One of the important conditions to be a qualifying Freezone is that the income must be derived from qualifying income. Tax is not charged on qualifying income as long as all the conditions are met.

Qualifying Income is not attributable to the following -

i) Domestic or Foreign Permanent Establishment, or

ii) Ownership or exploitation of immovable property.

iii) income from Immovable Property located in a Free Zone (other than Commercial Property located in a Free Zone when the income arises from a transaction with a Free Zone Person), and

iv) income from the ownership or exploitation of intellectual property (other than Qualifying Income from Qualifying Intellectual Property).
 

Except for the above cases, the Qualifying Income of the Qualifying Free Zone person shall include the following categories -

Income from transactions with other Free Zone Persons, (except income from excluded activities). The other Free Zone person must be the beneficial recipient of the transaction. Which means the Free Zone person receiving the service or goods has the right to use and enjoy them. They should not have a contractual or legal obligation to pass on the service or goods to another person.

Income from qualifying activities with Non-Free Zone Persons that are not excluded activities. The FTA has listed the following as Qualifying activities -

- Manufacturing of goods or materials,

- Processing of goods or materials,

- Trading of Qualifying Commodities,

- Holding of shares and other securities for investment purposes,

- Ownership, management, and operation of Ships,

- Reinsurance services,

- Fund management services,

- Wealth and investment management services,

- Headquarters services to Related Parties,

- Treasury and financing services to Related Parties,

- Financing and leasing of Aircraft,

- Distribution of goods or materials in or from a Designated Zone, and

- Logistics services

Qualifying activities also include ancillary activities that are necessary for the performance of the activity or are very minor activities that are closely related to the main activity and should not be treated as separate.

Income derived from the ownership or exploitation of Qualifying Intellectual Property will also be considered as qualifying income. Here qualifying income only arises to the extent R&D expenses are incurred either directly or outsourced to another person (except foreign related party).

Any non-qualifying income will be considered as qualifying income as long as it does not exceed the lower of- - AED 5,000,000 - 5% of total revenue

The following formula can be used to understand the de-minimus condition for qualifying income

Non-Qualifying Income = Excluded Activity + Activity that is not Qualifying Activities with a non-Free Zone Person + Transactions with Free Zone person, where it is not the beneficial recipient

Total Revenue = Total Sales in the taxable year - Revenue attributed to Domestic PE - Revenue attributed to Foreign PE - Revenue from Immovable property in Free Zone other than commercial property with Free Zone person - Revenue from Intelectual property other than Qualifying income from Qualifying Intelectual Property

Understanding the de-minimis calculation may be a bit more complicated but crucial to understanding if the Free Zone person may qualify to be a qualifying Free Zone Person. If you would like to understand the other requirements to be a qualifying Free Zone Person click here.