Free Zones in the UAE provide various benefits to businesses concerning taxation, if the company performs qualifying activities. For Qualifying Free Zone Persons such activities can benefit from 0% of corporation tax on qualifying income. This guide explains what qualifies lost profits activities or claims, in relation to other activities, and examines the impact of ancillary activities.
Qualifying Activities:
Qualifying Free Zone Persons can take advantage of the 0% corporate tax status when selling goods or services other than Excluded Activities to other Free Zone Persons who will be the ultimate beneficial users of the said goods or services. Moreover, if the income earned from Sales to Non-Free Zone persons enjoys the 0% corporate tax if it falls under some of the activities stated in Ministerial Decision No. 265 of 2023.
Key Qualifying Activities
The qualifying activities include virtually any business operation. This includes:
- Fabrication of Products or Substances
- Manufacturer or treatment of the goods or the material.
- Trading of Qualifying Commodities
- Possession of Shares and Other Securities in Respect of Which the Company is Void to the Shareholders for Investment only.
- Who Owns, Manages and Operates Ships
- Reinsurance Services
- Fund Management Services
- Services to manage the exchange and investment of money.
- Headquarter Services to Related Parties
- Treasury and Financing Services – Related Parties
- The financing and leasing of aircraft
- Goods or Materials dispatch or delivery from a particular specified zone.
- Logistics Services
It further defines the activities by orthodox business procedures as well as other natural occurrences that are part of the business that deals with each activity.
Understanding Supporting/Ancillary Activities: –
Supporting activities are those which are part of the main qualifying activity or which bear a minimal relation to that activity. Other activities play an essential role in identifying the QFZP’s qualifying and non-qualifying revenue; especially in the proportionality or what is commonly referred to as de minimis. It is identified as a necessity if an activity contributes to the supporting functions of the main activity that is involved in business.
Minor Contribution and Closely Related: –
Other similar activities can also be those that contribute a small portion of the principal activity but, still, are closely related to it and should be considered as being part of the same class. Such activities’ financial revenues should not significantly exceed the overall revenues of the business. For instance, a car maker company that deals in automotive accessories that are incorporated in the automobiles it produces as its major products may satisfy this element, while selling accessories as a secondary activity may not.
Surplus Funds: – Funds which are accumulated for future working capital needs of a QFZP come under its ancillary activity since this money is meant for future business needs and not to finance the same activity. Such surplus funds have to be a qualifying activity per se, for instance treasury and financing services to related parties, failing which it would be regarded as non-qualifying revenue.
Detailed Scope of Each Qualifying Activity
- Manufacturing of Goods or Materials: – Manufacturing is the process of transforming goods through one or more operations that alterations through manufacture from raw materials to finished products. This activity can be considered as long as it is a normal and relatively permanent function that is an organic part of the operations of the business.
- Example: – A Free Zone Person (a company) engaged in electronic components production with a small-scale manufacturing unit and units for conducting experimental tests for the production of cement and quality check on cement produced. As earlier noted, the testing facility is categorized under the incidental activity bearing in mind it is required for the actual manufacturing process to take place.
- Processing of Goods or Materials:- Manufacturing includes activities that take the inputs and convert them into outputs or finished products. This involves product processing and those activities that support the group’s main business line such as blending and manufacturing of products.
- Trading of Qualifying Commodities: – Sales frequently relate to the trading business, which connects different consumers who are interested in some basic materials necessary for the performance of various businesses. The qualifying products normally refer to familiar goods usually traded in markets, for instance oil, gas, and metals among others.
- Holding of Shares and Other Securities for Investment Purposes: – This activity implies the purchase and/or ownership of financial instruments with the intention of being appropriated for investments, and not for merely selling. Any income arising from such investments must be related to the main qualifying activity of the business.
- Ownership, Management, and Operation of Ships: –Shipping for transportation or as a logistics provider qualifies as ownership and management. This refers to all activities that are central to the shipping business process and may include; navigation, maintenance, and cargo operations.
- Reinsurance Services: – Reinsurance has to do with the insuring of other insurance companies against large claims. This activity is relevant to the insurance industry and falls under the provision of the corporate tax incentives for Qualifying Free Zone Persons.
- Fund Management Services: – Navigating investment funds for the client is regarded as a central or key business function. This encompasses the abilities to make investments and select portfolios and meet the finance regulations or requirements. Example: – Company D is a Qualifying Free Zone Person that deals with investment funds. It also offers research solutions that are useful in the formulation of good investment decisions. These research services are deemed as the support examination since they are the part of the fund management business.
