Overview

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”) was issued on 3 October 2022 and was published in Issue #737 of the Official Gazette of the United Arab Emirates (“UAE”) on 10 October 2022.

The Corporate Tax Law provides the legislative basis for imposing a federal tax on corporations and Business profits (“Corporate Tax”) in the UAE.

The provisions of the Corporate Tax Law apply to Tax Periods commencing on or after 1 June 2023.

Purpose of this guide

This guide is designed to provide general guidance on the application of the Corporate Tax Law to Free Zones and Free Zone Persons. It provides readers with an overview of:

• The conditions required to be met for a Free Zone Person to be a Qualifying Free Zone Person (“QZFP”) and benefit from the 0% Corporate Tax rate, and

• The activities that are considered Qualifying Activities and Excluded Activities for a QFZP.

Who should read this guide?

This guide should be read by any Person that is carrying on a Business in a Free Zone in the UAE. It is intended to be read in conjunction with the Corporate Tax Law, the implementing decisions and other relevant guidance published by the FTA.

How to use this guide

The relevant articles of the Corporate Tax Law and the implementing decisions are indicated in each section of the guide.

It is recommended that the guide is read in its entirety to provide a complete understanding of the definitions and interactions of the different rules. Further guidance on some of the areas covered in this guide can be found in other topic- specific guides.

In some instances, examples have been used to illustrate how key elements of the Corporate Tax Law apply to Free Zone Persons. The examples in the guide:

• Show how these elements operate in isolation and do not show all the possible interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal or tax advice purposes, and

• Are only meant for providing the readers with general information on the subject matter of this guide. They are exclusively intended to explain the rules related to the subject matter of this guide and do not relate at all to the tax or legal position of any specific juridical or natural persons.

Legislative references

In this guide, the following legislation will be referred to as follows:

• Federal Law No. 5 of 1985 on the Civil Transactions Law of the United Arab Emirates, and its amendments, is referred to as “Federal Law No. 5 of 1985”,

• Federal Law No. 6 of 2007 on the Organisation of Insurance Operations, and its amendments, is referred to as “Federal Law No. 6 of 2007”,

• Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments, is referred to as “Federal Decree-Law No. 8 of 2017”,

• Federal Decree-Law No. 14 of 2018 Regarding the Central Bank and Organisation of Financial Institutions and Activities, and its amendments, is referred to as “Federal Decree-Law No. 14 of 2018”,

• Federal Decree-Law No. 28 of 2022 on Tax Procedures is referred to as “Tax Procedures Law”,

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments, is referred to as “Corporate Tax Law”,

• Cabinet Decision No. 59 of 2017 on Designated Zones for the Purposes of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments, is referred to as “Cabinet Decision No. 59 of 2017”,

• Cabinet Decision No. 56 of 2023 on Determination of a Non-Resident Person's Nexus in the State for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Cabinet Decision No. 56 of 2023”,

• Cabinet Decision No. 75 of 2023 on the Administrative Penalties for Violations Related to the Application of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments, is referred to as “Cabinet Decision No. 75 of 2023”,

• Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Cabinet Decision No. 100 of 2023”,

• Ministerial Decision No. 43 of 2023 Concerning Exception from Tax Registration for the Purpose of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 43 of 2023”,

• Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, is referred to as “Ministerial Decision No. 73 of 2023”,

• Ministerial Decision No. 82 of 2023 on the Determination of Categories of Taxable Persons Required to Prepare and Maintain Audited Financial Statements for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 82 of 2023”,

• Ministerial Decision No. 97 of 2023 on Requirements for Maintaining Transfer Pricing Documentation for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 97 of 2023”,

• Ministerial Decision No. 114 of 2023 on the Accounting Standards and Methods for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 114 of 2023”,

• Ministerial Decision No. 132 of 2023 on Transfers Within a Qualifying Group for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 132 of 2023”,

• Ministerial Decision No. 133 of 2023 on Business Restructuring Relief for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 133 of 2023”,

• Ministerial Decision No. 265 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 265 of 2023”, and

• Federal Tax Authority Decision No. 3 of 2024 on The Timeline specified for Registration of Taxable Persons for Corporate Tax for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its amendments, is referred to as “FTA Decision No. 3 of 2024”.

Status of this guide

This guidance is not a legally binding document, but is intended to provide assistance in understanding the tax implications of the Corporate Tax regime for Free Zone Persons. The information provided in this guide should not be interpreted as legal or tax advice. It is not meant to be comprehensive and does not provide a definitive answer in every case. It is based on the legislation as it stood when the guide was published. Each Person's own specific circumstances should be considered.

The Corporate Tax Law, the implementing decisions and the guidance materials referred to in this document will set out the principles and rules that govern the application of Corporate Tax in the UAE. Nothing in this publication modifies or is intended to modify the requirements of any legislation.

This document is subject to change without notice.

Scope of the Free Zone Corporate Tax rules

Free Zones are an integral part of the UAE economy and play a critical role in driving economic growth and transformation both in the UAE and internationally. Free Zones offer Businesses various benefits such as relaxed foreign ownership restrictions, streamlined administrative procedures, modern and sophisticated infrastructure, developed Business communities and the availability of additional legal entity forms and commercial activities.

To recognise the continued importance of Free Zones, the UAE Corporate Tax rules enable Free Zone companies and branches that meet certain conditions to benefit from a 0% Corporate Tax rate on certain Qualifying Activities and transactions.

Generally, the Corporate Tax rules for Free Zones are intended to provide a 0% Corporate Tax rate on Qualifying Income from:

• Transactions between QFZPs and Free Zone Persons (where the Free Zone Person is the Beneficial Recipient of these transactions), and

• Certain activities performed from within the prescribed geographical areas of a Free Zone (or a Designated Zone for distribution activities).

The list of Designated Zones for VAT purposes is provided by Cabinet Decision No. 59 of 2017. All taxpayers should check with their respective Free Zone Authority to confirm if they operate in a Free Zone or Designated Zone for Corporate Tax purposes.

Conditions to be a QFZP

To be a QFZP, the Free Zone Person must meet all of the conditions required in the Corporate Tax Law and the implementing decisions, as set out in Sections 3.2.1 to 3.2.8. If a Free Zone Person does not meet all of the conditions, it will no longer be a QFZP and its income will be subject to the standard Corporate Tax rules and rates.

A Free Zone Person will be deemed to be a QFZP unless one of the conditions to be a QFZP is not met, or if the QFZP makes an election to be subject to tax.

Taxation of a QFZP

If the Free Zone Person meets all the conditions (including the de minimis requirements) to be a QFZP, it will be subject to Corporate Tax at the following rates:

• 0% on its Qualifying Income, and

• 9% on its Taxable Income that is not Qualifying Income.

A QFZP is not eligible to benefit from the 0% standard Corporate Tax rate applicable on Taxable Income up to the AED 375,000 threshold, and is subject to 9% on its Taxable Income that is not Qualifying Income.

To determine its Taxable Income that is not Qualifying Income, the Free Zone Person should apply the standard Corporate Tax rules in Article 20 of the Corporate Tax Law (for example, the Foreign Permanent Establishment exemption) to any income sources that do not give rise to Qualifying Income, but without the benefit of Small Business Relief, Qualifying Group Relief, Business Restructuring Relief, transfer of Tax Losses, or the Tax Group regime.

Losing status of a QFZP

A QFZP that elects to be subject to the standard Corporate Tax rules and rates or that fails to meet the criteria to be a QFZP for a certain Tax Period will cease to be a QFZP from the beginning of the Tax Period for which it elects to be subject to Corporate Tax or in which it fails to meet the criteria to be a QFZP, and the four subsequent Tax Periods.

Introduction

The Corporate Tax Law applies a 0% Corporate Tax rate to the Qualifying Income of a QFZP from transactions with Free Zone Persons and certain activities performed from within a Free Zone.^[1]

Each Free Zone is regulated by a Free Zone authority and has its own local regulations. The Free Zone authority regulates the establishment of various businesses, including legal entities and branches within the Free Zone and the issuance and monitoring of trade licences for activities conducted in or from within the Free Zone.

The 0% Corporate Tax rate applies for the remainder of the tax incentive period stipulated in the legislation of the Free Zone in which the QFZP is registered.^[2]

Being a Free Zone Person

A Free Zone Person is a juridical person that is incorporated, established, or otherwise registered in a Free Zone.^[3] This also includes the relevant Free Zone authorities and other Government Controlled Entities that are established in a Free Zone.

A foreign juridical person's registered branch in a Free Zone will be considered a Free Zone Person (with the foreign parent being considered as a Foreign Permanent Establishment). A UAE juridical person that has a branch that is registered in a Free Zone will be a Free Zone Person (with the UAE juridical person becoming a Domestic Permanent Establishment) for the purposes of the Corporate Tax Law.

A Person that is not a juridical person (i.e. an entity without a separate legal personality that is distinct from its owners or founders), such as an Unincorporated Partnership or a natural person, cannot be a Free Zone Person. A juridical person incorporated or established outside of a Free Zone also cannot be a Free Zone Person solely because the place of effective management and control of that juridical person is situated in a Free Zone.

A Free Zone Person will be deemed to be a QFZP unless one of the conditions to be a QFZP is not met, or if the QFZP makes an election to be subject to tax (see Sections 4.4 to 4.6).

Scope of the Free Zone Corporate Tax rules

The 0% Corporate Tax rate under the Free Zone regime applies to transactions and activities performed from within the prescribed geographical areas of Free Zones (including Designated Zones) and is intended to benefit Qualifying Income derived from the following sources:

• Transactions with another Free Zone Person who is the Beneficial Recipient of the transaction, unless the transaction relates to:

  • Excluded Activities (see Section 11),

  • Immovable Property located outside a Free Zone, or

  • non-Commercial Property located in a Free Zone.

• Transactions relating to Qualifying Activities (see Section 10) that are not Excluded Activities.

• Income from Qualifying Intellectual Property that a Free Zone Person has developed (see Section 9).

• Any other income where the de minimis requirements are met.

Beneficial Recipient

The 0% Corporate Tax rate on Qualifying Income is intended to apply to transactions between Free Zone Persons, provided the transactions do not relate to an Excluded Activity. However, to preserve the integrity of the rules, the 0% Corporate Tax rate only applies to those transactions if the recipient (i.e. the Free Zone Person) is the Beneficial Recipient of the relevant services or Goods.^[4]

A Free Zone Person is considered to be the Beneficial Recipient of services or Goods if the Free Zone Person has the right to use and enjoy the services or Goods and is not bound by a contractual or legal obligation to supply such services or Goods to another person.^[5] To be considered as the Beneficial Recipient, the services or Goods must be for use by the Free Zone parent and not by a Foreign Permanent Establishment or Domestic Permanent Establishment.

Where the recipient is acting as a conduit or intermediary (for example, an agent or nominee) for a third party (including a Related Party or group entity), the Beneficial Recipient of that transaction is the third party and not the conduit or intermediary.

Example 2: Beneficial Recipient rule

Company C (a Free Zone Person) is engaged in the Business of providing legal services (i.e. not a Qualifying Activity). Company C enters into a contract with Company M (a Non-Free Zone Person) to provide legal advice in Mandarin to Company M. While Company C performs the legal analysis, Company C outsources the Mandarin and other translation work to Company D (a Free Zone Person). The arrangements are illustrated in the diagram below.

For Company D, Company C would be the Beneficial Recipient of its services. Although Company C provides the translation directly to Company M to meet its commitments to Company M, Company C has the right to use and enjoy the services as Company C does not have a contractual or legal obligation to supply the specific services from Company D to Company M (i.e. the services Company D is performing are not specific deliverables for Company M but are an input for Company C and this is not an instance where Company M could have contracted directly with Company D in order to obtain the legal services). Accordingly, subject to meeting all the other relevant requirements, the income Company D derives from Company C will be considered to be derived from a transaction with a Free Zone Person that is the Beneficial Recipient of the services.

For Company C, the payment from Company M would be considered non-Qualifying Income as Company C is engaged in rendering non-Qualifying Activity to a Non-Free Zone Person (Company M).

