Case Study: Full Time employees only to benefit 0% Corporate Tax Rate?

The facts

A Company is registered and located in a Free Zone. Part of its employees involved in the Core Income Generating Qualifying Activity work halftime.

The question

Does this Company qualify for 0% Corporate Tax rate in the UAE?

The analysis

  • Article 3(2) of the Law on Corporate Tax stipulates that only Qualifying Free Zone Persons (QFZP) may apply the 0% tax rate.
  • To become a Qualifying Free Zone Person, one must comply with a number of conditions for which Art. 18(1), in particular to maintain an adequate substance in a Free Zone.
  • On June 30, 2023, the Cabinet issued a Decision No. 55. Article 5 of this Decision specifies that ‘a Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone and, having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures’.

The Cabinet did not require having full time employees involved in this activity here. Therefore, part-time employees were also an option.    

  • On 25 October 2023, the UAE’s Cabinet issued Decision No. 100.This decision repeals Cabinet Decision No. 55 of 30 May 2023, replacing earlier rules with new ones. In shall be applied retroactively from 1 June 2023.

According to Art. 8(1) of the Cabinet Decision No. 100 dated 25 October 2023  ‘A Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone or a Designated Zone, depending on where such activities are required to be conducted, and having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified full-time employees in a Free Zone or a Designated Zone depending on where such activities are required to be conducted, and incur an adequate amount of operating expenditures, in relation to each activity’.

  • Rules on Economic Substance has similar subject of regulation but use more favorable wording. Check it out:

ESR, Art. 6(1)(i) of the Cabinet Resolution № 57 of 10 August 2020

Art. 8 of Cabinet Decision № 100

for Corporate Tax.

‘has an adequate number of qualified full-time (or equivalent) employees in relation to the activity who are physically present in the UAE (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts)’

A Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone or a Designated Zone, depending on where such activities are required to be conducted, and having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified full-time employees in a Free Zone or a Designated Zone depending on where such activities are required to be conducted, and incur an adequate amount of operating expenditures, in relation to each activity.

 

So, there is no requirement to hire full-time employees in the ESR rules. According to para 3 of the Guidance on Economic Substance Report:

  • Average number of full time equivalent (FTE) employees in the UAE in relation to the Relevant Activity for the Reportable Period The number of full time employees refers to the number of persons involved in carrying on the Relevant Activity in the UAE, whether employed directly by the Licensee or by a related party or third party service provider, calculated based on a standard working week of 40 hours for the entire Reportable Period.
  • Any part-time employees or employees that did not work for the entire Reportable Period can be taken into account as a fraction of a “full time” employee, calculated by reference to the standard working week of 40 hours.
  • A Licensee with 1 full time employee working a 40 hour work week for the entire Reportable Period will report on its Economic Substance Report as having 1.0 FTE.
  • A Licensee with 1 full time employee working a 40 hour work week for 26 weeks of the Reportable Period (assumed to be 52 weeks) will report on its Economic Substance Report as having 0.5 FTE (i.e. 1 x 26 / 52).
  • A Licensee with 3 part time employees, each working 20 hours a week for the entire Reportable Period will report on its Economic Substance Report as having 1.5 FTE (i.e. 3 x 20 / 40).
  • Directors that perform Core Income-Generating Activities (“CIGAs”) in addition to their duties as Directors should also be counted when considering the number of full time equivalent employees, calculated by reference to the standard working week of 40 hours.

The conclusions

In view of the above, we may conclude:

  • ‘Full time’ is new requirement to be reckoned with since the very beginning of the Corporate Tax (from June 1, 2023).
  • Literal interpretation does not prevent the FTA from disqualifying Free Zone Person if it employs part-time employees to conduct Core Income Generating Activity.
  • Favorable interpretation is also available. Why not to use Equivalent of Full Time if it is equivalent.

 

 

 

 

 

 

 

 

 

 

 

 

 

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

Contacts

Maria Nikonova
Head of PGP Tax Consultancy in the UAE, PhD in Law
m.nikonova@pgplaw.ae

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