What is Qualifying Income in UAE Corporate Tax

Qualifying Income in UAE Corporate Tax 

The Federal Tax Authority (FTA) and the Ministry of Finance have introduced Corporate Taxation guidelines in the UAE. The Corporate Tax has come into effect in the United Arab Emirates from the 1st of June, 2023.

The rate of Corporate Tax in this country is 9%. It means people conducting their businesses in the UAE are subject to the UAE Corporate Tax of 9%.  But, here, one question arises whether all companies operating in this country are subject to this tax.

The UAE has issued different Corporate Tax regulations for the Free Zone. The phrase qualifying income Corporate tax in UAE has been released by the Government. This phrase is where the tax dues will be identified.

If you want to learn about the exact qualifying income in the UAE Corporate Tax, you must read this article. The article will disclose the exact qualifying income in the UAE corporate tax. In addition, we will discuss some essential details about UAE Corporate taxation guidelines related to the Qualifying income in Corporate Tax in the UAE.

What is Qualifying Income?

In the context of the United Arab Emirates (UAE) Corporate Tax Law (CTL), which was kicked in on 1st June 2023, the actual concept of Qualifying Income for Corporate Tax is an essential factor. Understanding this concept is essential for every business, especially for those located in the Free Zone.

Qualifying income is any kind of income received by the Qualifying Free Zone Person (QFZP) which is eligible for 0% Corporate Tax. The qualifying business activity or transaction conducted with the qualifying free zone is what yields or determines the qualifying income.

The Corporate Tax Law (CTL)  sets a primary Corporate Tax rate of 9% (nine per cent) on income that exceeds AED 375,000. However, a 0% (zero per cent) tax rate is applied to the Qualifying Free Zone Person (QFZP) on their Qualifying Income. In comparison, non-qualifying income which exceeds the de-minimis threshold gets taxed at 9% (nine per cent)

Criteria to Determine Qualifying Income

Several boxes need to be ticked to figure out what becomes a qualifying income for a Qualifying Free Zone Person (QFZP). As per the Cabinet Decision no. 100 of 2023, the following criteria determine the Qualifying income for Qualifying Free Zone Person (QFZP):

• The income must come from transactions with other free zone entities, as long as the transaction doesn’t stem from excluded activities. Income from transactions with non-free zone persons can also qualify. However, the income must be related to the qualifying activities, not from excluded activities.
• Qualifying activities are numerous. These activities include manufacturing, processing goods or materials, holding shares, and numerous services regulated within the UAE.
• Non-qualifying activities include numerous transactions, like those with natural persons (with a few exemptions). Activities performed in the banking, insurance, finance, and leasing sectors under regulatory watch are also out of the running. Ownership or exploitation of immovable or intellectual property assets comes under Excluded Activities.
• QFZPs can also qualify if you meet De minimis requirements. If you want to know about these requirements, keep reading. We will disclose details about the De Minimis requirements later in this article.
• Last but not least, the income will be considered as the qualifying where the income is derived from the transaction with a free zone person (FZP). Here, the Free Zone Person is the beneficial receipt of the relevant services or products.

Meeting these criteria is crucial to determining the Qualifying income for a Free Zone Person. Whenever you want to figure out the qualifying income, you should consider these facts.

Who is a Beneficial Recipient? 

In the UAE Corporate Tax regulations, the concept of a beneficial recipient is essential.  A beneficial recipient is a person with the right to use and enjoy products or services. These people have no contractual or legal obligations to transfer the service or goods. This factor implies both tangible and intangible items. The obligation to transfer does not exist in their agreement or the laws.

It is essential to ensure whether a Qualifying Free Zone Person (QFZP) possess a permanent establishment within the United Arab Emirates.

Qualifying Income for Domestic or Foreign Permanent Establishment

The payable income to the Domestic Permanent Establishment or a foreign Permanent Establishment of a Qualifying Free Zone individual would be considered Taxable income. These incomes will be Taxed at 9% (nine per cent) of the UAE Corporate Tax for the free zone business.

Suppose a QFZP has a domestic or foreign establishment and is earning for a tax period. In that case, the taxable income earned during a specific time will be treated as it belongs to an independent or separate person related to the QFZP.

Income Requirement for Free Zone-Located Immovable Property

Income payable to the immovable property situated in the Free Zone would be considered taxable. These earnings will be subject to the following taxes:

• Deals include any person regarding real estate that is not commercial
• Deals involving Commercial Property with Non-Free Zone People

The income payable to the Immovable property follows the Corporate Tax requirement. This income constitutes the taxable income for these two transactions during a certain tax period.

What are the De minimis Requirements?

The De minimis requirements are considered to be fulfilled when non-qualifying revenue by the QFZP in a tax period does not exceed the total revenue percentage of the QFZP in that tax period or the amount specified via the Minister, whichever is lower. The following revenue would not be included while calculating non-qualifying revenue and the total revenue:

1. Revenue payable to the non-immovable property in the Free Zone obtained from the following transaction:

• Transaction with Free Zone Person in terms of commercial property
• Transactions with people relating to immovable property which is not a commercial

B. Revenue payable to a Domestic or Foreign Permanent Establishment of the QFZP.

Non-qualifying revenue is obtained in a Tax Period from any of the factors mentioned below:

• Excluded activities
• Operations that do not qualify as Qualifying Activities, where the other party is a Non-Free Zone Person.

Remember, total revenue is also revenue obtained by the QFZP. A QFZP and its Domestic or Foreign Permanent Establishment would be treated as an Independent person and Related Parties to each other.

How can Flyingcolour Tax Consultant help you?

The UAE Corporate Tax was recently applied to the whole country. Navigating through the complex landscape of Corporate tax might be hard for most people in the UAE. Flyingcolour Tax consultant can help you to navigate this landscape. In addition, we can clear all your doubts about the Qualifying income for the Corporate Tax.

To learn more about Qualifying Income in UAE Corporate Tax, book a free consultation with one of Flyingcolour team advisors, simply call +971 50 5585305 or send WhatsApp messages to +971 4 4542366. you can also drop an email to info (at) flyingcolour (dot) com.

This article was published on 18-03-2024. The information provided in the article is based on the policies and rules applicable at the time of writing it. Talk to one of our consultants for any recent updates or changes.