When a Free Zone Person sells services or Goods to another Free Zone Person, it is required, in order to determine its own status as a QFZP, to consider if the purchaser is the Beneficial Recipient of such services or Goods. The seller or service provider may rely on a written statement or undertaking from the purchaser (for example, a contractual stipulation) confirming that the purchaser is the Beneficial Recipient and will use the services or Goods for its Free Zone Business, unless the seller has reason to believe that such representation may be incorrect (for example, because the Goods are to be delivered to a third party).

De minimis requirements

To preserve the integrity of the 0% Corporate Tax rate on Qualifying Income, where a Free Zone Person derives income that is outside the intended scope of the rules (see Section 4.3), it will lose its status as a QFZP unless it satisfies the de minimis requirements.^[6]

When assessing the de minimis requirements, Revenue derived from the following sources is not taken into consideration and will not affect a Free Zone Person's status as a QFZP:^[7]

• Revenue attributable to a Foreign Permanent Establishment,

• Revenue attributable to a Domestic Permanent Establishment,

• Revenue from Immovable Property located in a Free Zone (other than Commercial Property located in a Free Zone when the income arises from a transaction with a Free Zone Person), and

• Revenue from the ownership or exploitation of intellectual property (other than Qualifying Income from Qualifying Intellectual Property).

The income that arises from these Revenue sources will be subject to a 9% Corporate Tax rate (unless the income is Exempt Income) as applicable under the Corporate Tax Law.^[8]

For other Revenue sources, the de minimis requirements allow a Free Zone Person to derive an immaterial amount of income from Excluded Activities and non-qualifying sources without affecting its ability to be a QFZP provided the de minimis requirements are satisfied.^[9]

Applying the de minimis requirements

The de minimis requirements are satisfied where the non-qualifying Revenue derived by the QFZP in a Tax Period does not exceed the lower of:^[10]

• 5% of the total Revenue of the QFZP in that Tax Period, or

• AED 5,000,000.

To determine the non-qualifying Revenue and total Revenue to apply the de minimis requirements, the Revenue of a Free Zone Person must be segregated into its components:

• Total Revenue is all the Revenue that a Free Zone Person derives in Tax Period, less the amount of Revenue that is:^[11]

  • Attributable to a Foreign Permanent Establishment (see Section 7.2).

  • Attributable to a Domestic Permanent Establishment (see Section 7.3).

  • Derived from Immovable Property located in a Free Zone, other than Commercial Property transactions with Free Zone Persons (see Section 8 for more information on Immovable Property located in a Free Zone), and

  • Derived from the ownership or exploitation of intellectual property, other than Revenue relating to Qualifying Income from Qualifying Intellectual Property (see Section 9 for information on Qualifying Intellectual Property).

• Non-qualifying Revenue is the Free Zone Person's Revenue from the following activities/transactions once adjusted for the above exclusions:^[12]

  • Excluded Activities.

  • Activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person.

  • Transactions with a Free Zone Person where such Free Zone Person is not the Beneficial Recipient of the relevant services or Goods.

The Revenue that is attributable to a Foreign Permanent Establishment or Domestic Permanent Establishment is determined by applying the arm's length principle.

Example 3: Revenue attributable to a Domestic Permanent Establishment

Company B (a Free Zone Person) manufactures goods in a Free Zone and transfers those goods to its Domestic Permanent Establishment, which then sells those goods for AED 100,000. The arm's length price of the goods when they are transferred to the Domestic Permanent Establishment is AED 70,000.

The Revenue attributable to Company B's Domestic Permanent Establishment will be AED 30,000, which is the difference between the price for which the goods were sold and the arm's length price of the goods when they were transferred to the Domestic Permanent Establishment.

Example 4: Revenue attributable to a Domestic Permanent Establishment

Company D (a Free Zone Person) conducts part of its Business through a Domestic Permanent Establishment and conducts Qualifying Activities through its Free Zone parent. Company D performs routine administrative activities (for example, payroll administration) for the whole entity through its Domestic Permanent Establishment. The arm's length value of the services that are received by the Free Zone parent is AED 100,000.

The arm's length value of those services will constitute Revenue attributable to the Domestic Permanent Establishment and will be excluded for the purposes of the de minimis requirement. The income attributable to those activities would also be taken into consideration when determining the Taxable Income of the Domestic Permanent Establishment.

The segregation of Revenue to determine what is considered “non-Qualifying Revenue” is illustrated in the flow chart below.

Determining 'total Revenue' and 'non-qualifying Revenue'

Income that an Exempt Person derives in its capacity as an Exempt Person (for example, income from an Extractive Business) is also excluded from the above calculations/steps on the basis that the provisions of the Corporate Tax Law do not apply to that Business.^[13]

If the de minimis requirements are not met, the Free Zone Person will not be a QFZP and will be subject to the standard Corporate Tax rules and rates from the beginning of the relevant Tax Period and for the subsequent four Tax Periods.^[14]

Example 5: De minimis requirements to be treated as QFZP

Company E (a Free Zone Person) derives the following Revenue:

Revenue	Amounts in AED
From a Domestic Permanent Establishment	10,000,000
From rental of Immovable Property located in a Free Zone to Non-Free Zone Persons	2,500,000
From transactions with other Free Zone Persons (who are the Beneficial Recipients), of which AED 200,000 relates to Excluded Activities	5,000,000
From transactions with Non-Free Zone Persons, all of which arises from Qualifying Activities that are not Excluded Activities	2,000,000
From other transactions with Non-Free Zone Persons (that are not Qualifying Activities)	300,000

The Revenue from the Domestic Permanent Establishment (AED 10,000,000) and Immovable Property located in the Free Zone (AED 2,500,000) is disregarded in determining whether Company E has met the de minimis requirements to be considered as a QFZP.

Company E has non-qualifying Revenue of AED 500,000, arising from:

• AED 200,000 of Revenue from Excluded Activities from transactions with Free Zone Persons, and

• AED 300,000 of Revenue from other transactions with Non-Free Zone Persons (that are not Qualifying Activities).

For purposes of the de minimis requirement, the total Revenue of Company E is AED 7,300,000 arising from:

• AED 5,000,000 from transactions with other Free Zone Persons (who are the Beneficial Recipients). This includes the AED 200,000 that relates to Excluded Activities,

• AED 2,000,000 from transactions with Non-Free Zone Persons, all of which arises from Qualifying Activities that are not Excluded Activities, and

• AED 300,000 from other transactions with Non-Free Zone Persons (that are not Qualifying Activities).

As Company E's non-qualifying Revenue is 6.85% (500,000/7,300,000) of total Revenue, which exceeds the 5% de minimis threshold, Company E does not meet the requirements to be a QFZP and would, therefore, be subject to the standard Corporate Tax rules and rates on the entirety of its Taxable Income.

Example 6: De minimis requirements to be treated as QFZP

The facts are the same as in Example 5, except that the AED 300,000 from other transactions with Non-Free Zone Persons is attributable to Company E's Domestic Permanent Establishment.

Company E has non-qualifying Revenue of AED 200,000 arising from Revenue from Excluded Activities from transactions with Free Zone Persons. For purposes of the de minimis requirement, the total Revenue of Company E is AED 7,000,000. As the non-qualifying Revenue is 2.86% (200,000/7,000,000) of total Revenue, which is within the 5% de minimis threshold, and does not exceed the AED 5,000,000 de minimis threshold, Company E meets the de minimis requirements to be a QFZP and may be able to benefit from the 0% Corporate Tax rate for QFZPs on its Qualifying Income, provided it meets the other relevant conditions.

Other criteria to be a QFZP

In addition to meeting the de minimis requirements, a Free Zone Person must meet all the following criteria to be a QFZP in a Tax Period:

1. The Free Zone Person must have adequate substance (see Section 6).^[15] This means that it must undertake, in a Free Zone, all of its core income-generating activities relating to transactions and activities that generate Qualifying Income (for distribution activities, these core income-generating activities need to be undertaken within a Designated Zone). It is also required that the Free Zone Person maintains adequate assets, full-time employees, and operating expenditures in the Free Zone (or Designated Zone) to perform the core income-generating activities. The only exception to this requirement is in relation to Qualifying Intellectual Property where R&D activities may be outsourced to certain Persons outside the Free Zone.

2. The Free Zone Person must derive Qualifying Income (see Section 5.2).^[16] A Free Zone Person that does not earn any Qualifying Income in a Tax Period because it has not started to derive Revenue would be considered to meet this requirement (see Section 4.5.1).

3. The Free Zone Person must not have elected to be subject to the standard Corporate Tax rules and rates (see Section 4.6).^[17]

4. The Free Zone Person must comply with the arm's length principle for transactions with Related Parties (see Section 4.5.2) and maintain appropriate Transfer Pricing documentation for its overall UAE operations (see Section 4.5.3).^[18]

5. The Free Zone Person must prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law, regardless of the amount of Revenue that it earns (see Section 12.4).^[19]

Election not to be a QFZP

Being a beneficiary to the 0% Corporate Tax rate, a QFZP will not be eligible for some of the standard features of the Corporate Tax regime. For instance, a QFZP does not qualify for the 0% Corporate Tax rate on Taxable Income up to AED 375,000 that is available to a Person that is not a QFZP. A QFZP also does not qualify for Tax Grouping and specific relief provisions available under the Corporate Tax Law such as Small Business Relief, Qualifying Group Relief, Business Restructuring Relief and transfer of Tax Losses.

The Corporate Tax regime does, however, provide flexibility to allow a Free Zone Person to elect not to be treated as a QFZP, and to be subject to Corporate Tax in the same manner as other Taxable Persons in general.^[24] A Free Zone Person would, in those instances, be able to qualify for the specific provisions listed above, subject to meeting the necessary conditions.

The Free Zone Person has the option to make the election effective from either of:^[25]

• The commencement of the Tax Period in which the election is made, or

• The commencement of the Tax Period following the Tax Period in which the election was made.

The above election can be made by the Free Zone Person in relation to the relevant Tax Period at any time during such Tax Period and after the end of such Tax Period in the related Tax Return. The election cannot be made after the due date for filing the relevant Tax Return has lapsed.

Losing status as a QFZP

If a QFZP fails to meet the criteria to be a QFZP for a Tax Period, the QFZP will cease to be a QFZP from the beginning of that Tax Period and for the four subsequent Tax Periods.^[27]

Corporate Tax rate for a QFZP

If a Free Zone Person meets all the conditions (including the de minimis requirements) to be a QFZP, it will be subject to:^[28]

• 0% Corporate Tax rate on its Qualifying Income, and

• 9% Corporate Tax rate on its Taxable Income that is not Qualifying Income.

A QFZP is not entitled to a 0% Corporate Tax rate on its first AED 375,000 of Taxable Income.

Qualifying Income

Qualifying Income is defined in relation to the following categories of income:^[29]

• Transactions with a Free Zone Person who is the Beneficial Recipient of the transaction (except Revenue from Excluded Activities),

• Transactions in respect of Qualifying Activities (except Revenue from Excluded Activities),

• Qualifying Income from Qualifying Intellectual Property, and

• Other sources (including Revenue from Excluded Activities) if the QFZP satisfies the de minimis requirements.

However, Revenue from the following sources will not give rise to Qualifying Income, even if it falls within the items listed above:^[30]

• Revenue attributable to a Foreign Permanent Establishment,

• Revenue attributable to a Domestic Permanent Establishment,

• Revenue in respect of Immovable Property (other than Commercial Property located in a Free Zone when the income arises from a transaction with a Free Zone Person), and

• Revenue from the ownership or exploitation of intellectual property (other than Qualifying Income from Qualifying Intellectual Property).

Taxable Income that is not Qualifying Income

To determine the amount of Taxable Income that is not Qualifying Income, which will be subject to the 9% Corporate Tax rate, a QFZP will need to:

• separate the Revenue in its Financial Statements into Revenue pertaining to the Qualifying Income component and to the Taxable Income component,

• allocate the expenses in its Financial Statements against those components in a reasonable manner, consistent with the arm's length principle (see Section 5.4), and

• apply Article 20 of the Corporate Tax Law (i.e. the general rules for determining Taxable Income) to determine the Taxable Income that is not Qualifying Income (see Section 5.5).

