Calculating Corporate Tax for a Free Zone Person

Corporate Tax Rate for a QFZP

If a Free Zone Person (FZP) meets all the conditions, including the de minimis requirements, to be a Qualifying Free Zone Person (QFZP), the applicable Corporate Tax rates are:

• 0% Corporate Tax rate on Qualifying Income
• 9% Corporate Tax rate on Taxable Income that is not Qualifying Income

Note: A QFZP is not entitled to a 0% Corporate Tax rate on its first AED 375,000 of Taxable Income.

Qualifying Income

Qualifying Income is defined based on the following categories:

• Transactions with a Free Zone Person who is the Beneficial Recipient of the transaction (excluding Revenue from Excluded Activities)
• Transactions related to Qualifying Activities (excluding Revenue from Excluded Activities)
• Qualifying Income from Qualifying Intellectual Property
• Other sources (including Revenue from Excluded Activities) if the QFZP meets the de minimis requirements

Revenue from the following sources does not qualify as Qualifying Income, even if it falls within the categories listed above:

• Revenue attributable to a Foreign Permanent Establishment
• Revenue attributable to a Domestic Permanent Establishment
• Revenue from Immovable Property (other than Commercial Property located in a Free Zone when the income arises from a transaction with a Free Zone Person)
• Revenue from the ownership or exploitation of intellectual property (other than Qualifying Income from Qualifying Intellectual Property)

Taxable Income That Is Not Qualifying Income

To determine the Taxable Income that is not Qualifying Income, which will be subject to the 9% Corporate Tax rate, a QFZP must:

• Separate the Revenue in its Financial Statements into Revenue pertaining to the Qualifying Income component and the Taxable Income component.
• Allocate the expenses in its Financial Statements against these components in a reasonable manner, consistent with the arm’s length principle.
• Apply Article 20 of the Corporate Tax Law (general rules for determining Taxable Income) to determine the Taxable Income that is not Qualifying Income.

Corporate Tax on QFZP with a Domestic Permanent Establishment

Example: Company J

Revenue for the Tax Period Ending 31 December 2024:

• AED 1,000,000 attributable to Qualifying Activities that are not Excluded Activities performed in a Free Zone.
• AED 2,000,000 attributable to activities conducted through a Domestic Permanent Establishment.

Operating Expenses for the Tax Period:

• AED 600,000 incurred by the Free Zone parent.
• AED 1,400,000 incurred by its Domestic Permanent Establishment.
• AED 300,000 incurred in the Domestic Permanent Establishment for HR administrative activities that support both the Free Zone parent and Domestic Permanent Establishment. Applying an appropriate allocation key (e.g., relative headcount), Company J determines that 50% of these expenses should be attributed to its Free Zone parent.

Allocation of Revenue and Expenses: Based on the arm’s length principle, Company J determines that the Revenue and expenses in its Financial Statements for the Tax Period ending 31 December 2024 can be allocated between Qualifying Income and Taxable Income as follows (amounts in AED):

Corporate Tax Calculation:

• Company J will be subject to a 0% Corporate Tax rate on its Qualifying Income of AED 250,000.
• Company J will be subject to a 9% Corporate Tax rate on the AED 450,000 profit attributable to its Domestic Permanent Establishment, resulting in a Corporate Tax of AED 40,500.

This calculation assumes there are no further adjustments as per Article 20 of the Corporate Tax Law.

References:

• Article 3(2) of the Corporate Tax Law
• Article 3(1) of Cabinet Decision No. 100 of 2023
• Corporate Tax Guide | Free Zone Persons | CTGFZP1