Scope of Application
Cabinet Decision No. 100 of 2023 applies to Qualifying Free Zone Persons (QFZPs), namely, persons registered in a free zone, or a designated zone in the UAE who are undertaking qualifying activities. In order to properly appreciate the scope of this decision, it is important to distinguish between QFZPs and Non Free Zone Persons (NFZPs).
Table 2: Definitions of Key Terms
| Term | Definition |
|---|---|
| Qualifying Free Zone Person (QFZP) | An entity, registered in a free zone or designated zone in the UAE and engaged in qualifying activity |
| Non-Free Zone Person (NFZP) | Any person who is not a QFZP |
| Qualifying Income | Income derived from qualifying activities, under specific conditions |
| Designated Zone | Designated according to Federal Decree-Law No. (8) of 2017 on Value Added Tax, and Free Zone in accordance with the Corporate Tax Law |
| Adequate Substance | Having adequate amounts of assets, adequate number of qualified full-time employees and operating expenditures amounts in relation to each activity |
| Beneficial Recipient | A person with the right to exert his dominion over a service or good and who is not legally or contractually bound to supply such service or good to another |
Qualifying Income
The decision sets out the income categories that QFZPs can take into account when considering qualifying income. These include:
- It is income derived from transactions with other free zone persons, except income from excluded activities.
- Income from transactions with non free zone persons, if the activities are qualifying and not one of the excluded activities.
- The income from the ownership or exploitation of qualifying intellectual property.
- If you have any other income, that’s subject to the QFZP being met with specific de minimis requirements.
It is important to note that income from a domestic or foreign permanent establishment or immovable property owned or used by it is not qualifying income.
De Minimis Requirements
To take advantage of the qualifying income provisions, QFZPs must satisfy certain de minimis requirements. A QFZP should not derive the non qualifying revenue by more than a specified percentage of the total revenue or an amount as specified by the Minister, whichever is lower. Non qualifying revenue includes the revenue from the excluded activities, non qualifying activity with the non free zone persons and the revenue from the transaction with the free zone persons where the free zone person is not the beneficial recipient of the service or goods.
Income Attributable to a Domestic or Foreign Permanent Establishment
Income attributable to a domestic or foreign permanent establishment of a QFZP is considered taxable income and taxed according to the Corporate Tax Law. These include transactions with non free zone persons in respect of commercial property and with any person in respect of immovable property which is not commercial property.
Income Derived from Immovable Property Located in a Free Zone
QFZPs will be required to carry out their core income-generating activities in a free zone or designated zone and maintain substance. These transactions include transactions with non-free zone persons in respect of commercial property and transactions with any person in respect of immovable property that is not commercial property.
Maintaining Adequate Substance and Outsourcing in a Free Zone
QFZPs must conduct their core income generating activities in a free zone (FZ) or designated zone (DZ), and have adequate substance. This includes having enough assets, enough full time qualified employees, and making enough operating expenditures. The QFZP can outsource one of its core income generating activities to another person in a free or designated zone, as long as the outsourced activity is monitored by the QFZP.