Allocating expenses

Where a QFZP derives both Qualifying Income and Taxable Income that is not Qualifying Income, it will need to allocate its expenses between the two components to determine the Taxable Income component. This should be done by applying the arm's length principle.^[31] For income attributable to a Foreign Permanent Establishment or Domestic Permanent Establishment, this requires the Foreign Permanent Establishment or Domestic Permanent Establishment to be treated as if it were a separate and independent Person transacting at arm's length (“separate entity approach”). In relation to income that is not connected with a Foreign Permanent Establishment or Domestic Permanent Establishment, the Free Zone Person should make a reasonable allocation between the components to determine the arm's length value of profits attributable to each activity.

To attribute the profit between a Free Zone parent and its Foreign Permanent Establishment or Domestic Permanent Establishment, a two-step approach is required:

• Step one: Conduct a functional analysis to identify the functions performed by the Foreign Permanent Establishment or Domestic Permanent Establishment on one side, and the Free Zone parent on the other side, treating each as separate to the other. This analysis should also take into account the assets used and the risks assumed by the Foreign Permanent Establishment or Domestic Permanent Establishment and the Free Zone parent.

• Step two: Determine the compensation relating to arrangements or dealings between the Foreign Permanent Establishment or Domestic Permanent Establishment and the Free Zone parent, commensurate with their respective functions performed, assets deployed, and risks assumed.

For further information on the two-step approach, see the FTA Corporate Tax Guide on Transfer Pricing. Free Zone Persons can also refer to the 2010 report^[32] and the 2018 report^[33] on the attribution of profits to permanent establishments issued by the OECD for further guidance.

The approach adopted should be pragmatic, taking into consideration cost-benefit considerations and should be fact and circumstance specific.

Where expenses are incurred specifically for a determined income component, those expenses should be allocated directly to that category of income. However, if the QFZP incurs deductible expenses that cannot be directly attributed to the Qualifying Income or Taxable Income component (for example, Interest, centralised general and administration expenses), the QFZP will need to allocate those expenses between the Qualifying Income and Taxable Income components on an arm's length basis using appropriate allocation keys. This allocation should be consistent with the arm's length principle.

Allocation keys are criteria used to determine how costs can be assigned or distributed across different departments, products, services, or divisions within a Business. These keys can be applied to factors such as headcount, floor space, usage, time spent, or any other measurable and reasonable basis. The primary goal of allocation keys is to provide a fair and accurate distribution of costs, allowing for more accurate determination of the income arising from each income component.

The appropriate allocation key will depend on the nature of the expense and the contribution that it makes to each income component. In many cases, an allocation that pro rates expenses based on Revenue will be considered as a reasonable allocation. However, this will not always be the case and the following principles should be considered to determine whether Revenue or some other basis would be appropriate to allocate each expense item. For example:

Cause and effect: An allocation should be consistent with identifiable cause-and- effect relationships (for example, machinery running hours may be an appropriate allocation key to allocate maintenance costs).

Benefits derived: An allocation should be commensurate with the benefits received.

The allocation key chosen must be logical and must fairly represent the benefit that the expense generates for each income component. The allocation key should also be used consistently for each Tax Period unless there is a change in fact pattern which may justify a change in allocation or methodology.

Example 14: Allocation key for independent operations

Company K (a QFZP) has a Free Zone parent and a Domestic Permanent Establishment, each of which performs an independent Business and derives

Revenue from sales to third parties. There is no flow of goods between the Free Zone parent and the Domestic Permanent Establishment. However, Company K's HR, finance, and IT departments in the Domestic Permanent Establishment support both the Free Zone parent and the Domestic Permanent Establishment.

Company K has 60 employees in its Domestic Permanent Establishment and 40 employees in its Free Zone parent. Company K generates AED 25,000,000 in Revenue for the Tax Period ending 31 December 2024, of which AED 12,500,000 relates to sales by the Free Zone parent and AED 12,500,000 relates to sales by the Domestic Permanent Establishment. The structure is reflected in the following diagram.

Company K derives 50% of its Revenue from its Qualifying Income component. However, based on an analysis of the benefits derived by the Free Zone parent and the Domestic Permanent Establishment:

• It may be more reasonable for Company K to allocate 40% of the costs of its HR and finance department to its Qualifying Income component based on headcount and Revenue respectively, as the cost of those functions tends to be correlated to the number of employees and Revenue (this would be subject to a full Transfer Pricing analysis).

• It may be appropriate to allocate IT costs based on the number of IT support tickets raised by the Free Zone parent and the Domestic Permanent Establishment, as this may provide a reasonable indication of the intensity of IT related activity for each income component (this would be subject to a full Transfer Pricing analysis).

Other allocation keys may also be appropriate depending on the facts and circumstances and suitable Transfer Pricing analysis. Company K should adopt an allocation key for each expense that fairly represents the benefit that the expense generates for each income component.

Example 15: Allocation key for interdependent operations

The facts are the same as in Example 14, except that the Domestic Permanent Establishment and Free Zone parent are integrated and interdependent. The market value of the output of the Free Zone parent is AED 12,500,000, of which AED 6,000,000 is realised through sales to third party and AED 6,500,000 represents the arm's length value of output transferred to the Domestic Permanent Establishment. The Domestic Permanent Establishment further processes and sells the output from the Free Zone parent, and this forms part of the AED 19,000,000 of Revenue that the Domestic Permanent Establishment receives from sales to third parties. The structure is reflected in the following diagram.

Company K would allocate indirect costs between its Free Zone parent and Domestic Permanent Establishment applying similar principles to Example 14.

Taxable Income subject to the 9% rate of Corporate Tax

To determine the amount of Taxable Income that is not Qualifying Income and is subject to the 9% rate of Corporate Tax, the QFZP should start from the income and expenses that do not pertain to Qualifying Income. Then the QFZP should determine its Taxable Income under the standard rules of the Corporate Tax Law, subject to the removal of Exempt Income, and the unavailability of reliefs under the Corporate Tax Law that a QFZP is not eligible to benefit from. A QFZP will not be able to benefit from:

• Small Business Relief,^[34]

• Qualifying Group Relief,^[35]

• Business Restructuring Relief,^[36]

• The ability to transfer or receive a Tax Loss,^[37] or

• The ability to be a member of a Tax Group.^[38]

Taxation of a Free Zone Person that is not a QFZP

If a Free Zone Person does not meet the criteria to be a QFZP, the Free Zone Person will be subject to the standard Corporate Tax rates from the beginning of that Tax Period (unless the Free Zone Person qualifies to be an Exempt Person under the applicable articles of the Corporate Tax Law).^[45] The standard rates are:^[46]

• 0% on Taxable Income up to AED 375,000, and

• 9% on Taxable Income exceeding AED 375,000.

Adequate substance

To be a QFZP for a Tax Period, a Free Zone Person must maintain adequate substance in a Free Zone (or in a Designated Zone for the Qualifying Activity of distribution) throughout that Tax Period.^[47] This requires the Free Zone Person to:^[48]

• undertake the core income-generating activities for that Business in the Free Zone (or Designated Zone for the Qualifying Activity of distribution), and

• within the Free Zone (or Designated Zone), maintain adequate assets and qualified full-time employees, and incur an adequate amount of operating expenditures in relation to each of those core income-generating activities.

Core income-generating activities are the essential and value-adding activities that a Free Zone Person performs to generate Revenue from the Business that it operates in a Free Zone (or in a Designated Zone for the Qualifying Activity of distribution). With the exception of outsourced activities in respect of Qualifying Intellectual Property (see Section 6.3), the Free Zone Person must perform core income-generating activities in relation to each Qualifying Activity in the Free Zone otherwise the Free Zone Person cannot be a QFZP. The Qualifying Income of the Free Zone Person should also reflect the level of core income-generating activities performed in the Free Zone (or Designated Zone), consistent with the arm's length principle.

A Free Zone Person may also perform non-core activities relating to its Free Zone Business outside of a Free Zone. Activities are non-core if they do not directly drive sales or are routine in nature.

Core income-generating activities

To meet the requirement to maintain adequate substance, a Free Zone Person would need to have an adequate number of full-time, qualified employees in the Free Zone to perform each of the core income-generating activities that it needs to perform to derive Qualifying Income.

As Businesses vary, determining what constitutes adequate substance will depend on the nature and size of the Business that the Free Zone Person is conducting. To assess substance, the Free Zone Person should:

• Identify the core income-generating activities related to the relevant Business that it performs to derive Qualifying Income.

• Identify the assets, employees and operational costs associated with each core income-generating activity. The same employee of a Free Zone Person cannot be double counted while assessing whether the Free Zone Person has adequate employees to perform the core income-generating activities for all activities or transactions that derive Qualifying Income. For example, if a Free Zone Person performs manufacturing and treasury activities, the employee that oversees the treasury activity cannot be also counted for substance purposes for the manufacturing activity.

• Evaluate whether those assets, employees, and operational costs are consistent with the nature, size and Revenue of the activities and transactions generating Qualifying Income conducted in the Free Zone.

For example, a Free Zone Person engaged in reinsurance activities would need to be sufficiently capitalised in the Free Zone to support the level of risk that it assumes from other insurers.

In addition to performing the relevant core income-generating activities, the Free Zone Person should also ensure that the number of qualified full-time employees is adequate, having regard to the nature and size of the activities carried out. In some cases, it may be reasonable for one employee to perform multiple activities, that said, core income-generating activities will require separate substance per core income- generating activity.

Outsourced activities

For the purposes of assessing whether a Free Zone Person maintains adequate substance, core income-generating activities that are outsourced to another Person in a Free Zone (or Designated Zone for distribution activities) are treated as being performed by the QFZP, provided the QFZP has adequate supervision of the outsourced activity (see Section 6.3.1).^[49] In the case of Qualifying Intellectual Property, core income-generating activities can be outsourced to any Person in the UAE, or any Person outside the UAE that is not a Related Party.^[50]

If a Free Zone Person outsources a core income-generating activity to another Person (i.e. a Related Party or a third party) in a Free Zone or Designated Zone, that activity will be treated as being performed by the Free Zone Person if all of the following conditions are met:^[51]

• The core income-generating activity is conducted in the Free Zone or Designated Zone,

• The Free Zone Person is able to monitor, control and demonstrate adequate supervision of the core income-generating activity being undertaken, and

• The employees, expenditures, and physical assets of the provider of the outsourced activity are adequate in relation to its activity and the specific services provided to the Free Zone Person (for example, there should be no double counting of assets, employees and expenditures if the other Person provides outsourced services for multiple Free Zone Persons).

If a Free Zone Person outsources a core income-generating activity relating to Qualifying Intellectual Property to another Person in the UAE, or to any other Person outside the UAE who is not a Related Party, that activity will also be treated as being performed by the Free Zone Person, provided the Free Zone Person has adequate supervision of the outsourced activity.^[52]

General

A Foreign Permanent Establishment or Domestic Permanent Establishment is a place of Business or other form of presence outside of a Free Zone. There are two means by which a Person may create a Foreign Permanent Establishment or Domestic Permanent Establishment:

• Maintaining a fixed place of Business, or

• Conducting Business through a dependent agent.

The income of a QFZP that is attributable to a Foreign Permanent Establishment or Domestic Permanent Establishment is subject to the 9% Corporate Tax rate,^[53] unless the income is exempt from Corporate Tax under a specific provision. The Revenue that generates that income is also not taken into consideration when assessing the de minimis requirements to be a QFZP.^[54]

A Foreign Permanent Establishment or Domestic Permanent Establishment should be treated as if it were a separate and independent Person from a Free Zone parent. For example:

• The income or profits attributable to the Free Zone parent, Foreign Permanent Establishment or Domestic Permanent Establishment should be consistent with the arm's length principle (i.e. based on the respective functions, assets and risks of the Free Zone parent and the Foreign Permanent Establishment or Domestic Permanent Establishment, as if the Free Zone parent were a separate Person transacting at arm's length). The Free Zone parent must earn and record an appropriate level of operating profits or losses determined in accordance with internationally accepted profit attribution methods such as the separate entity approach.

