The UAE corporate tax law applies to traders, with non-free zone resident juridical taxable traders liable to pay tax on their global income. For natural persons working as traders, they are exempt from corporate tax if their revenue is up to Dh1 million in a Gregorian calendar year. Traders classified as Qualifying Free Zone Persons (QFZPs) are subject to a zero per cent tax rate on their qualifying income and a nine per cent tax rate on non-qualifying income. The question arises when Qualifying Free Zone Traders (QFZTs) sell non-qualifying goods to non-free zone persons that are not their PEs, will they still be able to enjoy 0% tax?
The UAE government offers specific incentives, such as a zero per cent tax rate, to QFZDs operating in designated zones. To retain their Qualifying Free Zone Person status in designated zones, QFZDs must consistently meet requirements like maintaining adequate substance in the designated zones, having audited financial statements, adhering to transfer pricing regulations, and generating non qualifying income less than 5% of the total income or Dh5 million, whichever is lower. The distribution of goods or materials within or from a designated zone involves importing, storing, managing inventory, handling, transporting, and exporting these items to customers. There are no restrictions on the method of distribution, but it specifically pertains to tangible products and does not cover intangible products and services.
To qualify as a qualifying activity, distribution services must be provided to customers who either resell the goods or process them for resale. The end user, who ultimately utilizes the product for its intended purpose, should not be the recipient of goods from a QFZD. Key activities of a QFZD include purchasing and resale of goods or materials, warehousing, transportation, delivery, logistics, inventory management, order processing, packaging, and ancillary activities like marketing, quality control, and customer support. It is crucial for free zone based traders to carefully determine their status, the nature of the goods being sold, and the customer’s status to apply taxation correctly.
The article is written by Mahar Afzal, who is a managing partner at Kress Cooper Management Consultants. These guidelines provide valuable information for traders in the UAE to understand the tax implications based on their status and activities. For further queries or clarifications, readers can contact Mahar Afzal at [email protected]. For traders operating in free zones in the UAE, understanding the tax laws and incentives is essential to ensure compliance and maximize benefits.
