Under the Corporate Tax Law, a 0% tax rate applies to the qualifying income of a QFZP. This article aims to provide a comprehensive overview of a Qualifying Free Zone Person (QFZP) under the UAE Corporate Tax Law and the Transfer pricing implications thereof on such QFZP.
QFZP – Article 18 (Clause 1)
A Qualifying Free Zone Person is a Free Zone Person* where all of the specified conditions are met:
- Maintains adequate substance in the State.
- Derives Qualifying Income**
- Has not elected to Corporate Tax
- Complies with the Article 34 (Arm’s Length Price) and Article 55 (Transfer Pricing Documentation)
- Meets any other conditions as may be prescribed by the Minister. (two conditions being included as part of Article 5 of the Ministerial Decision No.265):
- Non-Qualifying Revenue does not exceed the De Minimis requirements***
- Prepares Audited Financial Statements
*Free Zone Person – A juridical person incorporated, established, or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone.
To understand how your zone status impacts tax benefits, see our post on Free Zones Eligible for 0%.
**Qualifying Income – Any income derived by a Qualifying Free Zone Person that is specified in Article 3(2)
***De Minimis Requirement – The non-qualifying Revenue derived by the QFZP in a Tax Period does not exceed 5% of the total Revenue of the QFZP in that Tax Period or AED 5,000,000, whichever is lower.
Transfer Pricing for QFZP
As clearly seen from the above, one of the requirements for an FZP to qualify as a QFZP is compliance with Article 34 and Article 55 of the Corporate Tax Laws.
- Article 34 – Arm’s Length Principle:
As per the article, transactions between Related Parties (RP – Read more at https://staging.bcl.ae/related-parties-uae-transfer-pricing/) and Connected Persons (CP – Read more at https://staging.bcl.ae/corporate-tax-law-uae/) should adhere to the arm’s length principle, ensuring fair market terms are applied.
- Article 55 – Transfer Pricing Documentation:
This deals with requirements for preparing and maintaining TP documentation for qualifying taxpayers.
Special Consideration of TP for QFP
Thus, any transactions with Related Party and Connected Person must be undertaken at arm’s length. To identify the arm’s length of the transaction, a benchmarking study using a database is performed to identify similar companies engaged in these functions. Further, TP documentation (Local File) must be prepared for the QFZP if the relevant TP compliance thresholds are met. Therefore, maintaining adequate TP documentation (if applicable) and benchmarking studies for such transactions is key to demonstrating compliance if challenged.
Consequence of Non-Compliance
A Qualifying Free Zone Person that at any particular time during a Tax Period fails to meet any of the conditions set out above shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent (4) four Tax Periods.
Further, a QFZP who fails to adhere to the arm’s length principle and TP benchmarking shall also be subject to the penalty as per UAE TP regulations as applicable.
Therefore, to ensure that the status of the QFZP is not affected, it is crucial to comply with the arm’s length principle for transactions with RP and CP by undertaking a benchmarking study as applicable. Further, if thresholds are met, then TP benchmarking and documentation should also be maintained.
Avoid penalties by staying updated with this Corporate Tax Return Filing Deadline guide.
How BCL Globiz Helps?
Navigating the complexities of transfer pricing requires expertise and a strategic approach. BCL Globiz assists businesses by offering tailored solutions that ensure compliance with UAE tax regulations while optimizing transfer pricing strategies. Our team of experts helps in conducting functional and risk analyses, benchmarking studies, and preparing robust documentation to support transfer pricing positions. By leveraging industry best practices and in-depth regulatory knowledge, BCL Globiz ensures that MNEs can operate with confidence, mitigating risks associated with audits and tax disputes.
For further assistance, reach out to our expert rakesh@bclglobiz.com and check out our website www.bcl.ae.