• If the outputs from the Free Zone parent are used in the Business of its Foreign Permanent Establishment or Domestic Permanent Establishment, the Free Zone parent would be treated as if it has derived Revenue from a Non-Free Zone Person.

• In applying the Beneficial Recipient rule (see Section 4.3.1), a Foreign Permanent Establishment or Domestic Permanent Establishment would not be treated as if it were a Free Zone Person.

Foreign Permanent Establishment

A Foreign Permanent Establishment is a place of Business or other form of presence outside the UAE of a Resident Person that is determined in accordance with the criteria prescribed in Article 14 of the Corporate Tax Law.^[55]

A Resident Person, including a Free Zone Person, may elect to not take the income, and associated expenditure, of its Foreign Permanent Establishments into account in determining its Taxable Income,^[56] subject to meeting certain conditions.^[57] If such an election is made, the income of all of the Free Zone Person's Foreign Permanent Establishments (that meet the conditions) is exempt from Corporate Tax.^[58]

Domestic Permanent Establishment

A Domestic Permanent Establishment is a place of Business or other form of taxable presence of a QFZP outside the Free Zone in the UAE.^[59] Income attributable to a Domestic Permanent Establishment is subject to the 9% Corporate Tax rate (unless the income is Exempt Income) and is disregarded when applying the de minimis requirements. ^[60] The Domestic Permanent Establishment rules are relevant, for example, in the following scenarios:

• A QFZP has its head office in a Free Zone and a branch in the UAE outside the Free Zone wherein the branch may be treated as the Domestic Permanent Establishment.

• A QFZP has its head office in the UAE outside a Free Zone and a branch in the Free Zone wherein the head office may be treated as the Domestic Permanent Establishment.

A QFZP creates a Domestic Permanent Establishment if either of the following conditions are met:

• It has a fixed or permanent place outside a Free Zone in the UAE through which its Business, or any part thereof, is conducted, unless the activities performed through that place are solely of a preparatory or auxiliary nature.^[61]

• A Person has and habitually exercises an authority to conduct a Business or Business Activity outside a Free Zone in the UAE on behalf of the QFZP.^[62] This means that in relation to that Business or Business Activity, the Person habitually concludes contracts on behalf of the QFZP or habitually negotiates contracts that are concluded by the QFZP without the need for material modification by the QFZP, unless that Person is an independent agent acting for the QFZP in the ordinary course of that Person's Business.^[63]

“Immovable Property” and “Commercial Property”

Immovable Property means any of the following:^[75]

• Any area of land over which rights or interests or services can be created.

• Any building, structure or engineering work attached to the land permanently or attached to the seabed.

• Any fixture or equipment which makes up a permanent part of the land or is permanently attached to the building, structure or engineering work or attached to the seabed.

An Immovable Property is a property which is settled and fixed in its space and cannot be moved without deterioration or alteration of its shape. On the contrary, movable constructions (for example, construction sites or temporary structures) will not be considered as Immovable Property.^[76]

Commercial Property refers to an Immovable Property or part thereof used exclusively for a Business or Business Activity and not used as a place of residence or accommodation including hotels, motels, bed and breakfast establishments, serviced apartments and the like.^[77]

Immovable Property located in a Free Zone

Income that a QFZP derives from Immovable Property located in a Free Zone is subject to the following treatment:

• Income from transactions with a Free Zone Person (who is the Beneficial Recipient) in respect of Commercial Property located in a Free Zone is treated as Qualifying Income. Hence income from such transactions will not be treated as Taxable Income.^[78]

• Income from transactions with a Free Zone Person (who is not the Beneficial Recipient) in respect of Commercial Property located in a Free Zone is not treated as Qualifying Income and will be treated as Taxable Income subject to a 9% Corporate Tax rate. This will be disregarded for the purposes of calculating total Revenue and non-qualifying Revenue for the de minimis requirement.

• Income from other Immovable Property located in a Free Zone is not treated as Qualifying Income. Hence such income will be treated as Taxable Income and will be disregarded for the purposes of calculating total Revenue and non-qualifying Revenue for the de minimis requirement.^[79]

This treatment is illustrated in the following diagrams.

The ownership or exploitation of Immovable Property in a Free Zone, other than Commercial Property transactions conducted with a Free Zone Person, is defined to be an Excluded Activity (see Section 11.6).^[80] However, Revenue from such Immovable Property is not taken into account for purposes of the de minimis requirements.^[81]

Immovable Property located outside a Free Zone

The ownership or exploitation of Immovable Property located outside of a Free Zone is an Excluded Activity. ^[82] This means that the income from Immovable Property located outside of a Free Zone would be taken into consideration when applying the de minimis requirements, unless the income is attributable to a Foreign Permanent Establishment or a Domestic Permanent Establishment.^[83]

General

The Free Zone rules provide a benefit to QFZPs that carry out R&D activities to create Qualifying Intellectual Property. A QFZP will derive Qualifying Income from Qualifying Intellectual Property if there is a direct connection (a technical term for this is a “nexus”) between the income from Qualifying Intellectual Property and the qualifying R&D expenditures contributing to that income.

The fundamental principle underlying the nexus approach is that Qualifying Income only arises to the extent that the QFZP itself incurred the R&D expenditures that contributed to the Qualifying Intellectual Property, either directly or by outsourcing such activities to another Person (other than to a Related Party outside the UAE). Qualifying Income arises only on the proportion of expenditures by the QFZP that are directly related to development activities.

If a QFZP acquires Qualifying Intellectual Property or outsources the R&D to a Related Party outside the UAE, the portion of the income that is attributable to the acquisition cost or outsourced R&D does not give rise to Qualifying Income.

To benefit from the rules, a QFZP must establish a system to track expenditures and income of Qualifying Intellectual Property to show that Qualifying Income and Qualifying Expenditures are linked. Before establishing the system, the QFZP will need to consider whether Qualifying Intellectual Property should be tracked on an asset, product, and/or product family basis (see Section 9.6.1) because this will affect how R&D expenditure should be tracked and traced.

Special rules apply to take into consideration expenditures that were incurred before the first Tax Period under the Corporate Tax Law where the records of the QFZP are not sufficient to trace those expenditures to specific assets, products, and/or product families (see Section 9.6.2).

Intellectual property

Income derived from the ownership or exploitation of intellectual property (including intellectual property that is not Qualifying Intellectual Property) is subject to the following treatment:

• Income derived from the ownership or exploitation of Qualifying Intellectual Property, determined in accordance with the formula in Article 4(1) of Ministerial Decision No. 265 of 2023 (see Section 9.5) is treated as Qualifying Income.^[84]

• Income derived from the ownership or exploitation of Qualifying Intellectual Property that exceeds the amount determined under the formula in Article 4(1) of Ministerial Decision No. 265 of 2023, as well as other income derived from the ownership or exploitation of intellectual property, is treated as Taxable Income that is not Qualifying Income (subject to the 9% rate).^[85]

Intellectual property generally refers to intangible assets owned and legally protected by a Person from outside use or implementation without consent (for example, trademarks, patents, copyrights, brands, technical know-how). Intellectual property will in certain circumstances be considered as “Qualifying Intellectual Property”, which means any Patents, Copyrighted Software and any right functionally equivalent to a Patent that is both legally protected and subject to a similar approval and registration process to a Patent, such as utility models, intellectual property assets that grant protection to plants and genetic material, orphan drug designations, and extensions of Patent protection, but not including any marketing related intellectual property assets, such as trademarks (see Section 9.4).^[86]

Revenue derived from the ownership or exploitation of all intellectual property (except for the Revenue related to the Qualifying Income from Qualifying Intellectual Property) is disregarded when applying the de minimis requirements.

Income must be derived from intellectual property

For the purpose of applying the de minimis requirements, income must be derived from the ownership or exploitation of intellectual property, and not for some other purpose.^[87] This requires a separately identifiable income stream that is directly attributed to the intellectual property, such as royalties, licence fees, and capital gains. Income that is generated indirectly when embedded intellectual property is used to contribute to a product or service for which no separate remuneration is received from the intellectual property would not be considered to generate income from the ownership or exploitation of intellectual property for purposes of the de minimis requirements.

Qualifying Intellectual Property

A QFZP may benefit from a 0% Corporate Tax rate on income arising out of Qualifying Intellectual Property, provided there is a direct nexus between the income derived from the Qualifying Intellectual Property and the Qualifying Expenditures that the QFZP incurs to generate that income (i.e. the 0% rate would not apply to income from Qualifying Intellectual Property that the QFZP acquires from a third party).

Qualifying Intellectual Property refers to:^[88]

• Patents granted under the law regulating patents in the UAE or granted under the relevant law of a foreign jurisdiction,

• Copyrighted Software, which refers to any copyright subsisting in software granted under the law regulating copyrights in the UAE or granted under the relevant law of a foreign jurisdiction, and

• Any right functionally equivalent to a Patent that is both legally protected and subject to a similar approval and registration process to a Patent, such as utility models, intellectual property assets that grant protection to plants and genetic material, orphan drug designations, and extensions of Patent protection.

Utility models are generally provided to incremental inventions, have a less rigorous patent process, and provide patent protection for a shorter time period. Intellectual property assets that grant protection to plants and genetic material would include plant breeders' rights, which grant exclusive control over new varieties of plants. Orphan drug designations are provided by government agencies for certain pharmaceuticals that are developed to treat rare diseases or diseases that are not likely to lead to significant profits and these designations grant exclusive rights to the innovations. Extensions of patent protection such as supplementary protection certificates extend the exclusive right of certain patents for pharmaceuticals and plant protection products, and they recognise that the time needed to research and develop these intellectual property assets is generally longer than the time needed to research and develop other intellectual property assets and therefore justifies that the protected life of the asset should extend past the duration of the patent.

Qualifying Intellectual Property does not include any marketing related intellectual property assets, such as trademarks.^[89]

Qualifying Income from Qualifying Intellectual Property

Qualifying Income from the ownership or exploitation of each Qualifying Intellectual Property asset is calculated using the following formula:^[90]

Qualifying Income = Qualifying Expenditures + Uplift Expenditures Overall Expenditures X Overall Income

“Qualifying Expenditures” means expenditures incurred to fund R&D activities, conducted either by the QFZP or outsourced to any Person in the UAE or any Person outside the UAE that is not a Related Party, directly connected with the creation, invention or significant development of the Qualifying Intellectual Property.

The R&D cost incurred should be directly connected to the Qualifying Intellectual Property. This could include salary and wages, direct costs, overhead costs directly associated with R&D facilities, and cost of supplies so long as all of these costs arise out of activities undertaken to advance the understanding of scientific relations or technologies, address known scientific or technological obstacles, or otherwise increase knowledge or develop new applications. However, interest payments, building costs, acquisition costs, or any costs that cannot be directly linked to a specific Qualifying Intellectual Property asset are not included in Qualifying Expenditure. Building costs or other non-separable capital costs would not be included because it would be impossible to establish a direct link between the cost of an entire building and different intellectual property assets created in that building.

Where expenditures for general and speculative R&D cannot be included in the Qualifying Expenditures of a specific Qualifying Intellectual Property asset to which they have a direct link, they may be divided pro-rata across Qualifying Intellectual Property assets or products.

Where R&D activities are outsourced to a Person in the UAE or a Person outside the UAE that is not a Related Party, the amount of “Qualifying Expenditures” should be determined on the same basis as if they were undertaken by the QFZP itself. This means that any expenditures that would not be included in Qualifying Expenditures if incurred by the taxpayer itself (for example, Interest payments, building costs, and other costs that do not represent actual R&D activities) cannot be included in “Qualifying Expenditures”. The QFZP will need to obtain sufficient information from the Person to whom R&D is outsourced to demonstrate that “Qualifying Expenditures” in relation to outsourced R&D is measured in an appropriate manner.

Qualifying expenditures should be included in the nexus calculation at the time they are incurred, regardless of their treatment for accounting or other tax purposes. In other words, expenditures that are not fully deductible in the Tax Period in which they were incurred because they are capitalised will still be included in full in the nexus ratio starting in the Tax Period in which they were incurred. This timing rule only applies for purposes of the nexus ratio, and does not affect the timing for deductions under the Corporate Tax Law.