- Wealth and Investment Management Services: – Offering services in the form of consultancy in the areas of wealth and investable assets would also constitute another KYC activity. This would entail aspects such as; wealth management, investment management, as well as planning for the retirement needs of the clients. Example: – Company E focuses its services on management of wealth. They also utilize a team involved with the management of the file administration and the customers. These tasks are ancillary roles since they are an accompaniment of the key wealth management service.
- Headquarter Services to Related Parties: – Supply of administrative, management, strategic headquarter services to related parties can only be those that are the same core services the principal business provides.
- Treasury and Financing Services to Related Parties: – This entails in handling of assets and its liabilities in which a firm offers loans, deals with cash in bank and balances on ways of proper utilization of excess money. Such activities have to be complementary to the main business processes.
- Example: –Treasury services are provided to their related parties Company F according to the information. It is also involved in cash management operations for purposes of sourcing for cash for its operations. Most of these are activities that are needed to meet main cash management treasury services and therefore they are classified as ancillary activities.
- Aircraft financing and leasing: – It deals with the manner in which an aircraft or other aircrafts are funded or bought through financial institutions like banks with an agreement to be paid in installments over a given period of time or arrangement for its use. Hiring out its aircrafts to other businesses is therefore a core operation. This also entails every related process right from operations, maintenance, financing, to leasing.
- Distribution of Materials or Goods from a Designated Zone: – Distribution is the supply chain management of products such as; storage, goods market movement through service providers as this activity is classified as necessary to the extent that it serves the core business processes.
- Logistics Services: – These include the movement of stock, storage, and tracking of the stocks.
Case Studies and Practical Examples
- Export and Closely Related Activities: – Company B specializes in the sales of oil and g. It also avails itself in minor advisory services in relation to the commodities that it deals in. These advisory services are closely related and are a small part of the main trading activity; therefore, it can be concluded that they are ancillary activities.
- Distribution and Logistics Integration: – As stated Company C avails a large distribution center in a specified area. It also has transport and storage services whereby it transports the products and stocks them for distribution and other services. These are its logistics services provided to cover its distribution function and thus form part of the main operations.
- Aircraft Leasing and Maintenance: –Company G apart from owning aircrafts, rents them out to other businesses. It also runs a maintenance division that sees to it that the aircraft are in good condition at a given time. The maintenance facility is an example of a related service because it is directly connected with the main business of the company, which is the leasing service.
- Ship Management and Administrative Support: -Company H provides shipping services hence it is a ship owning company. It has an administrative team who deals with the compliance and paperwork for the ships. This clerical work is viewed as a secondary one since it is required to the smooth functioning of the ships.
- Logistics Services and Inventory Control: –Company I is involved in transport as well as storage business. It also organizes itself with a stock control team to ensure that there is adequate stock to meet client demands. This is true because inventory control is an ancillary activity, whose main function is to facilitate other logistic activities.
- Reinsurance and Risk Assessment: –The market offering is reinsurance services by Company J. It has a separate department for risk assessment to review possible claims. Since it forms part of the reinsurance endeavor, risk assessment can be categorized as part of the ancillary activities.
Compliance and Reporting
- Implementing a Tracking System: –In order to benefit from the 0% corporate tax rate, QFZPs must have in place a tracing mechanism which associates the expenditures with regards to the qualifying activities and the income from those activities. This system should be able to address all the cost aspects and the income therefrom to assure a complete and correct manner of reporting.
- Documentation and Record-Keeping: –It is particularly vital to keep records on all merges requiring Q&A and additional procedures. This consists of the documentations that enable the determination of the type of activity by the firm and its extent such as financial statements, contracts among others.
- Regular Audits and Reviews: – The necessity of the continuous audits and reviews of the business operations helps to make sure that the activities are still within the qualifying threshold. This enables one to learn of any variation from the set standard and do something about it so as to comply.
Conclusion: –The prospect of qualifying activities under the Free Zone regulations knowing and harnessing the fundamentals of the operations can also improve a business’s financial position. Thus, monitoring and recording the implementation of above activities ensures maximum tax advantages are claimed while staying within the law. This is because; manufacturing, trading, fund management, and logistics’ business activities are all different but can qualify as AIP business activities hence open up new opportunities of business expansion and taxation. The inclusion of ancillary activities in the business strategy helps to eliminate any potentially ignored functions and include them in the main qualifying activities. Therefore, through proper record keeping, and internal and external audits, the Qualifying Free Zone Persons can be in a position to maximize the 0 % corporate income tax rate for the company’s growth and profitability in the Free Zone environment.
