FTA Free Zone Persons Guide (CTGFZP1), May 2024

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Example 16: Application of Corporate Tax rate Company L (a QFZP) conducts Business through its Free Zone parent and multiple Foreign Permanent Establishments and Domestic Permanent Establishments and derives income (after arm’s length expense allocations) as follows: Source Free Zone parent Amount AED 1,000,000 Observation All Qualifying Income Domestic Permanent AED 500,000 Establishments Foreign Permanent AED 5,000,000 Establishments Company L elects not to take into account the income and associated expenditure of its Foreign Permanent Establishments,39 so the income of the Foreign Permanent Establishments is Exempt Income.40 Company L derives Qualifying Income of AED 1,000,000 in relation to its Free Zone parent and Taxable Income of AED 500,000 through its Domestic Permanent Establishments. Company L will be subject to Corporate Tax as follows: • 0% rate on the AED 1,000,000 of Qualifying Income, and • 9% rate on the AED 500,000 of Taxable Income that is not Qualifying Income, amounting to AED 45,000 of Corporate Tax due. This is because the 375,000 AED threshold (subject to 0%) does not apply to a QFZP.

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Example 19: Tax Loss incurred by QFZP Company N (a QFZP) has a Free Zone parent and a Domestic Permanent Establishment. Company N renders contract manufacturing services (a Qualifying Activity) through its Free Zone parent that generates Qualifying Income. Company N also renders tech consulting services from its Domestic Permanent Establishment that generates Taxable Income that is not Qualifying Income. For the Tax Period 2024, Company N reported the following financial results: • Manufacturing segment (Qualifying Income): Incurred a loss of AED 2,000,000. • Tech consulting segment (Taxable Income): Generated Taxable Income of AED 5,000,000 as per Article 20 of the Corporate Tax Law. Company N may not utilise any portion of the loss of AED 2,000,000 relating to its Free Zone parent to offset the Taxable Income (AED 5,000,000) generated from its Domestic Permanent Establishment. Additionally, Company N cannot carry the loss (AED 2,000,000) forward to future Tax Periods to offset against future Taxable Income. 42 Articles 37 and 39 of the Corporate Tax Law. 43 Article 37(3) of the Corporate Tax Law. 44 Article 38(1)(f) of the Corporate Tax Law. Company N will have to calculate its Corporate Tax liability on its entire Taxable Income (AED 5,000,000) without considering any loss in relation to the Free Zone parent that generates the Qualifying Income loss (AED 2,000,000).

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Example 5: De minimis requirements to be treated as QFZP Company E (a Free Zone Person) derives the following Revenue: Revenue Amounts in AED From a Domestic Permanent Establishment 10,000,000 From rental of Immovable Property located in a Free Zone to 2,500,000 Non-Free Zone Persons From transactions with other Free Zone Persons (who are the 5,000,000 Beneficial Recipients), of which AED 200,000 relates to Excluded Activities From transactions with Non-Free Zone Persons, all of which 2,000,000 arises from Qualifying Activities that are not Excluded Activities From other transactions with Non-Free Zone Persons (that are 300,000 not Qualifying Activities) The Revenue from the Domestic Permanent Establishment (AED 10,000,000) and Immovable Property located in the Free Zone (AED 2,500,000) is disregarded in determining whether Company E has met the de minimis requirements to be considered as a QFZP. Company E has non-qualifying Revenue of AED 500,000, arising from: • AED 200,000 of Revenue from Excluded Activities from transactions with Free Zone Persons, and • AED 300,000 of Revenue from other transactions with Non-Free Zone Persons (that are not Qualifying Activities). For purposes of the de minimis requirement, the total Revenue of Company E is AED 7,300,000 arising from: • AED 5,000,000 from transactions with other Free Zone Persons (who are the Beneficial Recipients). This includes the AED 200,000 that relates to Excluded Activities, • AED 2,000,000 from transactions with Non-Free Zone Persons, all of which arises from Qualifying Activities that are not Excluded Activities, and • AED 300,000 from other transactions with Non-Free Zone Persons (that are not Qualifying Activities). As Company E’s non-qualifying Revenue is 6.85% (500,000/7,300,000) of total Revenue, which exceeds the 5% de minimis threshold, Company E does not meet the requirements to be a QFZP and would, therefore, be subject to the standard Corporate Tax rules and rates on the entirety of its Taxable Income.

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Example 6: De minimis requirements to be treated as QFZP The facts are the same as in Example 5, except that the AED 300,000 from other transactions with Non-Free Zone Persons is attributable to Company E’s Domestic Permanent Establishment. Company E has non-qualifying Revenue of AED 200,000 arising from Revenue from Excluded Activities from transactions with Free Zone Persons. For purposes of the de minimis requirement, the total Revenue of Company E is AED 7,000,000. As the non-qualifying Revenue is 2.86% (200,000/7,000,000) of total Revenue, which is within the 5% de minimis threshold, and does not exceed the AED 5,000,000 de minimis threshold, Company E meets the de minimis requirements to be a QFZP and may be able to benefit from the 0% Corporate Tax rate for QFZPs on its Qualifying Income, provided it meets the other relevant conditions.