Qualifying Activity & Excluded Activity

Frequently Asked Questions

Qualifying Income pertains to the income eligible for the 0% Corporate Tax rate under the Free Zone Corporate Tax regime.

It includes the income derived from transactions with other Free Zone Persons and domestic and foreign-sourced income from any of the ‘Qualifying Activities’ specified in Ministerial Decision No. 139 of 2023. However, income earned from ‘Excluded Activities’ specified in the same Ministerial Decision is not considered as Qualifying Income.

If the revenues resulting from conducting Excluded Activities surpass the de minimis threshold, the Qualifying Free Zone Person will be disqualified from the Free Zone Corporate Tax regime.

For a Qualifying Free Zone Person established in a Designated Zone, income from the wholesale distribution of goods and materials (excluding sales to end consumers) to domestic and foreign businesses qualifies as Qualifying Income under the Free Zone Corporate Tax regime. On the other hand, a Qualifying Free Zone Person established in a Free Zone that is not designated can only earn Qualifying Income from the sale of goods and materials to other Free Zone Persons.

Additional details and guidance on the scope and meaning of each Qualifying Activity will be provided as needed in the future.

Income from royalties, license fees, and other separately identifiable income derived from intellectual property assets, such as patents, copyrights, and trademarks, is classified as income from an Excluded Activity.

If the revenue earned from intellectual property assets and other Excluded Activities exceeds the de minimis threshold, the Qualifying Free Zone Person will not be eligible to benefit from the Free Zone Corporate Tax regime.

Income derived from transactions with a Free Zone Person concerning Commercial Property located in a Free Zone is considered Qualifying Income and qualifies for the 0% Corporate Tax rate.

However, income derived from transactions with natural persons, mainland or foreign companies, or any other person who is not a Free Zone Person in respect to Commercial Property (whether located in a Free Zone or mainland UAE) is treated as Taxable Income and subject to the standard UAE Corporate Tax rate of 9%.

The term “Commercial Property” refers to immovable property (or part thereof) located in a Free Zone, used exclusively for business activities and not as a place of residence or accommodation.

Immovable property is defined as “anything which is settled and fixed in its space and cannot be moved without deterioration or alteration of its shape.” (The Civil Transactions Law, Article 101)

Income earned from Immovable Property situated outside a Free Zone is considered income from an Excluded Activity.

Depending on the revenue from this and any other Excluded Activities, a Qualifying Free Zone Person earning income from Immovable Property outside a Free Zone may not be eligible to gain from the corporate free zone tax system.

For mixed-use properties, such as residential buildings with retail space, generating both Qualifying and non-Qualifying Income, the Qualifying Free Zone Person must allocate and apportion income and expenses between both types of income. Relevant transfer pricing documentation and other records must support such allocations. Some income and expenses may be directly attributable, while others may need to be apportioned fairly and reasonably, adhering to the arm’s length principle.

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