“Overall Expenditures” means total expenditures incurred to fund R&D activities, conducted either by the QFZP or outsourced to any Person, directly connected with the creation, invention or significant development of the Qualifying Intellectual Property, including acquisition costs of the Qualifying Intellectual Property.

Expenditures for unsuccessful R&D will typically not be included in the formula for determining Qualifying Income from Qualifying Intellectual Property, since unsuccessful R&D does not generate any income.

“Overall Income” means royalties or any other income derived from Qualifying Intellectual Property, including embedded intellectual property income derived from the sale of products and the use of processes directly related to the Qualifying Intellectual Property as determined in accordance with the arm's length principle under Article 34 of the Corporate Tax Law.

“Uplift Expenditures” means the Qualifying Expenditures increased by 30%, but only to the extent that Qualifying Expenditures, after being uplifted, is less than or equal to Overall Expenditures (i.e. the sum of Qualifying Expenditures and Uplift Expenditures will be the lesser of: (i) 130% of Qualifying Expenditures or (ii) Overall Expenditures).

The formula applies an additive approach, and the calculation requires both that “Qualifying Expenditures” include all Qualifying Expenditures incurred by the taxpayer over the life of the Qualifying Intellectual Property asset and that “Overall Expenditures” include all Overall Expenditures incurred over the life of the Qualifying Intellectual Property asset. These numbers will therefore increase every time a taxpayer incurs expenditure that would qualify for either category. The proportion of the cumulative numbers will then determine the percentage to be applied to Overall Income earned each Tax Period.

Tracking systems to demonstrate nexus

To benefit from the 0% rate on Qualifying Income from Qualifying Intellectual Property, a QFZP must be able to demonstrate the nexus between Qualifying Expenditures and the income from Qualifying Intellectual Property. A QFZP that wants to benefit from the Qualifying Intellectual Property rules must, therefore, track expenditures, Qualifying Intellectual Property assets, and income to show that the Qualifying Income did, in fact, arise from Qualifying Expenditures.

If a QFZP has only one Qualifying Intellectual Property asset that it has fully self- developed and that provides all of its Qualifying Intellectual Property income, the ratio in the formula in Section 9.5 will be 1:1 (100% when expressed as a percentage). The QFZP would be able to satisfy the tracking requirements by demonstrating that it incurred the relevant R&D expenditures.

When a QFZP has more than one Qualifying Intellectual Property asset, engages in any degree of outsourcing or acquisition, or derives Revenue other than from Qualifying Intellectual Property, detailed tracking becomes essential. The QFZP will need to be able to track the link between expenditures and income of the Qualifying Intellectual Property asset and provide evidence of this to the FTA upon request.

Records relating to Qualifying Intellectual Property

To demonstrate the nexus between Qualifying Expenditures and income from each Qualifying Intellectual Property asset, a QFZP must maintain all records, books and documents that prove the following for each asset:^[91]

• Ownership and the right to exploit the Qualifying Intellectual Property,

• Qualifying Expenditures and Overall Expenditures incurred,

• Overall Income derived from the Qualifying Intellectual Property, and

• The link between Qualifying Expenditures and Overall Income derived from the Qualifying Intellectual Property.

If the QFZP is not tracking directly to each Qualifying Intellectual Property asset but is instead tracking to products, the QFZP must maintain documentation showing the complexity of its intellectual property business model and providing justification for using the product-based approach (i.e. why tracking to individual Qualifying Intellectual Property assets would be unrealistic and based on arbitrary judgements). The QFZP must also justify the appropriateness of this approach with reference to objective and verifiable information (for example, the commonality of scientific, technological, or engineering challenges underlying the R&D expenditures and income), demonstrate its consistency with the organisation of R&D activities within the group, and apply the approach consistently over time.

If the QFZP incurs expenditures for general or speculative R&D, the QFZP must either:

• show a link between such expenditures and the Qualifying Intellectual Property asset or product, or

• provide an explanation for how such expenditures were divided pro rata across Qualifying Intellectual Property assets or products.

If the QFZP acquired a Qualifying Intellectual Property asset from a Related Party, the QFZP must prepare documentation substantiating the arm's length price. This should include documentation on the Overall Expenditures that the Related Party transferor incurred.

These records need to be made available to the FTA upon request.

If a QFZP does not have an adequate tracking system, it will be unable to demonstrate the amount of Qualifying Income arising from its Qualifying Intellectual Property assets. In that case, the QFZP would not be able to apply the 0% Corporate Tax rate to income from its Qualifying Intellectual Property.

However, the QFZP would still be able to exclude its Revenue from the ownership and exploitation of intellectual property from total Revenue and non-qualifying Revenue when applying the de minimis requirements.

Overview

If a QFZP sells services or Goods (other than in relation to Excluded Activities) to other Free Zone Persons who are the Beneficial Recipients of those services and Goods, the QFZP can benefit from the 0% Corporate Tax rate on the income derived from those transactions.

If a QFZP sells services or goods to Non-Free Zone Persons, the QFZP can benefit from the 0% Corporate Tax if it derives Qualifying Income from transactions in respect of the following Qualifying Activities:^[92]

• Manufacturing of goods or materials,

• Processing of goods or materials,

• Trading of Qualifying Commodities,

• Holding of shares and other securities for investment purposes,

• Ownership, management, and operation of Ships,

• Reinsurance services,

• Fund management services,

• Wealth and investment management services,

• Headquarter services to Related Parties,

• Treasury and financing services to Related Parties,

• Financing and leasing of Aircraft,

• Distribution of goods or materials in or from a Designated Zone, and

• Logistics services.

The scope of each Qualifying Activity should be understood in the context of the meanings set out in Ministerial Decision No. 265 of 2023. In particular, the scope should also take into account how the relevant term is understood in conventional Business practice and encompasses all processes that form a natural and integral part of a coherent Business that a Free Zone Person is conducting in relation to that Qualifying Activity.

Qualifying Activities also include ancillary activities, which are activities that are necessary for the performance of the main Qualifying Activity or that make a minor contribution to the main Qualifying Activity and are so closely related to the main Qualifying Activity that it should not be regarded as a separate activity.^[93] Ancillary activities are discussed further below (see Section 10.2).

Sections 10.3 to 10.15 discuss the scope of each Qualifying Activity in more detail and identify activities that may fall within the scope of that activity and ancillary activities. The list of activities is illustrative and any activity on the list must be evaluated in the context of the nature of the specific Qualifying Activity. For example, if a Free Zone Person performs a solitary activity (for example, sells an Aircraft), it may not constitute a Qualifying Activity unless that activity forms a natural and integral part of a coherent Business that the Free Zone Person performs in relation to that and other Qualifying Activities. Further, in relation to any ancillary activities that are listed, those activities must naturally and integrally complement the main Business conducted by the Free Zone Person. If a listed ancillary activity is performed by the Free Zone Person without the execution of the main activity, it will not be treated as a Qualifying Activity.

Scope of Qualifying Activity and associated ancillary activities

Determining when a Qualifying Activity and associated ancillary activities ends and when a separate and potentially non-Qualifying Activity starts is important in determining qualifying and non-qualifying Revenue for the purposes of calculating the de minimis requirements, based on which a Free Zone Person can assess whether they qualify to be a QFZP or not.

As stated above, Qualifying Activities also include activities that are ancillary to a main Qualifying Activity. An activity is ancillary where:^[94]

• It is necessary for the performance of the main activity (see Section 10.2.1), or

• It makes a minor contribution to the main activity and is so closely related to the main activity that it should not be seen as a separate activity (see Section 10.2.2).

Ancillary activities will need to be determined on a case-by-case basis depending on the main Qualifying Activity conducted by the Free Zone Person.

Manufacturing of goods or materials

Processing of goods or materials

Processing of goods or materials includes the preparation, treatment, transformation or conversion of goods or materials into another form of good or material for further commercial or industrial use or sale.^[96] Processing is typically, but not always, the middle step in the production process that involves changing the properties or form of the raw materials or semi-manufactured goods or materials to make them suitable for use or final manufacturing. It can also be the end step, for example, rust-proofing a car with a special coating. Processing is more typically seen in industries like food, oil refining, milling, etc. where raw materials undergo different treatments to become ready for use. Processing is a wider concept than manufacturing and may occur where an item undergoes a process but remains essentially the same thing, and no new product is created. For example, freezing a fish before distribution and/or packaging for sale, pasteurisation of dairy products, re-packaging of finished products bought from a supplier could be processing of goods or materials. Processing implies a regular or continuous action or actions applied to a physical item or material.

While processing is different from manufacturing, the two are interconnected steps in many industries. For example, in the automobile industry/steel industry, the raw iron ore needs to be processed to create steel, which is then manufactured into various goods, such as cars. Here, the income comes primarily from the manufacturing of final products, but it is directly influenced by the efficiency and quality of the processing activity.

Activities that might constitute the Qualifying Activity of processing of goods or materials include:

• Production planning: This involves determining the schedule, sequence, and method of processing materials to optimise production efficiency and effectiveness.

• Processing: This is the repetitive or continuous action applied to good or materials. It could involve activities like assembly, fabrication, machining, chemical reactions, printing, or packaging depending on the industry.

• Quality control: This involves inspection, testing, and monitoring of materials and products at various stages of production to ensure that they meet the required quality standards.

Activities that might be treated as ancillary to the Qualifying Activity of processing of goods or materials, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Post-sale activities: This includes services that are directly linked to the goods or materials processed.

• Customer support: Providing support after the product has been sold, including warranty services, and handling customer queries.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of processing of goods or materials will be treated as a Qualifying Activity in their own right or on a standalone basis, if taken individually.

Trading of Qualifying Commodities

Trading of Qualifying Commodities means the physical trading activities of Qualifying Commodities and associated derivative trading used to hedge against risks involved in such activities (for example, using financial instruments, like futures or options, to protect against potential financial risks or losses that could occur in the commodity trading process).^[97]

Qualifying Commodities refer to metals, minerals, energy and agriculture commodities that are traded on a Recognised Commodities Exchange Market in raw form. A Recognised Commodities Exchange Market refers to:

• Any commodities exchange market established in the UAE that is licensed and regulated by the Central Bank of the UAE, the Dubai Financial Services Authority of the Dubai International Financial Centre (DFSA), the Financial Services Regulatory Authority of the Abu Dhabi Global Market (FSRA), or the Securities and Commodities Authority (SCA). For example, the Dubai Gold & Commodities Exchange in the UAE, or

• Any commodities exchange market established and recognised outside the UAE of equal standing. For example, the Chicago Board of Trade, and the London Metal Exchange.

The Qualifying Commodity needs to be in a form that is traded on a Recognised Commodities Exchange Market. Metals, minerals, energy and agriculture commodities that are traded on a Recognised Commodities Exchange Market will be deemed to be in raw form when they meet the conditions to be traded on the said exchange (for example, gold being 99.4% purity in bullion form). The trade itself does not need to be performed through an exchange. For example, if gold is considered the commodity and it is in a form that is traded on a Recognised Commodities Exchange Market, it can qualify as a Qualifying Commodity, regardless of whether any actual trades involving gold occur on the exchange market or off-market.

Holding of shares and other securities for investment purposes

Holding of shares and other securities for investment purposes includes the following:^[98]

• Shares of any class in the share capital of another juridical person or other types of equitable interests that entitle the holder to receive profits and liquidation proceeds, whether as a legal or beneficial owner (for example, ordinary shares, preferred shares, redeemable shares, membership and partners interest, options, warrants, other types of securities, capital contributions and rights, etc.).

• Negotiable or non-negotiable financial instruments, including, derivative instruments, financial commodities, cryptocurrency and other investment instruments that are or can be traded in a public or private market or that are convertible or exchangeable into a security or which confer a right to purchase a security, with the exception of the holding of financial or investment instruments that are issued pursuant to a securitisation of receivables from a non-financial asset.

In some cases, a major shareholder holding shares in a company for investment purposes may also derive income such as royalties or management fees from that company. Those other income streams would not constitute income from the Qualifying Activity of holding shares and other securities for investment purposes.

