derived from international trade or the exploitation of IP can be kept tax free while beneficial structures are being affected, with substantial savings and a cash flow benefit.
Compliance and Risk Mitigation:
If QFZP requirements are not satisfied (including the generation of Qualifying Income), full taxable income will be subjected to a 9% Corporate Tax for the current year as well as the following four years. Correctly categorizing Qualifying Income protects ongoing qualification and prevents penalties.
Business Structuring and Growth:
Qualifying Income supports strategic decision-making, for instance, qualifying activities to do or outsource rules. It incentivizes material in Free Zones (employees, etc.) while affording flexibility for global operations.
Protection from De Minimis Rule:
Even if some income isn’t qualifying, if you don’t go over the threshold, it can maintain 0% on everything else. This flexibility is essential for multi-product businesses.
Qualifying Income is, in effect, the key to keeping Free Zone tax credits and incentives beyond Corporate Tax.
Qualifying Income Tax in UAE Free Zone
During the UAE Free Zone qualifying income tax:
- QFZPs owe 0% on qualifying income.
- Other income that is non-qualifying is taxed at 9%.
- Permanent Establishment of foreign or domestic income is typically non-qualifying and taxed at a rate of 9%.
Special treatment for qualifying Immovable Property:
- Income from commercial qualifying Immovable Property in Free Zone (such as leasing offices or warehouses to other entities in the Free Zones which are beneficial recipients) is eligible for 0%.
- Revenues from residential or private commercial real estate transactions with non-Free Zone Persons are not qualifying.
- De minimis income from some real property is disregarded, which offers additional planning.
Audited financial statements (prepared in accordance with IFRS) and transfer pricing documentation are required for QFZPs to support Qualifying Income.
Tax Credits and Incentives in Free Zones
The main draw is naturally the 0% rate on Qualifying Income, but Free Zones propose other tax refunds, credits and incentives:
- No tax on payments made across borders.
- Foreign tax credit for double taxed income.
- Dividend participation of exemptions applies for profits from subsidiary interest.
- Future R and D incentives (full deductibility, and potential credits from 2026).
These are in addition to the Qualifying Income regime that makes Free Zones great for holding companies, logistics and IP rich businesses.
Conclusion
The significance of Qualifying Income for UAE’s Free Zone businesses rests on it being the foundation of tax efficiency. By anchoring Qualifying Activities, substance and appropriate revenue classification (including that of QIP), companies can achieve 0% tax and benefit from continuing tax credits & investments.
As we have approached 2026 and the regime reaches maturity, expert advice is necessary to negotiate Qualifying Income Tax in UAE Free Zone rules. Good planning can help your business to survive in one of the most dynamic economies around.
