In the UAE, Free Zone Persons (FZPs) have the opportunity to benefit from a 0% Corporate Tax rate if they qualify as a ‘Qualifying Free Zone Person’ (‘QFZP’). To achieve and maintain QFZP status, FZPs must meet specific conditions outlined in the Corporate Tax Law. These include maintaining substance within a Free Zone, generating qualifying income, steering clear of standard corporate tax rules, adhering to the arm’s length principle, having audited financial statements, and meeting de minimis requirements. Qualifying income can be derived from various activities conducted with specific beneficiaries under certain circumstances, such as selling goods or services to other Free Zone Persons.
Ancillary activities play a significant role in determining qualifying income for QFZPs. These activities, while not the main focus, are crucial for or closely related to the primary qualifying activity. The Corporate Tax Guide issued by the Federal Tax Authority highlights the importance of ancillary activities and provides key features for an activity to be considered ancillary. These activities should support the main business operations, be seamlessly integrated, and make a minor contribution to the total revenue. Examples of ancillary activities in various qualifying activities are also provided in the Guide.
To assess whether an activity qualifies as ancillary, its financial contribution relative to the total revenue is crucial. Activities closely related to the main activity and making minor contributions are considered ancillary. For instance, post-sale activities and customer support may be deemed ancillary in the manufacturing and processing of goods or materials. Similarly, warehousing and delivery are ancillary activities in the trading of qualifying commodities. Ancillary activities for the ownership, management, and operation of ships would include ship broking and overseeing voyages, among others.
Clarifications have been provided in the Guide regarding self-investments as ancillary activities. It is emphasized that investing surplus funds for oneself would not be considered ancillary unless the main activity is providing treasuring and financing services to related parties. The distinction between main and ancillary activities ensures that only activities integral to the main operations and making minor yet necessary contributions are classified as ancillary. Businesses must carefully analyze their operations to determine the qualifying nature of their ancillary activities under the tax law to benefit from the 0% corporate tax rate offered to Qualifying Free Zone Persons.
