In a recent decision, the Cabinet has laid out new guidelines for determining the qualifying income of free zone entities for the purpose of taxation. These guidelines aim to provide clarity and transparency in assessing the taxable income of qualifying free zone persons. This article serves as a comprehensive guide to help individuals and businesses understand the concept of qualifying income and its implications for taxation within free zones.
What is Qualifying Income?
Qualifying income refers to the revenue generated from activities conducted by a qualifying free zone person, excluding certain types of income specifically identified as non-qualifying. To determine qualifying income, it is essential to identify the nature of the activities being conducted and the parties involved in the transactions.
(a) Manufacturing of goods or materials.
(b) Processing of goods or materials.
(c) Holding of shares and other securities.
(d) Ownership, management and operation of Ships.
(e) Reinsurance services that are subject to the regulatory oversight of the competent
authority in the State.
(f) Fund management services that are subject to the regulatory oversight of the
competent authority in the State.
(g) Wealth and investment management services that are subject to the regulatory
oversight of the competent authority in the State.
(h) Headquarter services to Related Parties.
(i) Treasury and financing services to Related Parties.
(j) Financing and leasing of Aircraft, including engines and rotable components.
(k) Distribution of goods or materials in or from a Designated Zone to a customer that
resells such goods or materials, or parts thereof or processes or alters such goods or
materials or parts thereof for the purposes of sale or resale.
(l) Logistics services.
Determining Qualifying Income
The decision categorizes income into three main types for the purpose of assessing its qualification: income derived from transactions with other free zone persons, income derived from transactions with non-free zone persons in relation to qualifying activities, and any other income that satisfies the de minimis requirements specified by the Minister.
Transactions with Free Zone Persons
Qualifying income includes revenue generated from transactions with other free zone persons, as long as these transactions are not associated with excluded activities. The term “Beneficial Recipient” refers to the party that has the right to use and enjoy the goods or services without any obligation to pass them on to another person.
Transactions with Non-Free Zone Persons
Qualifying income may also arise from transactions with non-free zone persons, but only if the activities conducted are deemed qualifying and not excluded activities. This distinction ensures that income derived from specific non-free zone transactions can be included as qualifying income.
De Minimis Requirements
The decision establishes de minimis requirements to determine the threshold for nonqualifying revenue. The non-qualifying revenue should not exceed a certain percentage of the total revenue or a specified amount, whichever is lower, as set by the Minister. Non-qualifying revenue includes income derived from excluded activities or activities that are not deemed qualifying when the other party involved is a non-free zone person.
Domestic Permanent Establishment
To ascertain whether a qualifying free zone person has a domestic permanent establishment, Article 14 of the Corporate Tax Law is applicable. The decision emphasizes treating the qualifying free zone person and its domestic permanent establishment as separate entities. Separate and independent person – that is a related party of the qualifying free zone person.
Taxation of Permanent Establishments and Immovable Property
Income attributable to a domestic permanent establishment or a foreign permanent establishment of the qualifying free zone person is considered taxable income and subject to taxation. Similarly, income derived from immovable property located in a free zone, such as commercial property, is also considered taxable income.
a) Transactions with Non-Free Zone Persons in respect of Commercial Property.
b) Transactions with any Person in respect of immovable property that is not Commercial Property.
Maintaining Adequate Substance and Outsourcing
To ensure the legitimacy of operations within free zones, a qualifying free zone person is required to conduct its core income-generating activities within the free zone itself. Adequate substance, including assets, qualified employees, and operating expenditures, must be maintained. However, certain activities can be outsourced to related parties or third parties within the free zone, provided that adequate supervision is in place.
The recent Cabinet decision on determining qualifying income for free zones brings clarity and transparency to the taxation process. By defining qualifying income and establishing specific guidelines, the decision aims to create a fair and balanced tax regime within free zones. It is essential for qualifying free zone persons to familiarize themselves with these guidelines to ensure compliance with the law and optimize their tax planning strategies. Contact us today, and let us help you achieve your tax goals. Phone: +971 56 412 7768, Email: [email protected], Web: https://expand.company