active income, passive income, and other income. Active income refers to income derived from core income generating activities, while passive income refers to income derived from assets held by the free zone entity. Other income includes income derived from sources other than core income generating activities or assets held by the free zone entity.

In order to qualify for zero percent corporate tax, a free zone person must meet the conditions of De Minimis. These conditions include maintaining adequate substance, deriving qualifying income, not electing for the normal rate of corporate tax, satisfying the de minimis requirements, maintaining audited financial statements, and complying with transfer pricing rules.

Adequate substance, as defined in Cabinet Decision No. 55/2023, Article 7, is crucial for a free zone person. It entails having core income generating activities, adequate assets, an adequate number of qualified employees, and adequate operating expenditure in the free zone.

However, it is important to note that qualifying free zone persons may lose certain benefits that are extended to normal entities. These benefits include business restructuring relief, membership in a qualifying group, transfer of tax losses, and small business relief.

In conclusion, understanding the concept of adequate substance is of utmost importance for free zone entities. By meeting the conditions of De Minimis and earning qualifying income, a qualifying free zone person can benefit from zero percent corporate tax. However, they may also lose certain benefits that are available to normal entities.namely:

a) income derived from transactions with a non-free zone person, but only in respect of qualifying activities that are not excluded activities;

b) income derived from transactions with other free zone persons, provided these are not excluded activities (income will be considered as derived from transactions with a free zone person where that freezing person is the beneficial recipient of the relevant goods or services);

c) any other income, provided the qualifying free zone person satisfies the de minimis requirement.

Qualifying activities include: Manufacturing/processing of goods or materials; logistics services; holding of shares or securities; fund management, wealth management, and investment management services subject to regulatory oversight; headquartered, treasury, and financing services; ownership, management, and operation of ships; distribution of goods/materials in or from a designated free zone for further sale/resale; financing or leasing of aircraft, and reinsurance services subject to regulatory oversight.

Excluded activities include: Banking activities; finance leasing activities except provided to related parties; insurance activities except reinsurance activities; certain transactions with natural persons; ownership or exploitation of intellectual property rights and; ownership or exploitation of immovable property other than commercial property located in free zones.

The most contentious topic of discussion within the business community in the free zone pertained to the transportation of goods or materials directly from foreign country A to foreign country B through a designated free zone entity, and the tax implications associated with such transactions. However, the recent UAE Ministry of Finance Corporate Tax Consultation Paper has shed light on this matter. According to the paper, under qualifying activities point 3.11 Article 2(1)(k), specifically the distribution of goods or materials, it is evident that the ministry has provided clarification. It states that transactions involving the shipment of goods directly from foreign country A to foreign country B through a designated free zone entity will fall within the scope of qualifying activities. Consequently, any income derived from such activities will also be considered as qualifying income and will be subject to a corporate tax rate of zero percent.

It would be important to note that not all qualifying free zone persons will get the benefit from the distribution of goods/materials. Therefore, trading of goods/materials from non-designated Free zones will be subject to a 9 percent corporate tax. However, only designated free zone persons will get the benefit of a 0 percent tax rate from the distribution of goods/materials as clarified by the UAE Ministry of Finance Corporate Tax Consultation Paper.

Entities registered in free zones providing export of services (i.e. technology services, marketing services, consultancy services, etc.) to non free zone entities will be subject to a 9 percent corporate tax.

Normally, free zone entities holding properties in the UAE mainland will be subject to a 9 percent tax rate. The only exception is in regards to income from commercial properties held by qualifying free zone entities located in free zones, which will qualify for zero percent tax rates.

Further, all qualifying free zone entities will have to apply for corporate tax registration and have to compulsorily get their books of accounts audited irrespective of applicable tax rates either zero percent or nine percent.