Free zone qualifying income checker

Free zone authorities summarise the conditions as adequate substance, transfer pricing compliance, audited financial statements and the de minimis test. Cabinet Decision No. 55 of 2023 adds the detail on what counts as qualifying income and on substance.

• Core income-generating activities are carried out in the free zone, with adequate assets, qualified staff and operating spend
• Any outsourcing is to a free zone party and adequately supervised
• Transactions with related parties are on arm's length terms and documented
• Audited financial statements are prepared for the period
• Non-qualifying revenue stays within the de minimis limit
• The business has not elected to be taxed under the standard rules

Qualifying income includes income from transactions with other free zone persons (outside excluded activities), income from non-free zone persons for qualifying activities that are not excluded, and income incidental to those. Income attributable to a permanent establishment and most income from owning or exploiting immovable property sit outside it. The Ministry of Finance publishes the lists of qualifying and excluded activities in Ministerial Decisions that are updated from time to time, so check the current one.

Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million. Here is how that plays out for two companies.

• A DMCC commodities trader: total revenue AED 40 million, non-qualifying revenue AED 1.6 million. Limit is the lower of AED 2 million and AED 5 million, so AED 2 million. Test passed.
• A JAFZA distributor: total revenue AED 150 million, non-qualifying revenue AED 6 million. Five per cent would be AED 7.5 million, but the AED 5 million cap is lower. Test failed.
• Failing the test means losing qualifying status, and the law sets a period before it can be regained. Take advice before the year end if you are near the line.

The checklist only works if revenue is split correctly in the books. In HelloBooks, set up separate income accounts or classes for qualifying and non-qualifying streams. The AI agent proposes the tag on each invoice from the customer's free zone status and the item, and asks when it cannot tell.

Ask "what is my non-qualifying revenue this year?" and it returns the running total against the de minimis limit. The judgement on each stream, and the corporate tax return, stay with your accountant. Firms that want a free zone revenue report built to their own layout can request it at hello@hellobooks.ai.