Free zone person can claim the zero percent corporate tax provided he earns qualifying income and satisfies De Minimis conditions

All free zone businesses are typically subject to 9% taxation on profits exceeding Dh375,000. However, if the free zone person meets the requirements of De Minimis and is a qualified free zone person producing a qualifying income, the free zone person may benefit from 0% corporate tax. Qualification requirements to enter a free zone: A qualifying free zone person is one who maintains sufficient substance, derives qualifying income, does not elect the regular rate of corporate tax, satisfies the de minimis requirements, maintains audited financial statements, and complies with transfer pricing regulations.

It is crucial to comprehend what constitutes enough material. According to Article 7 of Cabinet Decision No. 55/2023, a free zone has appropriate substance if it has core revenue-generating activities, adequate assets, an adequate number of competent personnel, and an adequate level of running expenses. The free zone entity cannot take advantage of certain benefits that are available to normal entities, such as business restructuring relief, membership in a qualifying group, the transfer of tax losses, and taking advantage of small business relief.

A qualified free zone person who earns a qualifying amount of money is entitled for 0% company tax. According to Cabinet Decision No. 55 of 2023, "qualifying income" includes three types of income: a) income derived from transactions with a non-free zone person, but only with respect to qualifying activities that are not excluded activities; b) income derived from transactions with other free zone persons, as long as these are not excluded activities (income will be considered as derived from transactions with a free zone person where that freezing person is the recipient of the income); and c) income derived from other sources.

Manufacturing, processing, holding shares or securities, fund management, wealth management, investment management services subject to regulatory oversight, headquartered, treasury and financing services, ownership, management, and operation of ships, distribution of goods/materials in or from a designated free zone for further sale or resale, financing or leasing of aircraft, and reinsurance services are all qualifying activities.

According to the most recent UAE Ministry of Finance Corporate Tax Consultation Paper, qualifying activities point 3.11 Article 2(1)(k), distribution of goods or materials illustration, it appears that the ministry has made it clear that the transaction pertaining to goods being shipped directly from foreign country A to foreign country B from a designated free zone entity will be covered under the scope of qualifying activities and, as a result, any income earned from such an activity will be exempt from corporate tax.

It's crucial to keep in mind that not every eligible free zone resident will profit from the distribution of commodities or resources. Therefore, 9% corporation tax will apply to the trading of products and materials from non-designated Free zones. According to the UAE Ministry of Finance Corporate Tax Consultation Paper, only individuals who are designated free zone residents would benefit from the 0% tax rate on distribution of goods and materials.

Corporation tax of 9% will apply to companies registered in free zones that export services (such as technology, marketing, and consulting services) to companies outside of free zones. The standard tax rate for free zone entities owning property on the mainland of the UAE is 9%. The lone exception is that qualified free zone entities situated in free zones will qualify for tax rates of 0% on revenue from commercial assets owned by those companies. In addition, regardless of the appropriate tax rate—zero or nine percent—all qualified free zone firms must submit an application for corporate tax registration and must compulsorily have their books of accounts examined.