Qualifying activities for 0% Corporate tax UAE

The UAE introduced a corporate tax system in 2023, applying a standard rate of 9% on the taxable income of most businesses operating on the mainland. However, certain companies established within designated Free Zones, known as Qualifying Free Zone Persons (QFZPs), can avail of a 0% corporate tax rate on their qualifying income. One of the main criteria for achieving QFZP status is focusing your business activities on those classified as "qualifying activities". As per the Federal Decree-Law No. 47 of 2022, those qualifying activities encompass a range of sectors, including manufacturing, trading, logistics, and specific financial services. This guide provides the list of Qualifying activities under UAE Corporate tax as done by the QFZP and the list of excluded activities.

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What is a Qualifying Freezone Person (QFZP) in UAE?

A Qualifying Free Zone Person (QFZP) in UAE is a company established within a designated Free Zone that enjoys the privilege of a 0% corporate tax rate on its qualifying income. To achieve this status, the company must fulfil three main criteria:

• Registration and Licensing: It must be officially registered and licensed by the relevant UAE Free Zone Authority, adhering to their specific regulations.

• Compliance with Qualifying Activities: The company's primary source of income must come from activities classified as "qualifying activities" under the UAE Corporate Tax regime. These activities include manufacturing, trading, logistics, and certain financial services.

• Free Zone Presence: The company must maintain a substantial presence within the Free Zone, demonstrating a genuine commercial operation.

List of "Qualifying Activities" Under UAE Corporate Tax

There are certain business activities in UAE regarded as a Qualifying activity, have an advantage of 0% corporate tax in UAE. Any income derived from conducting these activities is called Qualifying income. As per Federal Decree-Law No. 47 of 2022, the following activities are termed Qualifying Activities:

• Manufacturing or Processing of Goods or Materials: This includes activities that transform raw materials into finished products or modify existing goods. (e.g., building cars, processing food)

• Trading of Qualifying Commodities: The specific definition of qualifying commodities may vary depending on the Free Zone authority. Generally, it refers to the buying and selling of physical goods.

• Holding of Shares and Other Securities for Investment Purposes: This includes owning stocks, bonds, and other financial instruments for investment purposes, not for trading purposes.

• Ownership, Management, and Operation of Ships: Owning and operating vessels for commercial purposes qualifies.

• Regulated Reinsurance Services: Providing insurance for other insurance companies qualifies but must be subject to regulatory oversight by the UAE authorities.

• Fund Management Services: Managing investment funds for clients qualifies but must be subject to regulatory oversight.

• Wealth and Investment Management Services: Providing personalised investment advice and managing client portfolios qualifies but must be subject to regulatory oversight.

• Headquarter Services to Related Parties: Providing administrative and strategic support to affiliated companies qualifies.

• Treasury and Financing Services to Related Parties: Managing financial activities like cash flow and loans for affiliated companies qualifies.

• Financing and Leasing of Aircraft: Financing or leasing aeroplanes, including engines and parts, qualifies.

• Distribution of Goods in or from a Designated Zone: Warehousing and distributing goods within a designated Free Zone qualifies.

• Logistics Services: Providing transportation and storage services for goods qualifies.

• Ancillary Activities: Any activities directly supporting the primary qualifying activities listed above (a-m) are also considered qualifying.

List of Excluded Activities Under UAE Corporate Tax

The following business activities are considered as a "excluded activities" under UAE Corporate tax. The business doing these excluded activilites liable to standard corporate tax rate of 9%.

• Transactions with Natural Persons: Generally, transactions made with natural persons (individual) subject to standard corporate tax rate. The specified transactions given in the qualifying activities list are an exception.

• Banking Activities: All banking activities conducted within the UAE, even in Free Zones, are subject to corporate tax.

• Insurance Activities (except for specific qualifying activities): Insurance businesses, with the exception of:

• Reinsurance Services (paragraph (f) of Clause (1)) which must be regulated by the UAE authorities

• Activities related to Wealth and Investment Management (paragraph (i) of Clause (1)) with proper regulatory oversight.

• Finance and Leasing Activities: Most financing and leasing activities are excluded, but there are exceptions, except mention in the Qualifying business activities list.

• Ownership or Exploitation of Immovable Property: Owning and managing real estate, with the exception of commercial property located within a Free Zone, when the transaction is conducted with another Free Zone Person.

• Ancillary Activities to Excluded Activities: Any activities that directly support the excluded activities listed above are also considered excluded.

De Minimis Rule

The de minimis rule essentially states that a QFZP can earn a small amount of income from non-qualifying activities without it disqualifying their total income for tax advantages. There are two thresholds that define the limit of non-qualifying income:

• 5% of Total Revenue: If the non-qualifying revenue earned by the QFZP in a tax period is less than 5% of its total revenue for that same period, then the de minimis rule is satisfied.

• AED 5 Million Threshold: Alternatively, even if the non-qualifying revenue exceeds 5% of total revenue, the de minimis rule is still considered satisfied as long as the absolute value of that non-qualifying revenue is less than AED 5 million.

Conclusion

In summary, to benefit from a 0% corporate tax rate in the UAE, companies must establish themselves as Qualifying Free Zone Persons (QFZPs) within designated Free Zones and focus their core operations on activities classified as "qualifying activities." These qualifying activities encompass a broad range of sectors including manufacturing, trading, logistics, and specific financial services. While some business activities are excluded from the 0% tax rate, QFZPs can still generate a limited amount of income from these excluded activities under the de minimis rule.

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