What are a Qualifying Free Zone Person and a Qualifying Group under UAE CT?
As the UAE gears up for the implementation of its new Corporate Tax regime, businesses in the country are required to familiarise themselves with the new rules and regulations set forth by the UAE government. The new tax framework will adhere to international standards of tax transparency; therefore, before the regime kicks in from June onwards, businesses must determine if they fall under the taxable category, or are categorized as either exempt or as Qualifying Free Zone Persons or Qualifying Groups.
Who is a Qualifying Free Zone Person?
Before being a qualifying free zone person, he must be a free zone person, i.e., meet the following criteria:
- A person incorporated in the free zone
- Established in the free zone
- Registered in the free zone
In the UAE, a Qualifying Free Zone Person is defined as an individual or corporate entity that is licensed to conduct business activities in the UAE free zones. Free zones are designated areas in the UAE that offer a multitude of incentives to foreign investors, including 100% foreign ownership, tax exemptions, and more. These free zones have become a significant driving force in attracting foreign investment and propelling economic development in the UAE.
A Qualifying Free Zone Person (QFZP) is an individual or entity that automatically benefits from the 0% Free Zone Corporate Tax regime if it meets specific criteria, which include:
- Have and maintain sufficient substance in the UAE by carrying out business activities within the country instead of only registering for tax advantages.
- Must earn a "Qualifying Income" which will be specified by the Cabinet Decision.
- Must follow transfer pricing rules and maintain the requisite documentation.
- Must not have opted out of the free zone tax regime.
If a Qualifying Free Zone Person fails to meet the aforementioned criteria or decides to be subject to the standard Corporate Tax regime, they will be taxed at a 9% rate starting from the tax period when they failed to meet the conditions.
Irrespective of being a qualifying free zone person, every entity in the free zone must get registered and file a CT return.
If the pillar two rules are to be embedded in the UAE Corporate Tax regime, then qualifying free zone entities that are part of large multinational groups are subject to being charged a different CT rate.
You can also read: UAE Corporate Tax on Free Zones | Key Facts & Guidelines
The term "qualifying income" refers to income obtained by the Free Zone Person (FZP) from transactions with companies outside the UAE, within the same, or any other free zone in the UAE. This income will be taxed at a rate of 0%. However, if any of their income is earned on the UAE's mainland, it will be subject to standard tax rates.
Qualifying Tax Group
A Qualifying Group is a group of entities that are related to each other through common ownership or control. These entities can be companies, partnerships, or any other legal form of business. A tax group is treated as a single taxable entity where the parent company takes on the responsibility of handling the tax administration and payment of CT for the entire group.
To qualify as a QG, the entities within the group must meet specific criteria.
- A taxable person should have either a direct or indirect stake of 75% or more in the other taxable persons. Alternatively, a third party can also possess a direct or indirect stake of 75% or more in each of the taxable persons involved.
To illustrate, let's say that Company X owns 20% of Company Y and 100% of Company Z. In turn, Company Z owns 80% of the shares of Company Y. Given that Company X indirectly owns 100% of the shares of Company Y (80% through Company Z), it can establish a Tax Group with both Company Y and Company Z.
- Both the parent and the subsidiary must not be exempt entities.
- Both the parent and the subsidiary must not be qualifying free zone person
- Both the parent and the subsidiary must follow the same financial year and use the same accounting standards
- The members of the group must be juridical persons who are UAE residents or non-resident persons having a permanent establishment in the UAE
Being recognized as QG can provide significant advantages for companies operating within the UAE. For instance, QGs can benefit from transferring assets and liabilities between each other at their net book value, without having to worry about taxes affecting their gains or losses.
CDA: Your Top-Notch Tax Partner in the UAE
Navigating the new federal corporate tax in the UAE may prove to be a challenging expedition for many businesses, as the terrain is uncharted and the rules are uncertain. However, the CDA Audit team of corporate tax experts is here to guide and support you. Our comprehensive legal, compliance, and tax advisory services will help you smoothly implement the corporate tax in the UAE. We'll even help you evaluate your business's categorization and take care of any necessary registrations or applications. Call us today, and let us provide the perfect solution for your needs!