The enactment of the Federal Decree-Law No. 47 of 2022 has marked a significant shift in the UAE’s corporate tax landscape. At the heart of this law lies the designation of “Qualifying Free Zone Persons” (QFZPs), which subjects entities to a 0% tax rate on “Qualifying Income”, while a 9% tax rate is applied to other income. To be categorised as a QFZP, entities are required to meet several conditions, one of which is maintaining adequate economic substance in the UAE.
- Core Income-Generating Activities (CIGAs): A primary requirement for QFZP designation is the conduct of Core Income-Generating Activities (CIGAs) within a Free Zone, emphasising the UAE’s intent to host substantive business operations.
- Assets, Employment, and Expenditure: Entities are expected to meet certain standards regarding assets, employment, and operational expenditures in alignment with the level of CIGAs carried out in a Free Zone.
- Management and Control within the UAE:
- Director Expertise: Directors should have the necessary knowledge and expertise for effective governance.
- Board Meetings: Holding an adequate number of board meetings in the UAE, with a physical quorum of directors, is mandated.
- Record-keeping: Documentation of board meeting minutes, signed by attending directors and retained in the UAE, is essential.
- Outsourcing Provisions: The law provides an option for QFZPs to outsource their CIGAs to a related or third party within a Free Zone, under certain regulatory guidelines.
The introduction of the UAE Corporate Tax Law, effective from 1 June 2023 but impacting many existing entities from 1st January 2024, necessitates a recalibration of operational frameworks for Freezone entities aiming to meet the economic substance requirements.
As entities navigate through these regulatory waters, professional assistance to achieve compliance could be beneficial. Cavenwell offers a range of services to help clients meet substance requirements including the provision of professional directors, corporate governance, and company secretarial services, aiding in the compliance with economic substance requirements and facilitating a smoother transition into the new tax regime.