When Can a Free Zone Person Be a Qualifying Free Zone Person As Per CT Law In UAE?

Ahamed Harshad
Senior Associate - LP Dubai

05-May-2023

The UAE is home to numerous free zones that provide companies with various tax exemptions and other benefits. One of these benefits is a preferential corporate tax rate of 0% on Qualifying Income for Qualifying Free Zone Persons (QFZPs). But what does it take to be considered a QFZP?

To be a QFZP, a Free Zone Person must meet certain requirements:

1. Adequate Substance In The UAE

To be a QFZP, a Free Zone Person must have adequate substance in the UAE. This means that they must have an office, employees, or other physical presence in the country.

2. Derive Qualifying Income

A QFZP must derive Qualifying Income to enjoy the tax benefits. Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister. 

3. Not Have Made An Election To Be Subject To Corporate Tax At The Standard Rates

QFZPs cannot elect to be subject to Corporate Tax at the standard rates if they want to enjoy the tax benefits. By not electing to be subject to Corporate Tax at the standard rates, QFZPs can avoid paying the usual corporate tax rate.

4. Comply With Transfer Pricing Requirements

QFZPs must comply with transfer pricing requirements to ensure that related entities are pricing their transactions at arm's length. This means that they must ensure that the prices they charge for goods and services transferred between related entities reflect what would be agreed upon between unrelated parties in similar circumstances.

The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet.

If a QFZP fails to meet any of the conditions or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard corporate tax rate from the beginning of the tax Corporate Tax period where they failed to meet the conditions.

In conclusion, being a QFZP has many benefits, including a preferential corporate tax rate of 0% on Qualifying Income. To be a QFZP, a Free Zone Person must meet specific requirements, including maintaining adequate substance in the UAE, deriving Qualifying Income, not electing to be subject to Corporate Tax at the standard rates, and complying with transfer pricing requirements.

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