Requirements to be a Qualifying Free Zone Person (QFZP)

This article sets out the tests that a Free Zone Person (FZP) must pass to be a Qualifying Free Zone Person (QFZP) under the Corporate Tax Law. Firms in free zones need these rules to hold the 0% rate.

How the 0% Rate Applies to a QFZP's Qualifying Income

The Corporate Tax Law sets a 0% rate on the qualifying income of a QFZP from transactions with other Free Zone Persons, and from certain activities carried on in a free zone. The aim is to draw firms to free zones and to support growth.

Being a Free Zone Person

A Free Zone Person is an entity set up and run in a named UAE free zone. To be a QFZP, it must pass set tests and follow the rules in the Corporate Tax Law. It must keep adequate substance in the free zone and earn qualifying income from permissible activities.

Scope of the Free Zone Corporate Tax Rules

The free zone rules cover income from transactions with other Free Zone Persons and from named qualifying activities. Firms must know which activities and transactions fall in scope, so they can stay compliant and keep the tax benefit.

Beneficial Recipient

To get the 0% rate, the firm must show that the other party to the transaction is the beneficial recipient of the goods or services. The firm must take a direct part in the economic activity that earns the income, not act as an intermediary.

De Minimis Requirements

The de minimis rules cap the non-qualifying revenue a firm may earn and still keep QFZP status. Non-qualifying revenue is income from activities or transactions outside the qualifying list.

Applying the De Minimis Requirements

Under the de minimis rules, a firm must keep its non-qualifying revenue below the set threshold. That calls for careful sums and records of every revenue stream. Say a firm earns AED 10,000,000 in total and AED 2,000,000 of that is from non-qualifying activities: the de minimis sum leaves out the AED 2,000,000 to work out the qualifying income ratio.

Other Criteria to be a QFZP

Beyond the de minimis rules, a firm must meet other tests to keep QFZP status.

Deriving Qualifying Income

A firm must earn qualifying income from permissible activities, as the Corporate Tax Law sets out. That covers transactions with other Free Zone Persons and set activities carried on in the free zone. A firm with no qualifying income yet, because it has not begun to trade, may still pass this test if it can show that it is still setting up.

Arm's Length Principle

The firm must apply the arm's length principle to transactions with related parties. That rule keeps transactions on the terms two unrelated parties would agree, so profit is not shifted and tax stays fair.

Transfer Pricing Documentation

A firm needs sound transfer pricing documentation. It should set out the pricing methods and the transactions with related parties, show that the firm meets the arm's length principle, and keep the tax return clear.

Election Not to be a QFZP

A firm may elect out of the QFZP rules and pay tax under the standard rules and rates. That choice can help in some cases, where the standard rules suit the firm better.

Effect of an Election to be Subject to Standard Corporate Tax Rules and Rates

A firm that makes that choice loses the 0% rate on qualifying income and pays the standard rates on all of its taxable income. The choice binds for a set period, so the firm must weigh the effect with care first.

Losing Status as a QFZP

A firm can lose QFZP status if it fails a test or breaks the rules. It then pays tax under the standard rules and rates for the tax period in which it failed, and the next four. To regain status, it must be assessed again and meet every requirement.

Conclusion

This article has set out the tests that a Free Zone Person must pass to be a QFZP. Firms in free zones need them to keep the 0% rate on qualifying income. The next article sets out how to work out corporate tax for a Free Zone Person, step by step.

Firms that meet these rules can steer the free zone tax regime with more ease, take the reliefs on offer and so support their own growth.