IQnewswire
The UAE introduced a federal business profits tax regime under Federal Decree-Law No. 47 of 2022, effective for financial years starting on or after 1 June 2023. One of the key incentives under this regime is the 0% tax rate for qualifying zone-based income, designed to promote growth, attract foreign investment, and maintain the UAE’s competitive edge in the Middle East. However, not all zone-based income automatically qualifies, the benefit applies only to certain types of income from recognized entities that meet the Qualifying Free Zone Person criteria (PwC, 2024).
Qualifying Free Zone Income
In this guide, the nature of the income that can be subject to the 0% corporate tax rate in economic zones of the UAE is described, including activities that are permitted, transactions, exports, intellectual property, and restrictions on the de minimum.
i. Income from Approved Free Zone Activities
The UAE Ministry of Finance recognizes specific Qualifying Activities in Free Zones. These include:
- Trading, manufacturing, and logistics conducted inside a designated zone.
- Headquarters functions that support and manage other zone-based or international entities.
- Fund or wealth management, treasury, and other financial services performed within the designated zone.
- Shipping or shipping-related services and ship leasing operations.
- Intellectual property (IP)-related income such as royalties from qualifying patents, software, or trademarks.
The income generated from these activities can be regarded as qualifying income, provided it is received by the zone-based company or through a counterparty that qualifies as a recognized QFZP (Mondaq.com, 2024).
ii. Income from Transactions between Free Zone Persons
One of the conditions is that income from transactions between zone-based entities may qualify if the counterparty is a recognized QFZP. For example:
- Sale of goods between two Economic Zone companies.
- Provision of services from one Free Zone entity to another.
These transactions must be arm’s-length and well-documented for corporate tax purposes. (Federal Tax Authority (FTA), 2024)
iii. Export Revenue
Firms in the UAE economic zones that either export or supply services to a foreign country are usually entitled to the zero rate of tax on their qualifying income. This incentive is aimed at motivating zone-based businesses to increase their operations internationally, but still retain an active and substantive operation in the UAE. One of the key conditions is that the goods or services that are exported should be included in the list of Qualifying Activities which should be approved by the authorities in order to comply with the requirements and to receive the preferential treatment in terms of taxes.
iv. Qualifying Intellectual Property (IP) Income
Income from IP, such as royalties or licensing fees, is considered qualifying if it comes from IP assets that:
- Are registered and recognized in UAE Economic Zones.
- Are actively used in business operations.
- Comply with IP-related corporate tax rules.
Passive or non-utilized IP may not qualify for the 0% rate.
v. Income Exceeding the De Minimis Threshold
Free Zone companies may earn some non-qualifying income, such as:
- Mainland UAE income.
- Non-approved financial services or certain real estate income.
This non-qualifying income must not exceed the de minimis threshold, the lower of 5% of total revenue or AED 5 million per tax period. If this threshold is exceeded, the company may lose QFZP status, and the 0% tax rate benefit will not apply.
Important Notes
- The zone-based company must maintain real operational substance in the UAE (office space, staff, expenditure).
- Audited financial statements and proper record-keeping are mandatory.
- Transfer pricing rules must be observed for related-party transactions.
- Only zones-based recognized by the Ministry of Finance are eligible.
The vision of the UAE government is to foster fair business operation, deter tax evasion, and be on par with the OECD BEPS principles and incentivize honest business operations in Free Zones.
Summary
The amount of income eligible to the 0% corporate tax rate as a zone-based rate is determined by a variety of sources including the approved activities within the zone including trading, manufacturing, intellectual property, shipping, treasury, and headquarters operations, transactions between recognized Eligible Persons, export revenue on goods or services delivered outside the UAE, and qualifying income on intellectual property. Any income over the de minimis base or one received as a result of non-approved activities are taxed under the normal corporate rate. To continue to enjoy the 0 percent rate, one must comply strictly, substantially and keep the records in a proper order to prove that she or he is in compliance with all the requirements imposed.
FAQs
Q1. Which Free Zone activities qualify for 0% corporate tax?
Trading, manufacturing, logistics, IP, treasury, shipping, headquarters, and fund management in recognized Free Zones qualify.
Q2. Can export revenue from a Free Zone company get 0% corporate tax?
Yes, exported goods or services from approved activities are considered qualifying income.
Q3. Does income from transactions between Free Zone entities qualify?
Yes, if both parties are recognized Free Zone Persons and the transactions follow arm’s-length rules.
Q4. What happens if non-qualifying income exceeds the threshold?
The company may lose QFZP status, and the 0% corporate tax benefit will not apply.
Q5. Is IP income eligible for 0% corporate tax?
Yes, income from qualifying, actively used IP in recognized Free Zones is eligible.
