Introduction
The Cabinet Decision has clarified what will constitute as Qualifying Income and it provided other important guidelines that are specifically designed for the Qualifying Free Zone Person.
Scope of Application
This decision will apply to Qualifying Free Zone Persons.
What is a Qualifying Income?
Qualifying Income of the Qualifying Free Zone Person shall include below categories of income:
- Income derived from transactions with other Free Zone Persons but not include income derived from Excluded Activities.
- Income derived from transactions with a Non-Free Zone Person, but only in relation to Qualifying Activities which are not Excluded Activities.
- Any other income where the Qualifying Free Zone Person satisfies the de minimis requirements.
Incidental Income: Qualifying income also includes the income derived from any person where the income is incidental to the income given above.
Note: The income should not be derived from a Domestic Permanent Establishment or a Foreign Permanent Establishment or from the ownership or exploitation of immovable property of this Decision.
Beneficial Recipient of Goods for Qualifying Income
Income is considered as derived from transactions with a Free Zone Person when the Free Zone Person is the Beneficial Recipient of the services or Goods.
Meaning of Beneficial Recipient: The Person who has the right to use and enjoy the service or the Good and does not have a contractual or legal obligation to pass on such service or good is known as Beneficial Recipient.
Meaning of Goods: The term ‘good’ includes tangible or intangible property that has economic value including movable and immovable property.
What are the De minimis Requirements?
The de minimis requirements are satisfied when the non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed more than:
- A percentage of the total Revenue of the Qualifying Free Zone Person in that Tax Period as given by the Minister, or
- An amount is given by the Minister,
whichever is lower.
Unsure about the De Minimis Limit or Threshold? Read our article here.
What are Non-Qualifying Revenue and Total Revenue?
Non-qualifying Revenue is Revenue obtained in a Tax Period from any of the following:
- Excluded Activities, or
- Where the other party is a Non-Free Zone Person, and the activities are not Qualifying Activities
Total Revenue is all Revenue that is derived by a Qualifying Free Zone Person in a Tax Period.
What are the revenues not to be included while calculating Non-Qualifying Revenue and Total Revenue?
The following Revenue is not considered in the calculation of Non-qualifying Revenue and Total Revenue:
- Revenue attributed to immovable property situated in a Free Zone derived from these transactions:
- Transactions with Non-Free Zone Persons in relation to a Commercial Property.
- Transactions with any Person in relation to an immovable property that is not a Commercial Property.
- Revenue attributed to a:
- Domestic Permanent Establishment, or
- Foreign Permanent Establishment of a Qualifying Free Zone Person
Domestic or Foreign PE
A Qualifying Free Zone Person and its Domestic Permanent Establishment or Foreign Permanent Establishment shall be treated as if the establishment was a separate and independent Person that is a Related Party of the Qualifying Free Zone Person.
What are the Incomes Attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment?
Income attributed to a Domestic PE or a Foreign PE of the Qualifying Free Zone Person shall be considered as the Taxable Income and taxed under Article 3 of the UAE Corporate Tax Law.
Separate and Independent Person: The income attributed to a Domestic PE, or a Foreign PE of the Qualifying Free Zone Person is the Taxable Income of established and calculated as if the establishment was a separate and independent person that is Related Party of the Qualifying Free Zone Person.
What are the Incomes Attributed to an Immovable Property Located in the Free Zone?
Income that is attributed to the immovable property in the Free Zone will be considered as Taxable Income if it derived from:
- Transactions with the Non-Free Zone Person related to Commercial Property.
- Transaction with any person related to the immovable property that is not a Commercial Property.
The Taxable Income for the Tax Period will be the income that is attributed to the immovable property and is calculated as per the relevant provisions of the UAE Corporate Tax Law.
Maintaining Adequate Substance in a Free Zone and Outsourcing
A Qualifying Free Zone Person will engage in its core income-generating activities in a Free Zone and as per the activities carried out, it will have:
- Adequate assets,
- Adequate number of qualified employees and
- Incur adequate amount of operating expenditures.
Outsourcing: Activities can be outsourced in a Free Zone to a Related Party or third party, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.
Publication and Application of Qualifying Income Decision
The Decision shall be published in the Official Gazette which will come into effect on 1 June 2023.
Conclusion for Qualifying Income
The term Qualifying Income is clearly accentuated with which income will be covered within the term for the purpose of the Qualifying Free Zone Person. It also covered the de minimis requirements.
FAQs
1. What types of income are considered as Qualifying Income for a Qualifying Free Zone Person?
The following types of income are included in qualifying income for a Qualifying Free Zone Person:
- Income from transaction with other Free Zone Person, excluding Excluded Activities.
- Revenue from dealings with Non-Free Zone Persons, but only in connection with qualifying activities that are not excluded activities.
- Any additional income, as long as the Qualifying Free Zone Person satisfies the de minimis criteria.
2. Does revenue from dealings with other Free Zone Persons count as Qualifying Income?
Yes, with the exception of revenue obtained from Excluded Activities, Qualifying Income does include transactions with other Free Zone Persons.
3. Can Qualifying Income be derived from transactions with Non-Free Zone Persons? If so, are there any conditions or restrictions?
Income derived through dealings with Non-Free Zone Persons may be regarded as Qualifying Income, provided that it satisfies the requirements of being connected to Qualifying Activities and not being an Excluded Activity.
4. What does “Beneficial Recipient” mean in terms of business dealings with people from Free Zones?
A person who has the right to utilize and enjoy the services or goods obtained in a transaction with a Free Zone Person is referred to as a “Beneficial Recipient”. Legally or contractually, the Beneficial Recipient is not required to transfer the received goods or services to another party.
5. What do the de minimis standards define as non-qualifying Revenue?
Non-qualifying Revenue is income generated during a tax period through Excluded Activities or non-qualifying activities, particularly when a Non-Free Zone Person is the other party to the transaction.
6. How are the de minimis criteria applied to total revenue?
Total Revenue is the sum of all revenue that a Qualifying Free Zone Person receives during a Tax Period from all sources combined.
7. How are the Qualifying Free Zone Person and its Domestic Permanent Establishment or Foreign Permanent Establishment treated under the de minimis requirements?
The Qualifying Free Zone Person and its Domestic Permanent Establishment or Foreign Permanent Establishment are treated as if they were separate and independent entities, resembling a Related Party relationship with the Qualifying Free Zone Person.
8. What happens to income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of a Qualifying Free Zone Person?
Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of a Qualifying Free Zone Person is considered Taxable Income and is subject to taxation Article 3(2)(b) of the UAE Corporate Tax Law.
