Calculating Corporate Tax for a Free Zone Person: A Detailed Guide

A Free Zone Person (FZP) does not pay one tax rate on everything. The rate turns on whether a revenue line counts as qualifying income, and on how costs are split against it. This guide walks through that calculation.

Corporate Tax Rate for a Qualifying Free Zone Person (QFZP)

Two rates apply to a QFZP. Qualifying income pays 0%. Income that does not qualify pays 9%. The two have to be separated in the accounts before either rate can be applied.

Qualifying Income

The law lists the income that counts as qualifying:

- Deals with another Free Zone Person who is the beneficial recipient, leaving out excluded activities.

- Revenue from qualifying activities, leaving out excluded activities.

- Income from qualifying intellectual property.

- Other sources, if the QFZP stays inside the de minimis limits.

Some revenue never counts as qualifying income. That takes in income from a foreign or domestic permanent establishment, income from immovable property (apart from certain commercial property in Free Zones), and income from non-qualifying intellectual property.

Taxable Income That is Not Qualifying Income

To work out the taxable income that is not qualifying, a QFZP must:

- Split its revenue in the accounts into qualifying and non-qualifying parts.

- Put expenses against each part on a reasonable basis, in line with the arm’s length principle.

- Apply the general rules for computing taxable income in Article 20 of the Corporate Tax Law.

Example:

Take a QFZP with revenue from qualifying activities in the Free Zone and from a domestic permanent establishment. It must split its expenses between the two in proportion, so that each taxable figure comes out right.

Allocating Expenses

Expenses go against qualifying and non-qualifying income on a reasonable basis, in line with the arm’s length principle. The accounts should then show the QFZP’s real economic activity.

Example:

Say a company shares HR costs between its Free Zone operations and a domestic permanent establishment. It should split those costs on factors such as headcount or time spent.

Taxable Income Subject to the 9% Rate of Corporate Tax

Income that does not qualify pays 9%. That takes in income from excluded activities, from domestic permanent establishments and from certain non-qualifying intellectual property.

Example:

Where a QFZP earns from Free Zone activities and from a domestic permanent establishment, the establishment’s income pays 9% once its share of the costs is set against it.

Tax Losses

Tax losses carry forward and set against taxable income in later years, subject to conditions. That helps a business through a lean year.

Taxation of a Free Zone Person That is Not a QFZP

A Free Zone Person that does not meet the QFZP tests pays the standard rates that apply to any other business. This is why QFZP status matters. Without it, the 0% rate goes.

Conclusion

A QFZP that keeps qualifying and non-qualifying income apart, and splits costs on a defensible basis, knows which rate applies to what. That is the whole of the calculation. Our next article looks at substance, the key requirement for keeping QFZP status.