The nexus approach involves tracking qualifying expenditures and overall expenditures for qualifying intellectual property (QIP) assets. When a qualifying free zone person (QFZP) is involved in the research and development (R&D) of intellectual property assets, there are tax benefits available. Income generated from qualifying intellectual property assets can attract zero percent corporate tax, while non-qualifying income from such assets and income from non-QIP assets are subject to a flat nine percent tax rate. There is a direct link between the income generated from QIP assets and eligible R&D expenses that have contributed to that income.
Intellectual property assets include intangible assets like patents, copyrights, trademarks, and technical know-how. These assets can be categorized as qualifying or non-qualifying depending on their registration and use. Qualifying income from QIP assets is determined using a specific formula outlined in the Guide and relevant Ministerial Decision. Qualifying expenditures include R&D expenses, while overall expenditures consist of acquisition costs and outsourcing expenses related to the creation, invention, or significant development of the QIP asset.
Expenditures must be directly linked to the development of the QIP asset, and qualifying expenses should be recognized when incurred. Tracking qualifying and overall expenditures, as well as overall income, is essential for accurate reporting. A robust tracking system is required to monitor multiple QIP assets, in-house R&D, and outsourced R&D. Proper record-keeping is crucial to establish the link between expenses and income from each asset.
Maintenance of detailed records demonstrating ownership rights, expenditures, income, and the relationship between expenditures and income is necessary. Without proper tracking, a QFZP may miss out on the tax benefits associated with qualifying income from QIP assets. Tracking historic expenditures for assets developed pre-corporate tax law implementation can be challenging. A transitional ratio method based on a three-year rolling average may be used initially, shifting to a cumulative ratio for subsequent tax periods.
In conclusion, the nexus approach is vital for QFZPs to maximize tax benefits related to qualifying income from QIP assets. Proper tracking of expenditures and income is crucial for accurate reporting and compliance with tax regulations. Establishing a connection between expenses and income for each asset is essential for claiming tax benefits. The writer, Mahar Afzal, provides valuable insights on the nexus approach and its implications for QFZPs. For further clarifications or queries, you can contact Mahar Afzal at [email protected].
