The UAE offers Free Zone businesses significant tax benefits, but not all income qualifies for the 0% corporate tax rate. To maximize tax savings, Free Zone companies must understand what constitutes Qualifying Income and how to structure their activities accordingly. This article breaks down the key aspects of Qualifying Income and how businesses can benefit.

What is Qualifying Income?

Qualifying Income refers to the type of revenue that is eligible for the 0% corporate tax rate under the UAE Corporate Tax Law. A Qualifying Free Zone Person (QFZP) can enjoy tax-free earnings on specific transactions, provided they meet the required conditions.

Types of Qualifying Income

A Free Zone business can benefit from 0% corporate tax if its income comes from the following sources:

Transactions with Other Free Zone Businesses

  1. Sales of goods and services to other Free Zone Persons.
  2. The recipient must also be a Free Zone business to qualify.

Manufacturing and Processing

  1. Income from producing, assembling, or modifying goods in a Free Zone.
  2. Exporting these goods to international markets or other Free Zone companies.

Trading of Qualifying Commodities

  1. Wholesale trading of raw materials, metals, and energy products within Free Zones.
  2. Transactions must be conducted within the designated areas.

Holding of Investments and Securities

  1. Earnings from dividends, capital gains, and interest on investments.
  2. Ownership of shares and financial instruments for investment purposes.

Fund Management and Reinsurance

  1. Income from fund management services regulated by UAE authorities.
  2. Reinsurance-related earnings within Free Zones.

Aircraft Leasing and Financing

  1. Revenue generated from financing, leasing, or maintaining aircraft and aviation equipment.

Logistics and Distribution in Designated Zones

  1. Storing, transporting, and distributing goods within a Designated Zone.
  2. Goods must be physically located in the designated area to qualify.

 

Intellectual Property (IP) Income

  1. Revenue from licensing patents, copyrights, trademarks, and trade secrets.
  2. Only Qualifying Intellectual Property benefits from the 0% tax rate.

 

What Income is Taxed at 9%?

Certain activities do not qualify for the 0% corporate tax and are subject to 9% tax, including:

  • Income from individuals (natural persons).
  • Real estate income, unless from commercial property leased to Free Zone businesses.
  • Banking, insurance (excluding reinsurance), and financial services.
  • Trading with non-Free Zone businesses in mainland UAE.
  • Excess non-qualifying income, which exceeds the de minimis threshold of AED 5 million or 5% of total revenue.

Maximizing Tax Savings with Qualifying Income

Free Zone companies can optimize tax savings by:

Structuring Business Transactions Strategically

  1. Prioritize transactions with other Free Zone Persons.
  2. Avoid exceeding non-qualifying income limits.

Maintaining Compliance with QFZP Rules

  1. Keep detailed financial records.
  2. Ensure activities align with approved Free Zone operations.

Leveraging Intellectual Property Rights

  1. License intellectual property that meets Qualifying IP requirements
  2. Avoid income sources that could disqualify the 0% tax benefit.

 

Final Thoughts

Understanding Qualifying Income is essential for Free Zone businesses looking to maximize tax savings. By ensuring compliance with UAE tax laws and structuring activities effectively, companies can continue benefiting from the 0% corporate tax rate while maintaining long-term profitability. If in doubt, seeking expert tax advice can help businesses remain compliant and optimize their financial strategy.