Case Study: Corporate Tax Implications for a Free Zone Logistics Company

The UAE Corporate Tax regime, introduced through Federal Decree-Law No. 47 of 2022, offers special benefits for businesses operating within Free Zones-provided they meet specific criteria to be classified as a Qualifying Free Zone Person (QFZP). In this case study, we explore how a JAFZA-based logistics company structured its operations to maintain QFZP status and benefit from the 0% Corporate Tax rate on qualifying income.

UAE Corporate Tax Law is introduced with benefits to Free Zone companies registered in the UAE, subject to the conditions. The conditions are well outlined through Corporate Tax Law, Ministerial Decision, Cabinet Decision, and the FTA has published a guide for Corporate Tax for Free Zone, the Corporate Tax Guide for Free Zone Persons (CTGFZP1 - May 2024). In this Article, let us dive into a case study of how a JAFZA-based logistics company availed the eligibility of 0% Corporate Tax by structuring their business aligned with conditions to become a Qualifying Free Zone Person.

Background of the Company

➤ Company Name: ABC Logistics FZCO

➤ Free Zone: Jebel Ali Free Zone Authority (JAFZA)

➤ Business Activity: Warehousing and third-party logistics for customers located in the free zone across the UAE

➤ Annual Revenue (FY 2024): AED 8 million

➤ Staff Strength: 15 employees (including storekeeper, warehouse staff and other admins)

➤ Facility: 50,000 sq. ft. warehouse with bonded storage license

ABC Logistics FZCO has structured operations to provide logistics and warehousing services to customers located across various Free Zones in the UAE. ABC Logistics FZCO does not conduct business or generate income from any customers who are located outside the Free Zone (Like mainland customers or international customers, or any individuals)

Objective

The management of the company wants us to assess their position in the corporate tax and give a report which should cover a minimum of;

Whether the income earned by the business is eligible for 0% Corporate Tax or not.
What are all the activities which are considered Qualifying Activities
What are the compliance requirements to be maintained by the company as per the instructions from the Ministry of Finance and the Federal Tax Authority?
What are the risks exposed for the business model in taxation under the new clarifications from the authority?

Legal Framework and FTA Guidance

Article 18 of UAE Corporate Tax, Cabinet Decision No.100 of 2023 and Ministerial Decision No.256 of 2023 have explained the conditions to become a Qualifying Free Zone, which benefits the free zone company to avail 0% Corporate Tax on their Qualifying Income, which are as below;

Maintain adequate substance in the Free Zone by way of adequate full-time qualified employees, adequate operating and capital expenditure in the free zone and core income-generating activities are conducted in the free zone.
Derives income from Qualifying Activities.
Make sure that the non-qualifying income falls within in the de minimis threshold.
Prepare and maintain audited financial statements.
Comply with arm's length pricing and transfer pricing documentation.

Further clarifications were provided by the UAE Federal Tax Authority (FTA) through the guide published, which is the Corporate Tax Guide for Free Zone Persons (CTGFZP1 - May 2024).

Evaluation of Activities and Clients

ABC Logistics FZCO primarily provided:

Storage and warehousing services to Free Zone trading companies.
Inventory management for cross-border shipments on behalf of the customers,
Customs documentation support for the movement of goods within the free zone and free zones to free zones

All clients were registered Free Zone Persons and held valid tax registrations. No transactions were made with natural persons or mainland companies. The company did not engage in:

Retail distribution
Direct-to-consumer delivery
Onshore invoicing

As per Section 10.6.2 of the CTGFZP1, "logistics and warehousing services to Free Zone Persons" are considered Qualifying Activities, provided the recipient is the Beneficial Recipient.
All the customers who received services from ABC Logistics FZCO were registered Free Zone Persons and held a valid tax registration number under the Corporate Tax Law. None of the transactions were made with natural persons (individuals) or mainland companies or foreign companies. ABC Logistics FZCO did not engage in;

Retail distribution of goods
Direct delivery to the consumer
Any invoicing to onshore customers.

Article 3-1-a of Cabinet Decision No.100 of 2023 outlined that a free zone person generates income from another free zone person is considered as Qualifying Income unless the income is generated from Excluded Activities. Also, the additional conditions applied that the service receiver must be a beneficiary recipient of the services provided by the Free Zone company.

Excluded Activities are as below;

Most of the services provided to natural persons
Banking activities
Insurance activities
Most of the Financing and leasing activities
Most of the real estate income
Any other activity which is ancillary to the above excluded activities

Substance and Operational Compliance

ABC Logistics FZCO maintained:

A dedicated physical office and warehouse in JAFZA. A warehouse of 50000 sq. ft. is maintained by the company along with a dedicated physical office.
Full-time qualified employees are working in the company and available in the free zone to handle the core business operations
All the related party transactions and connected person payments are handled as per the Arm's length principle
Annual audited financial statements are prepared and maintained by the company. The company has been doing this practice from the year of incorporation and submits it to the free zone authority.
As required under the law, the company ensured that:
Its core income-generating activities were carried out in the Free Zone
The adequate substance requirement to run the business was maintained by the company in the Free Zone, which is aligned with tax laws.

De Minimis Test Not Applicable

Since the company:

The entity has not engaged in or generated income from any excluded activities. Thus, there was no non-qualifying income for the company.
The 100% income was generated from other Free Zone companies, and there was no income received from Non-Free Zone Persons.
Since there was no non-qualifying income recorded during the year, which is specified in the Ministerial Decision No.265 of 2023, the company has satisfied the de minimis conditions specified.

Result

For the Tax year ending 31 December 2024, ABC Logistics FZCO qualifies as a Qualifying Free Zone Person and is eligible for the 0% UAE Corporate Tax rate on its entire income, as:

All the incomes were generated from Qualifying Activities, and no income was generated from excluded activities
All the clients were beneficial recipients and they were also located in Free Zones across in UAE.
All economic substance, reporting, and documentation conditions were met.

The company is not required to pay Corporate Tax on qualifying income for FY 2024. However, it must continue to comply with the QFZP requirements annually and monitor any future changes in its client base or service scope. If any conditions to qualify as a 0% Corporate Tax company is violated, the company will cease to get the 0% tax benefits in the year of violation and the 4 subsequent years.

Key Takeaways

Providing warehousing and logistics services to Free Zone Persons qualifies under 0% Corporate Tax under Article 18 and the relevant Ministerial and Cabinet Decision.
To keep the status of Qualifying Free Zone Person, the free zone entity must sure that the non-qualifying income portions are below the de minimis threshold.
Free Zone businesses must maintain adequate substance, submit audited financials, and apply transfer pricing where required. Throughout the tax years, the free zone companies must look into the compliance requirements like adequate substance, transfer pricing and audited financials.
UAE Corporate Tax regime has the benefit of 0% Corporate Tax for Free Zone-to-Free Zone benefits as long as the conditions are met. Identifying the customer location, customer type, transaction model etc, is crucial to determine the tax position of the free zone company.

Need Help Evaluating Your Free Zone Tax Position?

At Flying Colour Tax Consultant, we help UAE Free Zone companies:

Assess their QFZP eligibility
Prepare compliant transfer pricing documentation
Navigate de minimis thresholds and reporting obligations

To learn more about Case Study: Corporate Tax Implications for a Free Zone Logistics Company, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.