Qualifying Activities vs. Excluded Activities

The UAE’s introduction of Corporate Tax (Federal Decree-Law No. 47 of 2022) has brought new tax implications for Free Zone companies. While Free Zones continue to offer a 0% corporate tax rate under specific conditions, only certain business activities qualify for this benefit. Others, known as excluded activities, are subject to the standard 9% tax rate.

It provides a comprehensive guide to help Free Zone businesses distinguish between Qualifying Activities and Excluded Activities to ensure compliance and avoid losing tax incentives.

1️⃣ Who is a Qualifying Free Zone Person (QFZP)?

A QFZP is a Free Zone entity that:

Maintains adequate substance in the Free Zone (office, staff, operations).

Derives Qualifying Income from defined Qualifying Activities.

Complies with transfer pricing rules.

Does not earn significant non-qualifying or excluded income beyond the de minimis threshold (5% or AED 5 million).

Only a QFZP is eligible for the 0% corporate tax rate on qualifying income.

2️⃣ What Are Qualifying Activities?

Qualifying Activities are specific business activities that support UAE’s economic growth and Free Zone objectives. As per Cabinet Decision No. 139 of 2023, these include:

Manufacturing and processing of goods or materials.

Holding of shares and earning dividends and capital gains.

Ownership, management, and operation of ships.

Reinsurance services subject to regulatory approvals.

Fund management services directed toward foreign markets.

Wealth and investment management services for non-residents.

Headquarter services to related parties.

Treasury and financing services to related parties.

Distribution of goods or materials within or from a Free Zone (including imports through UAE customs).

Logistics and storage services supporting international trade.

Trading of qualifying commodities, such as oil, gas, metals, and minerals.

✅ Income from these activities is generally eligible for 0% tax, provided other QFZP conditions are met.

3️⃣ What Are Excluded Activities?

Excluded Activities are specific activities that do not qualify for the 0% tax rate. Income from these activities is taxable at 9%, regardless of whether it is earned in a Free Zone. As per the Ministerial Decision:

Transactions with UAE mainland entities (unless related to qualifying distribution).

Banking and financial services (excluding certain treasury functions for related parties).

Insurance activities (except reinsurance services).

Income from immovable property located outside Free Zones, including property leasing or sale.

Income from intellectual property (IP) that is not a qualifying IP asset.

Income from excluded intra-group financing not meeting qualifying conditions.

If a Free Zone entity earns excluded activity income exceeding the de minimis limit (5% or AED 5 million), it loses its QFZP status and its entire taxable income is subject to 9% corporate tax for that tax period.

4️⃣ Importance of the De Minimis Rule

The de minimis rule is a safety threshold that allows Free Zone entities to earn a small amount of non-qualifying or excluded income without losing tax benefits.

Threshold: Lower of 5% of total income or AED 5 million per tax period.

If exceeded, the entity will not qualify as a QFZP for that year and will be taxed at 9% on all profits.

5️⃣ Compliance Requirements for Free Zone Entities

To maintain the 0% tax rate, businesses must:

Monitor and categorize all income sources (qualifying vs. excluded).

Maintain substance and operational presence in the Free Zone.

Keep audited financial statements for accurate reporting.

File corporate tax returns on time, declaring non-qualifying income separately.

Ensure proper transfer pricing documentation for related-party transactions.

Key Takeaway

Understanding the difference between Qualifying Activities and Excluded Activities is essential for Free Zone businesses to:

Retain QFZP status.

Avoid unexpected 9% corporate tax liabilities.

Maximize the 0% tax benefits offered in UAE Free Zones.

Businesses should periodically review their activities and income sources to ensure compliance and avoid penalties under the UAE Corporate Tax Law.

✅ Need Expert Assistance?

At Sheikh Anwar Accounting and Auditing LLC, we help Free Zone entities structure their operations effectively, identify qualifying activities, and maintain compliance to secure 0% corporate tax benefits.

📧 Email: info@sa-auditors.com

🌐 Website: www.sa-auditors.com