In the context of free zones, logistics services play a pivotal role as the defining activity that qualifies a business.
In the United Arab Emirates (UAE), a free zone company named Company F has successfully leveraged the country's corporate tax law to enjoy a 0% tax rate on its logistics services. This advantageous tax treatment is a result of the company's services falling under the category of 'Logistics Services', which is one of the qualifying activities for a Qualifying Free Zone Person (QFZP) under UAE corporate tax law.
The UAE corporate tax law defines a wide range of qualifying activities for QFZPs, including manufacturing, processing, trading, investment, shipping, reinsurance, fund management, wealth and investment management, headquarters services, treasury and financing services, financing and leasing of aircraft, distribution, and logistics services. Ancillary activities related to these main qualifying activities are also considered eligible.
In the case of Company F, the services it provided to a non-free zone customer, Company R, included shipping, storage, order fulfilment, and freight forwarding. These services are all part of the logistics sector, making them eligible for the 0% corporate tax rate under UAE free zone provisions.
The revenue generated by Company F from these services was Dh50,000 from transporting goods, Dh15,000 from warehousing, Dh20,000 from order fulfilment, and Dh10,000 from freight forwarding. All of these amounts are eligible for the 0% corporate tax rate.
The UAE corporate tax law provides flexibility for logistics operations, as it places no limitations on the mode of delivery. This means that companies like Company F can operate efficiently, regardless of the method they choose for delivering their services.
To maintain its QFZP status and continue enjoying the 0% corporate tax rate, Company F must also meet other conditions. These include maintaining adequate substance in the UAE, complying with the arm's length principle in transactions between related parties, filing audited financial statements, and not opting to be taxed under the standard corporate tax regime.
It is important to note that while ancillary activities in logistics may qualify as eligible activities, this classification doesn't automatically mean that any activity potentially ancillary to logistics services will be treated as a qualifying activity on its own right or standalone basis when considered individually.
Last mile delivery services conducted outside of a free zone by a free zone person are also considered part of the qualifying logistics services activity. This means that even if some services are provided outside the free zone, they may still be eligible for the 0% corporate tax rate, as long as they are naturally and integrally complement the main qualifying activity while meeting the conditions for ancillary activities.
In summary, the UAE corporate tax law offers a 0% corporate tax rate for businesses operating in free zones, provided they engage in one or more of the specified qualifying activities within the free zone and meet prescribed substance and compliance requirements. This case study of Company F demonstrates how a free zone company can leverage this advantageous tax regime to grow its business while enjoying significant tax savings.
[1] UAE Federal Tax Authority (FTA), Qualifying Free Zone Persons (QFZPs) Guide, [online] Available at: https://www.tax.gov.ae/media/12340/qfzps-guide.pdf [2] UAE Federal Tax Authority (FTA), Substance Requirements for Qualifying Free Zone Persons (QFZPs), [online] Available at: https://www.tax.gov.ae/media/12342/substance-requirements-qfzps.pdf [3] UAE Federal Tax Authority (FTA), Corporate Tax Law, [online] Available at: https://www.tax.gov.ae/en/law-and-legislation/corporate-tax-law.html
In the UAE corporate tax law, logistics services, such as shipping, storage, order fulfillment, and freight forwarding, are considered eligible for the 0% corporate tax rate for Qualifying Free Zone Persons (QFZPs). Additionally, while ancillary activities may not be automatically classified as qualifying activities, last mile delivery services conducted outside of a free zone by a free zone person can still be part of the qualifying logistics services activity and therefore eligible for the 0% corporate tax rate, as long as they meet the conditions for ancillary activities.
