The Ministry of Finance in the United Arab Emirates (UAE) released guidelines outlining the regulations surrounding 'qualifying income' and the implications for free zone businesses under the new corporate tax rule.

The anticipated 0% corporate tax rate for these businesses will apply to all activities involving transactions with other free zone entities. This includes activities such as renting commercial property, providing professional services, and distribution, among others.

Qualifying Activities

Qualifying activities are those performed exclusively within the free zone entity. Examples of qualifying activities: manufacturing, processing, holding securities, ship operation, reinsurance services, regulated fund management, wealth and investment management, headquarters services, treasury and financing services to related parties, aircraft financing and leasing, logistics services, distribution in designated zones, and ancillary activities.

Excluded Activities

Income from certain excluded activities is not considered qualifying income. Excluded activities include transactions with individuals, certain regulated financial services, income from intangible assets, and income from immovable property (except for commercial immovable property within free zones).

De-minimis Threshold

Free zone entities can earn a small amount of non-qualifying income within the de-minimis threshold.
The de-minimis threshold is the lower of Dh5 million or 5% of total revenues.
Amounts exceeding the de-minimis threshold are subject to corporate tax.

Compliance Considerations

Revenue from permanent establishments and immovable property in free zones not eligible for the tax regime does not count towards the de-minimis threshold.
The associated taxable income will be subject to the regular UAE corporate tax rate of 9%.
Failure to meet the de-minimis requirements or other qualifying conditions results in the loss of the 0% tax benefit for a minimum of five years.

These regulations aim to simplify the tax regime while supporting the growth and development of businesses operating within free zones.

By understanding the qualifying conditions, qualifying activities, and excluded activities, free zone businesses can navigate the tax landscape effectively and ensure compliance with the new regulations.

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