The active trading of shares and other securities also would not constitute a Qualifying Activity for the purposes of the rules. Shares and other securities are deemed to be held for investment purposes when held (or there is an intention to hold and the QFZP can demonstrate its intention to hold) for an uninterrupted period of at least 12 months.^[99]

If a Person trades shares and securities on a Recognised Stock Exchange, the Person may presume that the transaction is not made with a natural person and hence will be treated as a Qualifying Activity, provided the 12-month ownership test is satisfied (see Section 11.2).

Activities that might constitute the Qualifying Activity of holding of shares and other securities for investment purposes include:

• Investment planning: This involves identifying the right investment opportunities based on the investor's financial goals and risk tolerance. This includes analysing financial statements, company reports, market trends, and other critical data to make informed investment decisions and estimating the future performance of investments based on various financial and economic indicators.

• Buying and selling securities: This is the actual act of purchasing shares or other securities and selling them when they have appreciated in value or when the investor needs to divest.

• Portfolio management: This involves monitoring the performance of the whole investment portfolio, rebalancing it periodically to ensure it aligns with the investment goals, and making necessary adjustments based on market conditions.

Activities that might be treated as ancillary to the Qualifying Activity of holding of shares and other securities for investment purposes, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of holding of shares and other securities for investment purposes will be treated as a Qualifying Activity in their own right or on a standalone basis, if taken individually.

Ownership, management, and operation of Ships

Ownership, management and operation of Ships includes the ownership, management and operation of Ships used in the international transportation of passengers, goods or livestock, towing activities and the provision of general assistance to Ships at sea, dredging activities at sea, and the leasing and chartering of Ships on a bareboat basis used in the international transportation of passengers, goods or livestock.^[100] This activity does not include Ships used for local transportation or leisure or recreational purposes, or as floating hotels, restaurants or casinos.^[101] It also does not include the leasing of shipping containers, unless that activity is ancillary to a shipping Business.

A Ship refers to any structure normally operating, or set for operating, in maritime navigation regardless of its power and tonnage.^[102] Ships include tugboats, barges, etc. that are used for marine operation, or to transport goods or passengers from vessels in international waters to UAE domestic waters, or to maneuver other types of Ships (for example, container ships, passenger ferries, etc.).

International transportation means the movement (of goods or persons) beyond the territorial waters of the UAE. Transportation between two ports in the UAE (for example, a cruise Ship sailing from Abu Dhabi to Dubai) would be considered to be international transportation provided it is an integral part of transportation involving a broader itinerary that includes ports outside of the UAE.

The use of Ships in offshore oilfield and maritime services, involving such operations as oil drilling, seismic surveys, and related services typically associated with oilfield support and offshore vessels, are within the scope of ownership, management and operation of Ships.

Transactions with natural persons in relation to ownership, management, and operation of Ships are not Excluded Activities and may benefit from the 0% Corporate Tax rate on Qualifying Income.^[103]

Activities that might constitute the Qualifying Activity of ownership, management, and operation of Ships include:

• Ownership of Ships: This involves the purchase, ownership, and maintenance of various types of Ships. The owner is responsible for all aspects of the Ship, including its upkeep and safety protocols.

• Management of Ships: This activity involves the administrative and operational aspects of running Ships. It is inclusive of managing crew members, updating certifications and licences, ensuring safety and health compliance, etc. A Business consisting solely of maintenance, fit-out or repairing Ships will not be considered as a Qualifying Activity.

• Operation of Ships: This refers to the actual functioning of the ships including navigation, cargo handling, routine checks, and Ship repairs (overhaul and maintenance) if required. This might also encompass route planning and logistics management, among other operational tasks.

Activities that might be treated as ancillary to the Qualifying Activity of ownership, management and operation of Ships, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Ship broking: involves buying, selling, or chartering Ships (this could only be a Qualifying Activity on the basis that it is an ancillary activity that meets the necessary conditions).

• Organising and overseeing voyages includes the logistical aspects of the operation of Ships, and determining which routes to use.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of ownership, management and operation of Ships will be treated as a Qualifying Activity in their own right or on a standalone basis, if taken individually.

Reinsurance services

Reinsurance services means reinsurance operations that are regulated under Federal Law No. 6 of 2007.^[104] These include the activity of assuming all or part of a risk undertaken by another insurer or reinsurer under a contract or policy of insurance or reinsurance, respectively, provided this is subject to regulatory oversight of a Competent Authority in the UAE.

Any income earned by virtue of conducting reinsurance services (such as reinsurance premiums, underwriting fees, actuarial services, account management etc.) will be considered as income generated from a Qualifying Activity.

Activities that might constitute the Qualifying Activity of reinsurance services include:

• Underwriting premiums: this involves careful underwriting and assessment of the insurance policies that are transferred by insurers.

• Salvage and subrogation recoveries: Reinsurers may pay claims and then recover part of that money, for example, from the sale of salvaged goods or from a third-party responsible for the loss.

• Claim handling or management: this involves handling and processing reinsurance claims when they arise.

• Loss adjusting and claims management: this includes dealing with claims, determining the amount of loss, and coordinating with the ceding insurer on claim settlement.

Activities that might be treated as ancillary to the Qualifying Activity of reinsurance services, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Investing activities: this involves investing the premiums received from insurers in bonds, stocks, real estate, and other financial instruments that provide a return until they need to pay out claims.

• Actuarial services: a reinsurance service provider may employ actuaries to evaluate and forecast future risks and losses. This service may be extended to insurance clients as an additional service.

• Risk management: Offering risk management solutions for other insurance companies.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of reinsurance services will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

Example 64: Reinsurance services to both a primary insurer and consumers

Company J (a Free Zone Person) is a reinsurance service provider that issues re- insurance policies to primary insurers. The arrangement is illustrated in the following diagram.

Income earned by Company J from reinsurance premiums and retrocessions is derived from Qualifying Activities irrespective of the location of the primary insurer and that of the insured person or the insured asset or activity.

Example 65: Reinsurance services

Company K (a Free Zone Person) provides reinsurance services to a primary insurer and also provides insurance directly to consumers (for example the insured Person). The arrangements are illustrated in the following diagram.

The transactions with the insured Person would not form part of the Qualifying Activities of Company K.

Fund management services

Fund management primarily includes managing a specific portfolio of investments on behalf of third-party investors. This could be a mutual fund, a hedge fund, or a pension fund. The fund manager aims at generating maximum returns by investing in securities such as stocks, bonds etc. based on the fund mandate. The decision of where to invest is taken solely by the fund manager, having in-depth knowledge of financial markets and economies. Fund management is typically restricted to handling investments in a specific fund.

Fund management services includes the activities of portfolio management, risk management, discretionary and non-discretionary fund management services and other services relating to the day-to-day management and operation of an investment fund by a fund manager that is appointed by the fund or its investors, including those activities that are delegated by an investment fund or its fund manager to an investment advisor or sub-advisor.^[105] Such services will be Qualifying Activities if the Free Zone Person is appropriately regulated as an investment fund manager or investment advisor and subject to the regulatory oversight of the relevant Competent Authority in the UAE (Central Bank of the United Arab Emirates, the Dubai Financial Services Authority, the Financial Services Regulatory Authority of the Abu Dhabi Global Market, or the Securities and Commodities Authority).^[106]

Fund management services provided to natural persons are not Excluded Activities so may benefit from the 0% Corporate Tax rate on Qualifying Income.^[107]

Activities that might constitute the Qualifying Activity of fund management services include:

• Investment planning and strategy: Identifying the best investment opportunities based on the financial goals and risk tolerance of the clients, including making decisions on the holding and selling of investments.

• Investment diversification: Investing in a mix of asset types and sectors to reduce investment risk.

• Asset allocation: Distributing the client's investments across various asset classes like equities, bonds, real estate, and others to balance risk and reward.

• Fund management: Managing the client's funds or portfolio, making necessary adjustments based on market trends and client's requirement.

• Performance monitoring: Regularly reviewing the performance of the client's portfolio, assessing its progress towards the set financial goals, preparing relevant regulatory or other reports for government authorities and investors, and regular reporting to clients about the performance of their portfolios.

Activities that might be treated as ancillary to the Qualifying Activity of fund management services, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Financial advisory: Providing financial advice to clients on the best ways to achieve their financial goals.

• Training and education: Educating clients about financial products and investment strategies might also be part of their responsibilities, though not a primary task.

• Financial planning: Some fund management firms may also offer holistic financial planning services, including retirement planning, estate planning, insurance needs analysis, etc.

• Technological support: Providing clients with digital platforms to check their investments, make transactions, view reports, etc.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of fund management services will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

Wealth and investment management services

Wealth and investment management services includes the activities of providing discretionary and non-discretionary investment management and advisory services, portfolio management and wealth and investment advisory services.^[108] Such services will be Qualifying Activities if they are subject to the regulatory oversight of the relevant Competent Authority in the UAE (i.e. the Central Bank of the United Arab Emirates, the Dubai Financial Services Authority of the Dubai International Financial Centre, the Financial Services Regulatory Authority of the Abu Dhabi Global Market and the Securities and Commodities Authority as applicable).^[109]

Typically, wealth and investment management is a holistic service that differs from fund management because it extends beyond just investing. It encompasses all parts of a person's financial life. A wealth manager offers services like retirement planning, estate planning, tax planning, budgeting and so on. They create custom strategic plans for their clients to meet their individual short and long-term financial goals.

Wealth and investment management services provided to natural persons are not Excluded Activities so may benefit from the 0% Corporate Tax rate on Qualifying Income.^[110]

Activities that might constitute the Qualifying Activity of wealth and investment management services include:

• Portfolio management: designing and managing client portfolios based on risk tolerance, financial goals, and investment timelines.

• Financial planning: budgeting, retirement planning, tax advice, estate planning, and more to help clients meet their financial objectives and secure financial future.

• Asset allocation: placement of investments across various asset classes such as stocks, bonds, real estate, and other types of investment products.

Activities that might be treated as ancillary to the Qualifying Activity of wealth and investment management services, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Risk management: assessing and managing different types of investment risks. It helps clients to protect their investment from potential discrepancies.

• Market research: analysing market trends, studying investment opportunities and potential risks.

• Investment analysis: detailed assessment of investments, which includes examining financial performance, economic environment, recent trends, and even unexpected developments.

• Family governance: managing intergenerational wealth, succession planning for family Businesses, and setting up family offices.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of wealth and investment management services will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

Headquarter services to Related Parties

Headquarter services to Related Parties includes the administering, overseeing and managing of Business Activities of Related Parties, including the provision of senior and general management services, captive insurance services (self-insurance that allows a group to meet its unique risk management needs), administrative services, procurement services, business planning and development, risk management, coordination of group activities, and in general incurring expenditures on behalf of Related Parties and providing other support services to Related Parties.^[111] A typical structure is illustrated in the following diagram.

The reference to “Related Parties” for the purposes of the Qualifying Activity of providing headquarter services is limited to juridical persons and branches of juridical persons as per Article 35(1)(c) and (d) of the Corporate Tax Law. For the purposes of the scope of headquarters services, it should also be understood to include Foreign Permanent Establishments and Domestic Permanent Establishments.

A Free Zone Person is considered to conduct headquarter services if the entity provides specific services to resident and/or non-resident Related Parties. A headquarter company can take the responsibility for the overall success of the group, or an important aspect of the group's performance, and ensure corporate governance.

For a Free Zone Person to be considered as having “taken on the responsibility for the overall or an important aspect of the overall group's success or performance”, the services provided by the entity may involve:

• The provision of strategic services,

• The provision of senior management,

• The assumption or control of material risk for activities carried out by group companies, or

• Substantive advice in relation to the assumption or control of such risks.

Activities that might constitute the Qualifying Activity of headquarter services to Related Parties include:

• Taking relevant management/strategic decisions: this refers to making decisions on the substantive functions and significant risks for group companies, making decisions on the groups' overall strategic vision, ongoing operations, future projects or initiatives, such as decisions on material acquisitions and purchases, the group companies'sales and marketing strategy, product development, business process standardisation, etc.

