A Qualifying Free Zone Person (Company A) supplies specialized software services to another Free Zone Person (Company B) located in the same free zone. Under its contract with Company A, Company B has a legal and contractual obligation to recharge the exact cost of these services, without markup, to Company B's own mainland UAE customer, who receives and uses the software directly. Under Ministerial Decision No. 265 of 2023's 'Beneficial Recipient' requirement for Qualifying Income, does Company A's income from this arrangement qualify as income from a transaction with another Free Zone Person?
- Yes, because Company B is itself a Free Zone Person, and any transaction between two Free Zone Persons automatically qualifies as Qualifying Income regardless of how the recipient uses the services
- Yes, because the recharge is made at cost with no markup, and Ministerial Decision No. 265 of 2023 treats an at-cost recharge between Free Zone Persons as automatically satisfying the Beneficial Recipient test
- No, because Company B is not the Beneficial Recipient of the services -- it is contractually obligated to pass their benefit through to its mainland customer -- so the transaction is not treated as one with another Free Zone Person for Qualifying Income purposes, and Company A's income from it must instead be tested under the rules that apply as if the recipient were not a Free Zone Person
- No, because a Qualifying Free Zone Person can never derive Qualifying Income from providing services to another Free Zone Person, only from selling goods
Why C? And why not the others?
Correct answer: C. No, because Company B is not the Beneficial Recipient of the services -- it is contractually obligated to pass their benefit through to its mainland customer -- so the transaction is not treated as one with another Free Zone Person for Qualifying Income purposes, and Company A's income from it must instead be tested under the rules that apply as if the recipient were not a Free Zone Person
Under Ministerial Decision No. 265 of 2023, income from transactions with another Free Zone Person only qualifies as Qualifying Income if that other Free Zone Person is the Beneficial Recipient of the relevant goods or services -- meaning it has the right to use and enjoy them without a legal or contractual obligation to pass the benefit on to another person. Because Company B here is contractually required to pass the software services through to its mainland customer at cost, Company B is merely a conduit and is not the Beneficial Recipient, so the transaction with Company A does not qualify as one with another Free Zone Person; Company A's income instead has to be assessed as though earned directly from the ultimate mainland recipient, which is not itself automatically disqualifying but removes the automatic same-free-zone qualification. The option asserting that any transaction between two Free Zone Persons automatically qualifies is wrong because the Beneficial Recipient condition exists precisely to prevent routing income through an intermediary Free Zone Person to obtain the 0% rate. The option claiming an at-cost recharge automatically satisfies the Beneficial Recipient test is wrong because the test turns on whether the recipient retains the benefit for itself, not on whether a markup was charged. The option asserting services can never qualify at all is wrong because Qualifying Income can include income from services just as much as goods, provided the Beneficial Recipient and other conditions are met.
Source: Ministerial Decision No. 265 of 2023 (Qualifying Free Zone Person conditions -- Beneficial Recipient requirement), under UAE Federal Decree-Law No. 47 of 2022, Article 18