+971 557 188 763
[email protected]
Connect Us
Post By: admin February 26 2024

List Of Excluded Activities Under Qualified Income Person Under FZ

The Free Zone in the United Arab Emirates offers a tempting proposition for businesses - zero corporate income tax for Qualifying Income Persons (QIPs). However, there is a catch. Certain activities are excluded from this tax exemption, and failure to identify and comply with these exclusions can lead to unexpected tax liabilities. This blog provides a comprehensive guide to understanding the list of excluded activities and ensuring that your FZ business operates without incurring any unforeseen tax burdens. Join us as we explore the intricacies of FZ regulations and equip you with the knowledge to confidently navigate this tax haven.

Understanding The Core

Before diving into the specifics, let's establish the foundation. A QIP under the FZ regime is a business entity primarily engaged in Qualifying Activities, which generally involve:

  • Trading of goods (import, export, wholesale, retail): This forms the backbone of most FZ entities.
  • Logistics and warehousing: Facilitating the movement and storage of goods plays a vital role in global trade.
  • Manufacturing and assembly: Transforming raw materials into finished products adds value and fosters economic growth.
  • Consultancy and professional services: Expertise in various fields provides support to other businesses.

Now, the crucial part: Excluded Activities. As the name suggests, these are activities that fall outside the scope of Qualifying Activities and attract corporate income tax at the standard rate. The list of excluded activities is broad and can be categorized into:

  1. Financial Activities:
    • Banking and insurance services are regulated by the UAE Central Bank.
    • Finance and leasing activities are subject to UAE regulatory oversight.
  1. Real Estate:
    • Ownership and exploitation of immovable property within the UAE (except commercial property within the FZ).
  1. Intellectual Property:
    • Ownership and exploitation of intellectual property assets like patents, trademarks, and copyrights.
  1. Transactions with Natural Persons:
    • Most transactions involve individuals residing in or from the UAE, with specific exceptions.
  1. Ancillary Activities:
    • Activities supporting excluded activities, even if they are necessary for their operation.

Excluded Activity Income

Income derived from the following excluded activities would not qualify for FZ tax relief, regardless of whether it comes from FZ or non-FZ parties:

  1. Transactions with natural persons, except those relating to qualifying activities 4, 6, 7, and 10 as per the law.
  2. Banking activities subject to regulatory oversight by the local competent authority.
  3. Insurance activities subject to regulatory oversight by the local competent authority, except activity 5 in the list of qualifying activities as per the law.
  4. Finance and leasing activities subject to regulatory oversight by the local competent authority, except those in qualifying activities 9 and 10 as per the law.
  5. Ownership or operation of immovable property, except commercial property located in an FZ transacted with other FZ parties.
  6. Ownership or operation of intellectual property assets.
  7. Activities ancillary to those listed above.

As a result, the FZ relief would generally not cover transactions with natural persons or most immovable property transactions (except commercial property deals between FZ parties). Additionally, any income from licensing or exploiting intellectual property would not qualify for FZ tax relief.

The nuances, as they say, is in the details. So, let's unravel some specific nuances within these categories:

  • Excluded Transactions with Natural Persons: Transactions related to employee salaries, housing allowances, and certain professional services like legal or tax advice are exempt. Consult the relevant Federal Tax Authority (FTA) guidelines for a comprehensive list.
  • Intellectual Property: Exploiting IP assets for internal use of the FZ business is permitted. However, income generated from licensing or selling IP falls under excluded activities.
  • Ancillary Activities: Activities like cleaning or catering within the FZ solely for the benefit of the FZ entity are not considered excluded. However, providing such services to other businesses within the FZ might attract tax.

Navigating the Landscape

With the list of excluded activities in mind, how do you ensure your FZ business operates tax-efficiently? Here are some key takeaways:

  • Seek Professional Guidance: Consulting with a tax advisor like CDA who specializes in FZ regulations is crucial to navigate the complexities and customize a compliant strategy for your business.
  • Maintain Clear Records: Document your activities meticulously, differentiating between Qualifying Activities and any potentially excluded activities. Transparent and auditable records are your safeguard during tax audits.
  • Structure Your Business Model: Consider structuring your business to separate Qualifying Activities from excluded activities. This can mitigate tax liabilities and optimize your overall tax footprint.
  • Seek Updates: The FZ regulations and list of excluded activities are subject to change. Stay informed about these updates and adapt your practices accordingly.

CDA at Your Service

The United Arab Emirates' Free Zone is known for its tax-free environment, which is undoubtedly attractive to businesses. However, to avoid unexpected tax liabilities and remain compliant, it's crucial to understand the nuances of Qualifying Activities and Excluded Activities. Seeking professional guidance from experts like CDA, employing strategic planning, and having a comprehensive understanding of excluded activities can help steer your FZ business towards growth and profitability within the legal and fiscal framework. Remember, knowledge is power, and in the world of taxes, it's the key to unlocking success.

Contact Us today for more information!