• Incurring operating expenditures on behalf of group entities: taking specialist advice or procuring technology on behalf of the group, or purchasing significant assets or specific services for or on behalf of group companies.

• Coordinating group activities: ensuring that activities that provide an advantage to group entities (such as procurement, marketing, HR, IT, finance, tax etc.) are coordinated and organised in a way that produces the best outcome for the group as a whole as opposed to individual group companies.

• Financial management: it could include financial forecasting, budgeting, business modelling, treasury functions and providing company-wide financial advice.

• Central procurement services: assisting in the purchasing of equipment, office supplies, or raw materials for the operations of Related Parties.

• Human resource management: this includes strategic hiring, payroll processing, staff benefit programs, administrative tasks and implementing any HR related strategies or policies across different branches of the company.

• Technical Support: providing technical support to Related Parties.

• Legal and compliance services: ensuring all Related Parties comply with regulations and provide legal assistance when needed.

• Intellectual property management: administrative management of intellectual property rights such as patents, trademarks, copyrights and trade secrets of the company.

Activities that might be treated as ancillary to the Qualifying Activity of headquarter services to Related Parties, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Training and development: hosting training sessions to upgrade and develop the skills of the employees of Related Parties.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of headquarter services to Related Parties will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

The transactions should comply with the arm's length principle. This means that the pricing of transactions between the headquarters office and its Related Parties should be the same as it would be between unrelated parties under similar circumstances. All these transactions need to be appropriately documented and priced using the arm's length principle, following the relevant Transfer Pricing rules.

Treasury and financing services to Related Parties

Treasury and financing services includes the provision of cash and liquidity management, financing, debt management, and financial risk management and related advisory services to Related Parties, including centralised payment and collection activities for or on behalf of Related Parties (including Domestic Permanent Establishments and self-investment).^[112] Treasury and financing services also includes cash pooling.

Shareholder loans fall under the scope of financing services and there is no threshold for the amount of loans that must be granted in order to qualify for the Qualifying Activity of treasury and financing services.

Any payment (for example, Interest or a service fee) received as part of conducting the treasury and financing services will be treated as Qualifying Income from a Qualifying Activity.

Activities that might constitute the Qualifying Activity of treasury and financing services to Related Parties include:

• Cash management: this involves maintaining optimal cash flow to meet current and future financial obligations. It involves tracking cash inflows and outflows, and planning for short-term and long-term financial needs.

• Risk management: identifying, evaluating, and managing financial risks such as credit risk, liquidity risk, and operational risk in order to reduce potential losses.

• Investment management: this involves deciding on investment strategies and managing the organisation's portfolio of investments.

• Financing: securing funds needed for Business Activities, through means such as loans, bonds, or equity financing.

Activities that might be treated as ancillary to the Qualifying Activity of treasury and financing services to Related Parties, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of treasury and financing services to Related Parties will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

A typical structure is illustrated in the following diagram:

The reference to “Related Parties” for the purposes of the Qualifying Activity of providing treasury and financing services includes juridical persons and branches of juridical persons as per Article 35(1)(c) and (d) of the Corporate Tax Law, as well as Domestic Permanent Establishments and self-investment.

Transactions should comply with the arm's length principle. This means that the pricing of transactions between the head office and its Related Parties should be the same as it would be between unrelated parties under similar circumstances. All these transactions need to be appropriately documented and priced using the arm's length principle.

Financing and leasing of Aircraft

The financing and leasing of Aircraft includes the financing, leasing and securitisation of the financing and leasing of Aircraft, Aircraft engines or rotable components, granting the right to use Aircraft, Aircraft engines or rotable components in exchange for rental or other consideration pursuant to a finance lease, operating lease or other arrangement, and related advisory and agency services for the procurement, sale or leasing of Aircraft, Aircraft engines or rotable components undertaken by the QFZP.^[113] Sub-leasing of Aircraft will fall within the scope of this activity.

An Aircraft refers to any machine that can derive support in the atmosphere from the reactions of the air other than the reactions of the air against the surface of the earth.^[114] It includes drones but does not include hovercraft or spacecraft.

Financing and leasing of Aircraft services provided to natural persons are not Excluded Activities so may benefit from the 0% Corporate Tax rate on Qualifying Income.^[115]

Activities that might constitute the Qualifying Activity of financing and leasing of Aircraft include:

• Agreeing funding terms; financing: this relates to the funding of the acquisition of Aircraft, Aircraft engines or rotable components and includes agreeing the type of leasing (operational lease, financial lease etc.), the type of funding (for example, equity, preference shares, debt, etc.), the quantum of funding, the currency, the rates of interest payable, the security given (if any), and any covenants.

• Identifying and acquiring the Aircraft, Aircraft engines or rotable components to be leased: involves the activity of identifying and verifying suitable assets to purchase and then rent to a hirer or lessee for an agreed period, including negotiating the acquisition and the terms of the supply of the assets to be leased or hired.

• Setting the terms and duration of any financing or leasing: this includes the financial terms, the parameters as to acceptable counterparties, the amounts, rates of interest, the legal agreements and the period for which the financing or leasing is to be provided.

• Monitoring and revising any agreements; lease management: includes the acquisition of data about a borrower or a lessee, testing compliance against contract and covenants, extending the duration or the changing of other terms of the financing provided, managing the details of the lease agreement, such as terms, conditions, rental rates, lease duration, and ensuring all relevant information is fed into the decision-making process and any amended financing terms.

Activities that might be treated as ancillary to the Qualifying Activity of financing and leasing of Aircraft, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Credit analysis: evaluating the creditworthiness of potential lessees.

• Portfolio management: monitoring and managing the mix of lease contracts and financing agreements to maintain risk diversification.

• Disposal or sale of Aircraft or any part thereof: companies may sell aircraft from their portfolio, either at the end of the lease term or during the lease term.

• Asset management: maintenance oversight, arranging inspections, and making sure the Aircraft are being handled as per the lease terms and industry standards.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of financing and leasing of Aircraft will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

Example 78: Provision of aviation financing

Company W (a Free Zone Person) is a lessor that provides financing to an airline to acquire an Aircraft and Aircraft engines in the form of a finance lease. The financing is secured over the Aircraft and Aircraft engines. The arrangement is illustrated in the following diagram.

The finance lease payments from the airline to Company W and the income derived by the head lessor from the intermediate lessor relate to Qualifying Activities.

The bank which finances the acquisition of the Aircraft by Company W would not be considered as undertaking the Qualifying Activity of financing and leasing the Aircraft.

Distribution of goods or materials in or from a Designated Zone

Distribution typically includes the process of transporting products from a manufacturer, storing them, and selling them to different stores and customers. A key feature of a distribution activity is that the distributor holds title to the products. This differentiates distribution from logistics services (see Section 10.15). Distribution implies a change in the location of goods or materials.

The distribution of goods or materials in or from a Designated Zone includes the buying and selling of goods, materials, component parts or any other items that are tangible or movable and may include the importation, storage, inventory management, handling, transportation and exportation of those goods or materials to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale, provided:^[116]

• Such activities are conducted in or from a Designated Zone, and

• If the goods or materials enter the UAE, they are imported through the Designated Zone (i.e. the requirement for distributed goods to enter a Designated Zone only applies to the distribution of foreign goods to customers in the UAE outside of a Designated Zone).

There are no limitations on the mode of distribution. The distribution of goods does not include the distribution of intangible products and services such as licences, software and financial products or services. However, if any goods have embedded software or firmware, income for which cannot be separately identifiable, this would not be excluded (see Section 10.3.2 for the meaning of goods).

End user

In order to fall within the scope of this Qualifying Activity, distribution services should be performed vis-à-vis a customer that further resells or a person that processes the goods or part thereof for the purpose of resale. If goods or materials are distributed to a customer that is the 'end user', (i.e. uses or consumes the product), then such activity will not be treated as a Qualifying Activity.

The end user could be a Person that the goods are ultimately intended for, after it has been passed through any intermediate stages of distribution, production, or resale. In other words, the end user is the person who eventually uses the product for its intended purpose, whether that may be personal, commercial, or industrial. For example, if a person buys a laptop for personal use, that person is the end user of the laptop. If a company buys office supplies for its employees to use, the company is the end user of those supplies as they are not further sold by the Company.

Accordingly, a Free Zone Person that is engaged in the activity of distribution of goods or materials must conduct necessary due diligence (such as ’know your client' (“KYC”), seeking confirmation by way of an undertaking or a contract, etc) to ensure that its customer is not the end user, in order to fall within the scope of the Qualifying Activity.

Activities that might constitute the Qualifying Activity of distribution of goods or materials include:

• Purchase and resale of goods or materials: this involves buying products from manufacturers or producers at a lower price, and then reselling them at a marked- up price to retailers.

• Warehousing: this involves storing products purchased from manufacturers in a safe and secure location until the time for them to be delivered.

• Transportation, delivery and logistics: this includes all the activities related to moving goods from the point of origin to the point of destination. For example, movement of goods from their warehouse to the retailer or directly to the customer. It also includes planning routes and schedules, handling shipment documentation, and ensuring products are delivered on time.

• Inventory management: this involves the management and tracking of stock levels, orders, sales, and deliveries, avoiding over-stocking or under-stocking scenarios.

• Order processing: this involves receiving and processing orders from retailers or directly from customers and arranging for the delivery of purchased items.

• Packaging and repackaging: this involves adding branding, instructions, warranty information, improving the packaging of the goods, etc.

Activities that might be treated as ancillary to the Qualifying Activity of distribution of goods or materials, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Marketing and advertising: although not directly related to the distribution process, marketing and advertising activities are help to promote the products and drive sales volume.

• Quality control and inspection: distributors often take up the role of maintaining the quality of the goods distributed. Hence, services related to quality control and

  inspection of goods before they are delivered to the customer can be an essential ancillary activity.

• Customer support services: offering comprehensive customer services such as handling queries, grievances, or feedback.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of distribution of goods or materials will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

Example 82: Distribution of goods or materials outside of the UAE (high sea sales or third port trading)

Company C is a Free Zone Person in a Designated Zone that buys goods from a manufacturer in Country A and sells these goods to a retailer/distributor in Country B. Company C earns a profit on the goods sold to the retailer/distributor in Country B. The goods are shipped directly from the manufacturer in Country A to the retailer/distributor in Country B. The arrangement is illustrated in the following diagram.

Company C performs its activities in or from a Designated Zone and the arrangements do not involve goods or materials entering the UAE. Consequently, Company C is performing Qualifying Activities.

Example 83: Distribution of goods or materials in the UAE (import)

Company D is a Free Zone Person in a Designated Zone that buys goods from Country A and sells these goods to a retailer/distributor in the UAE. Company D earns a profit on the goods sold to the retailer/distributor. The goods are shipped by the manufacturer in Country A to Company D in the Designated Zone from where they are imported into the UAE.

As Company D conducts its activities in or from a Designated Zone and the goods entering the UAE are imported through the Designated Zone, Company D is performing Qualifying Activities.

If the goods or materials were not imported through the Designated Zone, the activities of Company D would not be Qualifying Activities.

Example 84: Distribution of goods or materials from the UAE (export)

Company E is a Free Zone Person in a Designated Zone that buys goods from a juridical person in the UAE (outside a Free Zone). The goods have been either manufactured in the UAE or imported into the UAE by another Person.

Company E sells these goods to a retailer/distributor outside the UAE. Company E earns a profit on the goods sold to the retailer/distributor. The goods are shipped by the manufacturer (or importer) in the UAE to the retailer/distributor outside the UAE.

The goods or materials are shipped/transferred directly by the manufacturer/importer to the retailer/distributor without passing through the Designated Zone as the goods were already in the UAE. As Company E conducts its activities in or from a Designated Zone, and the goods are already in the UAE at the time Company E purchased them, they do not need to pass through a Designated Zone when they are subsequently sold to the retailer/distributor, Company E is considered to be performing Qualifying Activities.

Example 85: Distribution of goods or materials within the UAE

Company F is a Free Zone Person in a Designated Zone that buys goods from a juridical person in the UAE (outside a Free Zone). The goods have been either manufactured in the UAE or imported into the UAE by another entity. Company F sells these goods to a retailer/distributor in the UAE outside a Free Zone. Company F earns a profit on the goods sold to the retailer/distributor.

