Page 6 - ICAI UAE TAX UPDATE_MAY 2024

• Maintain adequate substance. and guide outsourced activities, demonstrated through
• Derive QI. contractual agreements and actual conduct. Without
• Not have made an election to be subject to the adequate supervision, outsourced activities won’t
regular UAE CT regime. count towards maintaining adequate substance and the
• Comply with arm’s length principle and transfer company shall not qualify as QFZP.
pricing rules and documentation requirements.
• Ensuring non-qualifying revenues do not exceed the Allocation of Expenses
de-minimis requirements (Minimum of 5% or 5 million
of total revenue). Where a QFZP derives both Qualifying Income and
• Prepare and maintain audited Financial Statements Taxable Income that is not Qualifying Income, it will need
(FS). to allocate its expenses between the two components to
In case of QI derived from transactions between FZPs, determine the Taxable Income component. This should
the seller may obtain a written statement or undertaking be done by applying the arm’s length principle.
from the purchaser affirming their role as a Beneficial
Recipient and their intention to utilize the services or For income attributable to a Foreign PE or Domestic
goods for their free zone business. PE, this requires the Foreign PE or Domestic PE to be
treated as if it were a separate and independent Person
The CT regime does, however, provide flexibility to transacting at arm’s length (“separate entity approach”).
allow a FZP to elect not to be treated as a QFZP, and to
be subject to CT in the same manner as other Taxable In relation to income that is not connected with a Foreign
Persons in general. PE or Domestic PE, the FZP should make a reasonable
allocation between the components to determine the
Adequate Substance arm’s length value of profits attributable to each activity.

To be a QFZP for a Tax Period, a FZP must maintain To attribute the profit between a Free Zone business and
adequate substance in a Free Zone or Designated Zone its Foreign PE or Domestic PE, a two-step approach is
throughout that period. This includes undertaking core required:
income-generating activities, maintaining adequate
assets, qualified full-time employees, and incurring Step one: Conduct a FAR performed by the Foreign
adequate operating expenditures and substance to be Domestic PE on one side, and the Free Zone business
maintained in relation to each activity. on the other side, treating each as separate to the other.

FZP who have not earned any QI in a Tax Period because Step two: Determine the compensation relating to
they haven’t commenced revenue generation won’t lose arrangements or dealings between the Foreign or
eligibility as a QFZP because of adequate substance, if Domestic PE and the Free Zone business, commensurate
they do not derive any non-qualifying revenue and fulfil with their respective functions performed, assets
all other obligations outlined in the CT Law. deployed, and risks assumed.

Below are the key points for consideration: Tax Losses:

• Core income-generating activities (CIGA) must be If a QFZP incurs Tax Losses on the Taxable Income
performed in the Free Zone or Designated Zone. component, those Tax Losses may be carried forward and
• Adequate substance varies by business nature and offset against the QFZP’s Taxable Income in subsequent
size, requiring an assessment of assets, employees, and Tax Periods except for income from intellectual property,
operational costs. provided the conditions in relation to Tax Loss relief
• Non-core activities or routine works can be performed and carry forward of Tax Losses are met. Income from
outside the Free Zone. intellectual property can only be offset against Tax
• CIGA can be outsourced within the Free Zone or Losses from such intellectual property.
Designated Zone, provided there is adequate supervision
and proper documentation. A QFZP cannot utilise any losses incurred prior to the
• For Qualifying Intellectual Property, CIGA can be commencement of CT or prior to becoming a Taxable
outsourced to any Person in the UAE or outside the UAE Person.
(non-Related Party).
If a QFZP incurs losses in relation to the Qualifying
Adequate supervision requires mechanisms to oversee Income component of its income, those losses may

6 www.icaidubai.org

UA E TAX UPD ATE NEWSLET TER ISSUE 02 - May 2024