Is rental income from free zone property qualifying income?

Article 3 – Qualifying Income 1. For the purposes of application of Article 18 of the Corporate Tax Law, Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income, provided that such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment in accordance with Article 5 of this Decision, or derived from the ownership or exploitation of immovable property in accordance with Article 6 of this Decision, or considered Taxable Income under Clause 2 of Article 7 of this Decision: a. Income derived from transactions with a Free Zone Person, except for income derived from Excluded Activities. b. Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities. c. Income derived from the ownership or exploitation of Qualifying Intellectual Property under Clause 1 of Article 7 of this Decision. d. Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements under Article 4 of this Decision. 2. For the purposes of paragraph (a) of Clause 1 of this Article, income will be considered as derived from transactions with a Free Zone Person where that Free Zone Person is the Beneficial Recipient of the relevant services or Goods. 3. For the purposes of this Article, the term “Beneficial Recipient” shall mean a Person who has the right to use and enjoy the service or the Good and does not have a contractual or legal obligation to supply such service or Good to another person and the term “Good” shall mean tangible or intangible property that has economic value in dealing including movable and immovable property. 4. For the purposes of determining whether a Qualifying Free Zone Person has a Domestic Permanent Establishment, the provisions of Article 14 of the Corporate Tax Law shall apply and the expression “Qualifying Free Zone Person” shall be used instead of the expression “Non-Resident Person”, and the expression Cabinet Decision No. 100 of 2023 – As published by Ministry of Finance 3 “geographical areas outside the Free Zones in the State” shall be used instead of the word “State”, wherever used in that Article.

Article 4 – De minimis Requirements 1. The de minimis requirements shall be considered satisfied where the nonqualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed a percentage of the total Revenue of the Qualifying Free Zone Person in that Tax Period as specified by the Minister, or an amount specified by the Minister, whichever is lower. 2. Subject to Clause 3 of this Article, the following provisions shall apply: a. Non-qualifying Revenue is Revenue derived in a Tax Period from any of the following: 1) Excluded Activities. 2) Activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person. 3) Transactions with a Free Zone Person where such Free Zone Person is not the Beneficial Recipient of the relevant services or Goods. b. Total Revenue is all Revenue derived by a Qualifying Free Zone Person in a Tax Period. 3. The following Revenue shall not be included in the calculation of non-qualifying Revenue and total Revenue: a. Revenue derived from the following transactions in relation to immovable property located in a Free Zone: 1) Transactions with a Non-Free Zone Person in respect of Commercial Property. 2) Transactions with any Person in respect of immovable property that is not Commercial Property. b. Revenue attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person. c. Revenue derived from the ownership or exploitation of intellectual property, Cabinet Decision No. 100 of 2023 – As published by Ministry of Finance 4 except for the Revenue related to the Qualifying Income referred to in Clause 1 of Article 7 of this Decision. 4. For the purposes of this Article, a Qualifying Free Zone Person and its Domestic Permanent Establishment or Foreign Permanent Establishment shall be treated as if the establishment was a separate and independent Person that is a Related Party of the Qualifying Free Zone Person.

This treatment is illustrated in the following diagrams. Free Zone Free Zone QFZP QFZP Commercial Property (Office building) Non-Commercial Property (Hotel) Lease Lease Qualifying Income Subject to 9% CT Subject to 9% CT Subject to 9% CT Free Zone Person Non-Free Zone Persons Free Zone Person Non-Free Zone Persons The ownership or exploitation of Immovable Property in a Free Zone, other than Commercial Property transactions conducted with a Free Zone Person, is defined to be an Excluded Activity (see Section 11.6).80 However, Revenue from such Immovable Property is not taken into account for purposes of the de minimis requirements.81 8.2.1. Mixed-use property located in a Free Zone Income derived from a mixed-use property located in a Free Zone shall be subject to Corporate Tax at 0% and 9%, based on the use of the respective components of the property. For example, a residential apartment building located in a Free Zone that has retail units on the ground floor can generate both: • Qualifying Income from the renting of retail space to Free Zone Persons, and • income that is not Qualifying Income from the renting of residential apartments to any Person. Similarly, in the case of a hotel building in a Free Zone, the Revenue should be allocated between the commercial and non-commercial units. This could be based on records of the relevant land registry department or some alternate basis (for example, rental or property value) that results in an arm’s length allocation that is reasonable based on the facts and circumstances of each case. Generally, retail outlets and restaurants in a hotel are commercial units but rooms, conference rooms and/or banquet halls are non-commercial units. 80 Article 2(2)(e) of Ministerial Decision No. 265 of 2023. 81 Article 4(3)(a) of Cabinet Decision No. 100 of 2023. Corporate Tax Guide | Free Zone Persons | CTGFZP1 64