According to the UAE Corporate Tax law (UAE CT law), the qualifying income (QI) of a qualifying free zone person (QFZP) is subject to 0% corporate tax (CT), while the non-qualifying income (NQI) of the QFZP is taxed at a rate of nine percent.
If a qualifying free zone person (QFZP) engages in transactions with other free zone persons, all income from such transactions will be classified as qualifying income (QI), except for income derived from excluded activities. This raises questions regarding the nature of excluded activities, which will be extensively discussed in this article.
According to Article 3 of Ministerial Decision No. 139 of 2023, the excluded activities are specified.
- Article 3(1)(a) states that if a qualifying free zone person (QFZP) engages in transactions with natural persons, the income from these transactions will generally be considered non-qualifying income (NQI), except for income derived from (i) ownership, management, and operation of ships, (ii) regulated fund, wealth, and investment management services overseen by UAE regulatory authorities, and (iii) financing and leasing of aircraft, including related services provided to natural persons. In summary, income from transactions with natural persons will be classified as NQI, except for the aforementioned activities, which will generate qualifying income (QI).
- Banking and insurance services provided by QFZP under UAE regulatory oversight are generally classified as NQI, except for income generated from reinsurance services, which is classified as QI.
- Finance and leasing activities subject to UAE regulatory oversight are also classified as NQI, except for treasury and financing services provided to related parties and aircraft financing and leasing services, which are classified as QI.
- Income from the ownership or exploitation of immovable property by QFZP is generally classified as NQI, except for income from free zone-based commercial property not used for accommodation purposes when transacted with another free zone entity.
- Income from hotels, serviced apartments, and residential properties, even when transacted with other free zone entities, is classified as NQI due to their accommodation purposes. The transaction can involve property sales and leases.
- Income generated from ownership or exploitation of intellectual property assets is classified as excluded activities and taxed at a rate of nine percent. Intellectual property assets include copyrights, patents, trademarks, brands, and technical know-how that generate separate identifiable income. If QFZP performs ancillary activities related to its main activities, the income from such activities follows the same treatment as the main activity.
In summary, QFZP activities with other free zone entities generate QI income taxed at 0%, except for excluded activities taxed at nine percent. A proper understanding of customers and transaction nature is crucial for accurate tax applications.