In the dynamic landscape of corporate taxation in the UAE, a Free Zone Person (FZP) stands to gain significantly from a 0% Corporate Tax rate, contingent upon their qualification as a 'Qualifying Free Zone Person' (QFZP). This privileged status is regulated by rigorous criteria set forth in the Corporate Tax Law, ensuring that only entities fulfilling all stipulated conditions can enjoy these advantages. To secure and uphold QFZP status, an FZP must adhere to several critical requirements. These include maintaining adequate substance within a Free Zone, generating qualifying income, and refraining from opting into the standard corporate tax rules and rates. Furthermore, they must adhere to the arm's length principle, maintain audited financial statements, and ensure their non-qualifying revenue meets the de minimis threshold.
Qualifying income for a QFZP encompasses a range of activities, provided they are conducted with specific beneficiaries and under particular conditions. The law stipulates that a QFZP selling goods or services (excluding those related to Excluded Activities) to other Free Zone Persons who are the beneficial recipients, can benefit from the 0% corporate tax rate on the income derived from these transactions. In cases where services or goods are sold to non-Free Zone Persons, the QFZP can still benefit from the 0% corporate tax if the income is derived from transactions related to certain Qualifying Activities. These activities include, among others, the manufacturing and processing of goods or materials, trading of qualifying commodities, holding shares and other securities for investment purposes, ownership and management of ships, and a variety of financial and logistical services.
A crucial aspect of the qualifying income criteria involves ancillary activities. These are activities that, while not the primary activity, are essential for or closely tied to the main qualifying activity. An activity is considered ancillary if it is necessary for the performance of the main activity or makes a minor contribution to it and is so closely related that it should not be regarded as a separate activity. The recently issued Corporate Tax Guide by the Federal Tax Authority on Free Zone Persons has placed special emphasis on 'ancillary activities' and key features for an activity to be ancillary to the main activity, along with several examples covering each of the qualifying activities. These activities must support the main business operations, serving as a necessary function rather than being a core activity themselves. For instance, administrative support services that facilitate the main business operations could be deemed ancillary. Additionally, these activities should be seamlessly integrated into the business's operations, with their absence disrupting the main activities, highlighting their necessity.
To determine whether an activity is ancillary, one must consider its financial contribution relative to the total revenue of the business. This evaluation depends on whether the activity’s contribution is minor and how closely it is related to the main activity. For example, if a car manufacturer includes automotive accessories in its primary production and sales processes, these could be considered ancillary. However, if the same manufacturer sells accessories as a separate, sidelined venture, this would not typically meet the ancillary criteria. In the case of manufacturing and processing of goods or materials, activities that might be treated as ancillary to qualifying activities include post-sale activities and customer support. Similarly, in the case of trading of qualifying commodities, ancillary activities would include warehousing and delivery. In the case where the main activity is ownership, management, and operation of ships, ancillary activities would include ship broking, i.e., buying, selling, or chartering ships (subject to meeting the primary conditions) and organizing and overseeing voyages including logistics.
For entities providing reinsurance services, investing and actuarial services, as well as risk management would be classified as ancillary. For entities providing headquarter services to related parties, providing training and development is specifically classified as ancillary when one company is providing. A key clarification provided in the guide is in the case of self-investments, which clarifies that investing surplus funds for oneself would not be considered as an ancillary activity. The only exception in this case is that if the main activity relates to providing treasury and financing services to related parties, then self-investment would still be considered as a qualifying activity. This distinction between main activity and ancillary activity ensures that only activities integral to the main operations and making minor yet necessary contributions are classified as ancillary. Whether an activity is ancillary or not would depend on a case-to-case basis and would primarily depend on the main activity. Accordingly, businesses must carefully analyze their operations to determine the qualifying nature of their ancillary activities under the tax law, ensuring compliance and benefiting from the favorable tax arrangement offered to Qualifying Free Zone Persons.