The goods are shipped/transferred by the manufacturer (or importer) in the UAE to the retailer/distributor in the UAE outside a Free Zone.

The goods or materials are shipped/transferred directly by the manufacturer/importer to the retailer/distributor without passing through the Designated Zone. As Company F conducts its activities in or from a Designated Zone, and the goods are already in the UAE at the time Company F purchased them so they do not need to pass through a Designated Zone when they are subsequently sold to the retailer/distributor, Company F is considered to be performing Qualifying Activities.

Activities of a sales agent or consultant that only assists in the buying or selling of goods or materials without being involved in the actual buying and selling of goods or materials, (i.e. their activities are not linked to the physical activity of distribution), are not covered within the scope of Qualifying Activity of distribution of goods or materials.

Example 86: Distributor versus sales agent

A book publishing company in the UAE (outside a Free Zone) has published a new novel. It sells the novel in bulk to a distributor, Company D (a Free Zone Person in a Designated Zone). Company D sells the books to different bookstores (retailers) across the UAE and outside UAE through the Designated Zone. Company D owns the books once it buys them from the publisher, and it manages the logistics of getting the books to the various bookstores (retailers). It also bears the financial risk if the books do not sell. Company D is performing the Qualifying Activity of distribution of goods.

The same book publishing company also employs a sales agent, Company S (a Free Zone Person in a Designated Zone) to sell its books. Company S does not buy the books. Instead, it represents the publishing company to get bookstores to place orders for the book, which is then supplied directly by the publisher. Company S performs all its marketing and promotion activities from the Designated Zone. It gets a commission for each book ordered due to their efforts. Company S does not own the books or bear the financial risk if the books do not sell, as its primary role is to facilitate sales. The activities of Company S do not involve the Qualifying Activity of distribution of goods, as it does not take title to the books. Company S renders professional services of sales and marketing.

Variation: If the publishing company were a Free Zone Person, Company S's Revenue may still benefit from the 0% Corporate Tax rate on the basis that it derives Qualifying Income from a transaction with another Free Zone Person that is the Beneficial Recipient of its services, subject to Company S meeting all the other requirements to be a Qualifying Free Zone Person.

Logistics services

Logistics services includes the storage and transportation of goods or materials on behalf of another Person without taking title to the good or material of that other Person. Logistics services include activities such as cargo handling, warehousing, container storage, transport agency services, customs brokerage services, order and inventory management, freight forwarding and brokerage services, document preparation, packing and unpacking and other related services.^[117] There are no limitations on the mode of delivery. However, logistics services do not include the movement of people.

Activities that might constitute the Qualifying Activity of logistics services include:

• Transporting goods: this refers to the movement of goods on behalf of clients and managing the associated risks and includes everything from planning routes to overseeing the boarding and offloading of goods.

• Warehousing: this involves the storing of goods, managing stocks and processing orders. It implies managing of inventory and maintaining of quality control and controlling the associated risks.

• Inventory Management: logistics companies are responsible for tracking and managing inventory levels to ensure that the supply of goods matches the demand.

• Declaration and documentation: this involves the process of preparing declarations, declaring goods to customs authorities and other government agencies when entering or leaving the UAE or any other jurisdiction including providing and preparing supporting documentation.

• Freight forwarding services: this entails serving as an intermediary between transportation Businesses importing or exporting goods and clients to whom these goods are intended.

• Order fulfilment:involves receiving, processing, and delivering orders to end customers.

• Packing:Some logistics companies provide packing services, ensuring that goods are appropriately packed for transit and reaching the end consumer in good condition.

Activities that might be treated as ancillary to the Qualifying Activity of logistics services, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities (see Section 10.2), include:

• Supply chain management: this involves coordinating and managing all the different parties involved in the production and distribution of goods, from suppliers to manufacturers to retailers.

• Customs brokerage: some logistics companies provide customs brokerage services, helping Businesses navigate the complexities of international trade laws and regulations.

• Customer service: handling client queries, complaints, and issues related to the transportation and delivery of goods.

This does not necessarily mean that any activity that might be ancillary to the Qualifying Activity of logistics services will be treated as a Qualifying Activity in their own right or standalone basis, if taken individually.

A typical structure is illustrated in the following diagram.

Where the Free Zone Person performs most of its logistics services within a Free Zone for its customers in the UAE outside a Free Zone or foreign customers but provides last mile delivery services outside of the Free Zone in the UAE or in a foreign country, the last mile delivery services will still form part of the Free Zone Person's logistics services Qualifying Activity.

Overview

Revenue from Excluded Activities is treated as non-qualifying Revenue for the purposes of the de minimis requirements, unless the Revenue is attributable to a Free Zone Person's Foreign Permanent Establishment or Domestic Permanent Establishment or pertains to Immovable Property in a Free Zone that does not generate Qualifying Income. The following activities are Excluded Activities:^[118]

• Any transactions with natural persons, except transactions in relation to:^[119]

  • Ownership, management and operation of Ships,

  • Fund management services that are subject to the regulatory oversight of the Competent Authority in the UAE,

  • Wealth and investment management services that are subject to the regulatory oversight of the Competent Authority in the UAE, or

  • Financing and leasing of Aircraft, including engines and rotable components.

• Banking activities.^[120]

• Insurance activities, other than:^[121]

  • Reinsurance services, and

  • Captive insurance related activities forming part of headquarter services to Related Parties.

• Finance and leasing activities, other than:^[122]

  • Ownership, management and operation of Ships,

  • Treasury and financing services to Related Parties, and

  • Financing and leasing of Aircrafts, including engines and rotable components.

• Ownership or exploitation of Immovable Property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.^[123]

Excluded Activities also include ancillary activities that are integral or closely connected to each Excluded Activity. Similar to Qualifying Activities, an activity is ancillary where it is necessary for the performance of the main activity or it makes a minor contribution to the main Excluded Activity and is so closely related to the main Excluded Activity that it should not be seen as a separate activity (see Section 10.2).^[124]

Transactions with natural persons

As noted in Section 11.1, all transactions with natural persons are treated as Excluded Activities, except transactions in relation to the ownership, management and operation of Ships, fund management services, wealth and investment management services, and financing and leasing of Aircraft.^[125]

Example 88: Leasing of aircraft

Company G (a Free Zone Person) charters an Aircraft to natural persons. The transaction is illustrated in the following diagram.

The income derived from chartering the Aircraft would not be considered to arise from Excluded Activities.

Banking activities

Banking activities means the regulated financial activities specified under Article 65 of Federal Decree-Law No. 14 of 2018.^[126] These are as follows:

• Receiving all types of deposits, including Sharia-compliant deposits.

• Providing all types of credit facilities.

• Providing all types of funding facilities, including Sharia-compliant funding facilities.

• Providing currency exchange and money transfer services.

• Providing monetary intermediation services.

• Providing stored values services, electronic retail payments and digital money services.

• Providing virtual banking services.

• Arranging and/or marketing licensed financial activities.

• Acting as principal for financial products that affect the financial position of the licensed Financial Institution, including but not limited to foreign exchange, financial derivatives, bonds and sukuk, equities, commodities, and any other financial products approved by the Central Bank.

Banking activities do not include fund management services, wealth and investment management services or treasury and financing services to Related Parties if they constitute a separate and distinct Business performed by a Free Zone Person.

If a Free Zone Person engaged in banking activities performs any of these services, (i.e. fund management services or wealth and investment management services or treasury and financing services to Related Parties), the same could be treated as Qualifying Activities but it would need to satisfy the de minimis requirements.

Insurance activities

Insurance activities means insurance operations that are regulated under Federal Law No. 6 of 2007.^[127] This includes activities that are subject to regulatory oversight, such as, the Business of accepting risks by effecting or carrying out contracts of insurance, in both the life and non-life sectors. Insurance activities do not include reinsurance activities.

Reinsurance activities and captive insurance that fall within the scope of the Qualifying Activity of “reinsurance services” or “headquarter services to Related Parties” are specifically excluded from the scope of this Excluded Activity and therefore can give rise to Qualifying Income (see Sections 10.8 and 10.11).

Finance and leasing activities

Financing and leasing activities means the provision of credit or financing for any kind of consideration (including digital and cryptocurrency), and the letting, hiring out or otherwise granting the right to use an asset in exchange for rental or other consideration pursuant to a finance lease, operating lease or other arrangement, that are subject to the regulatory oversight of the relevant Competent Authority (i.e. the Central Bank of the United Arab Emirates, the Dubai Financial Services Authority of the Dubai International Financial Centre, the Financial Services Regulatory Authority of the Abu Dhabi Global Market and the Securities and Commodities Authority as applicable) in the UAE.^[128]

Finance and leasing activities do not include:^[129]

• Financing and leasing of Ships.

• Financing services to Related Parties (Related Party financing is not a regulated activity in the UAE).

• Financing and leasing of Aircraft (including engines and rotables).

Example 92: Leasing

Company J (a Free Zone Person) is a regulated lessor. Company J enters into a hire purchase agreement under which it leases a forklift to a lessee for consideration (irrespective of the location of the lessee). The transaction is illustrated in the following diagram.

The rental income derived from the leasing activity is considered income from an Excluded Activity.

Example 93: Financing

Company K (a Free Zone Person) is a regulated non-bank lender. Company K makes a loan to a borrower that is not a Related Party and earns Interest on the loan (irrespective of the location of the borrower). The transaction is illustrated in the following diagram.

The Interest income is considered income derived from an Excluded Activity because it related to a regulated Business.

Ownership or exploitation of Immovable Property

The ownership or exploitation of Immovable Property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons, is an Excluded Activity.^[130]

Section 8 discusses the treatment of Immovable Property and the implications of the ownership or exploitation of most Immovable Property being an Excluded Activity.

Record Keeping

A QFZP is a Taxable Person for the purposes of the Corporate Tax Law, even if all its income is Qualifying Income that is subject to a 0% Corporate Tax rate. Consequently, a Free Zone Person must maintain all records and documents required for Corporate Tax purposes for 7 years following the end of the Tax Period to which they relate.^[131]

All Taxable Persons must provide the FTA with any information, documents or records reasonably required by the FTA when requested to do so. The records must, therefore, be easily accessible if the FTA requests them.

Tax Registration

A Free Zone Person, including a QFZP should register for Corporate Tax with the FTA in the form and manner and within the timelines prescribed by the FTA.^[132] Failure to submit a Tax Registration application as per the prescribed timelines will result in Administrative Penalties.^[133]

A non-resident juridical person with a branch in a Free Zone that derives only State Sourced Income^[134] and does not have a Permanent Establishment in the UAE (for example, performs only preparatory or auxiliary activities in the UAE) is not required to register for Corporate Tax purposes.^[135]

Applicable Accounting Standards

The Corporate Tax Law does not require a Free Zone Person to maintain separate Financial Statements relating to its activities that generate Qualifying Income. However, in all cases, a QFZP would need to have sufficient documentation to demonstrate how it calculated its Qualifying Income.

For the purposes of the Corporate Tax Law, a Taxable Person is required to prepare Financial Statements based on applicable Accounting Standards. Accounting Standards that are accepted in the UAE for Corporate Tax purposes are the IFRS, or IFRS for SMEs for a Taxable Person with Revenue of AED 50,000,000 or less in the relevant Tax Period, or Cash Basis of Accounting where the relevant conditions are met.^[136]

Preparing audited Financial Statements

A Free Zone Person is required to prepare and maintain audited Financial Statements for Corporate Tax purposes (regardless of its Revenue) as a condition of being a QFZP.^[137]

A QFZP is not required to prepare separate Financial Statements for its Qualifying Income and its other income and is also not required to prepare separate audited financial statements for any branches that it may have. However, the QFZP should have sufficient documentation to demonstrate how it calculated its Qualifying Income.

Tax Return and Corporate Tax payment

Corporate Tax is a self-assessed regime. A Free Zone Person is required to pay Corporate Tax (if any) and file their Tax Return to the FTA in the form and manner prescribed by the FTA within 9 months from the end of the relevant Tax Period.^[138]