Be aware of the conditions to enjoy 0% tax rate

Corporate Tax (CT) law applies to all businesses operating in the UAE, including those located in free zones. To qualify as a Qualifying Free Zone Person (QFZP) and enjoy the preferential rate of 0 per cent tax rate, businesses must satisfy certain conditions provided under Corporate Tax Law.

A recent update in Cabinet Decision No. 100 and Ministerial Decision No. 265 dated 27.10.2023 on qualifying income has been issued repealing earlier decisions, with effect from June 1, 2023. The update further enhances upon the concept of income derived from headquarter services, maintaining adequate substance and income from qualifying commodities.

Income from headquarter services

A preferential 0 per cent CT rate is eligible on income from headquarter services being rendered to related parties. Headquarter services includes the administering, overseeing, managerial business activities of related parties, business planning and development, risk management, coordination of group activities, and in general incurring expenditures on behalf of related parties and providing other support services to related parties.

Maintaining adequate substance

Maintaining adequate substance is an important compliance requirement to claim the 0 per cent preferential tax rate. To demonstrate adequate substance, the QFZP requires to conduct the core income-generating activities within the UAE whilst maintaining adequate full time employees, physical office, assets and incurring adequate operating expenses.

Trading of qualifying commodities

Income derived from trading of qualifying commodities with non-free zone persons (domestic or overseas) would also be eligible for 0 per cent CT rate. Qualifying commodities means metals, minerals, energy, and agriculture commodities traded on a recognised commodities exchange market — in the UAE or overseas — in raw form.

Key considerations for Qualifying Free Zone Person

Any payment made by related party (Mainland Entity) to a QFZP that is taxed at 0 per cent tax rate shall not be deductible for determination of taxable income of Mainland Entity. This may impact the mainland entity attracting 9 per cent CT rate on such non-deduction of payment.

FZP’s earning mainland sourced income from UAE mainland business entity or its branch in the UAE mainland will be subject to 9 per cent CT.

Transfer pricing requirements

Transfer pricing (TP) rules apply to UAE businesses having related party transactions, irrespective of whether the related parties are located in the UAE mainland, a Free Zone or in foreign jurisdiction.

FZP companies that are subject to TP requirements must also comply with the following obligations:

Appoint a TP Officer

Maintain an appropriate TP policy depending on the nature of service (i.e. core business activity, low value added service or any such other)

Prepare an annual TP report

Make TP documentation available to tax authorities upon request

Transfer pricing documentation

The TP documentation requirements for free zones under UAE CT law are outlined in Ministerial Decision No. 97 of 2023. This decision states that a taxable person should maintain a Local File and a Master File if the taxable person satisfies either of the conditions below:

The taxable person is a constituent entity of a Multinational Enterprise Group, with annual consolidated group revenues exceeding Dh3.15 billion, OR

The taxable person’s revenues exceed Dh200 million

— The writer is Managing Director, TRC Pamco Middle East