What is the UAE Corporate Tax Qualifying Income?

The introduction of corporate taxation in the United Arab Emirates (UAE) represents a significant transformation in the country’s tax framework. Effective from June 1, 2023, a corporate tax rate of 9% applies to businesses operating within the country. However, businesses primarily based in UAE Free Zones may qualify for a distinct tax treatment concerning qualifying income. Understanding the components of UAE Corporate Tax qualifying income is essential for ensuring compliance and optimizing tax liabilities.

This article will elucidate the concept of qualifying income under UAE Corporate Tax law and emphasize the importance of engaging a corporate tax consultant for navigating these complexities.

What Is Qualifying Income?

Qualifying income is defined as income earned by a "Qualifying Free Zone Person" (QFZP), eligible for a 0% corporate tax rate under the UAE's tax regulations. Specifically, this income arises from qualifying activities closely linked to Free Zone transactions or other approved sources.

While the Corporate Tax Law imposes a 9% tax on income exceeding AED 375,000, qualifying income for QFZPs is subject to a 0% rate. Therefore, recognizing which types of income qualify is critical, as tax treatment can significantly differ.

Criteria to Determine Qualifying Income

To ascertain what constitutes qualifying income, businesses must adhere to several criteria as outlined in Cabinet Decision No. 100 of 2023:

- Transaction Source: Income must arise from transactions involving other Free Zone entities to ensure alignment with the Free Zone's core activities. Transactions with non-Free Zone entities may qualify if they pertain to explicitly listed qualifying activities.

- Qualifying Activities: Activities such as manufacturing, processing goods, holding shares, and providing regulated services are recognized as qualifying. These activities must align with the UAE’s broader economic goals and regulatory framework.

- Excluded Activities: Transactions involving natural persons (with exceptions) and operations in specified sectors (e.g., banking, insurance, finance) are excluded from qualifying income. Similarly, activities involving the ownership or exploitation of real or intellectual property do not qualify.

- De Minimis Requirements: The UAE Corporate Tax includes de minimis thresholds, which permit certain low-level non-qualifying income to be disregarded for tax purposes. If a QFZP's non-qualifying income does not exceed a specific percentage of total revenue during a tax period, it may still be considered qualifying income.

The Role of Beneficial Recipients in Corporate Tax UAE Qualifying Income

Understanding the concept of "beneficial recipients" is also essential for interpreting qualifying income. A beneficial recipient is defined as an individual entitled to utilize the products or services without obligation to transfer them to another party.

A QFZP must ensure that income derived from Free Zone transactions is linked to a beneficial recipient who will utilize the goods or services, ensuring appropriate tax treatment.

Qualifying Income for Domestic or Foreign Permanent Establishments

If a QFZP operates a permanent establishment (PE) within or outside the UAE, the income generated by such establishments is subject to corporate taxation. This income will be liable to the 9% tax rate as it is treated as taxable income for the purposes of UAE Corporate Tax compliance. Income generated from a PE is considered independent of the QFZP itself, disqualifying it from the 0% tax rate on qualifying income.

Income from Free Zone Immovable Property

Businesses holding immovable property within a Free Zone may face corporate taxation on income derived from real estate transactions, including commercial and non-commercial assets. Specifically, transactions involving commercial properties and non-Free Zone individuals are subject to corporate tax.

Conclusion

Navigating the complexities of the UAE Corporate Tax, especially concerning qualifying income and tax liabilities, can be challenging. Engaging Accucus Chartered Accountants can provide businesses with the expertise needed to understand and comply with UAE tax regulations effectively. Our team of specialists can guide you through the processes of identifying qualifying income, determining tax liabilities, and ensuring compliance with applicable laws.