The United Arab Emirates (UAE) has long been a hub for businesses due to its strategic location, modern infrastructure, and most notably, its tax-friendly environment. However, with the new Corporate Tax (CT) Law effective from June 1, 2023, businesses operating in the UAE, particularly in the Free Zone, need to stay updated with the recent changes.
One of the crucial aspects of the new CT law is the concept of ‘Qualifying Income,’ which has recently been clarified by the UAE Ministry.
What is ‘Qualifying Income’?
Under the new CT law, a company becomes a Qualifying Free Zone Person (QFZP) when it meets specific conditions and earns ‘Qualifying Income.’ The QFZP are eligible for a 0% tax rate on their Qualifying Income, while a 9% tax rate applies to other Taxable Income.
However, until recently, the term ‘Qualifying Income’ was not defined in the CT law. The recent clarification by the Ministry provides a clearer picture.
Defining the Source of ‘Qualifying Income’
The Qualifying Income needs to be determined depending on the source of the income:
- Transaction with a Free Zone person: All revenue qualifies as Qualifying Income, except for the revenue from ‘Excluded Activities.’
- Transaction with a Non-free Zone person (including a person outside the UAE): Only the income derived from ‘Qualifying Activities’ and not from Excluded Activities counts as Qualifying Income.
- Any other income: It qualifies if it meets the ‘de-minimis’ threshold limit, i.e., 5% of total revenue or AED 5 million, whichever is lower.
What Counts as ‘Qualifying Activities’?
‘Qualifying Activities’ include a wide range of strategic business activities, including manufacturing, processing, distribution for resale purposes, holding of shares and securities, shipping business, logistics services, reinsurance services, fund/investment management services, and more.
On the other hand, ‘Excluded Activities’ include transactions with natural persons, banking, insurance, leasing business, certain activities connected to immovable property, and activities connected to intangible property.
What Do Businesses Need to Do?
- To enjoy a 0% CT rate, a business in the UAE Free Zone needs to meet several conditions, including:
- Maintain adequate substance in the State
- Transactions with related parties and connected persons must be at arm’s length
- Prepare audited financial statements
- Derive ‘Qualifying Income’
- Non-qualifying Income should not exceed the ‘de-minimis’ level
These regulations are quite complex, and businesses need to evaluate whether they meet all the conditions.
At KRV Auditing, we understand that navigating these new tax laws can be challenging. Our team of tax experts is ready to provide tailored advice to ensure your business benefits from these changes while remaining compliant with the law. Contact us today to learn how we can assist you in understanding and implementing the new UAE CT law.
