New decisions made in regard to free zones in the UAE's business tax system
The Ministry of Finance of the United Arab Emirates (UAE MoF) has issued two new decisions that, when combined, detail the primary aspects of the corporate tax regime that is applicable to juridical persons operating out of free zones in the UAE. These decisions were made public.
The Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and the Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities are both examples of these types of decisions.
"Free Zone Persons," which refers to a juridical person that is incorporated or otherwise formed or registered in a Free Zone, are eligible to take advantage of the Free Zone Corporate Tax regime. This regime is offered to Free Zone Persons. Only within the designated boundaries of the free zones can the special tax regime for corporations that apply to free zones be used.
The Free Zone Authority can be contacted by businesses in order to verify whether or not their particular Free Zone qualifies for the 0% tax rate.
The capital gains tax regime for free zones is designed to apply solely to the income that is earned from activities that are carried out wholly or primarily within a free zone.
According to the Ministry of Finance, this is reflected in the definition of "Qualifying Income," which includes income derived from transactions with other Free Zone Persons as well as income sourced domestically and internationally that is derived from conducting any of the "Qualifying Activities" listed in the related ministerial decision.
Manufacturing of goods or materials, processing of goods or materials, holding of shares and other securities, ownership, management, and operation of ships, reinsurance services, fund management services that are subject to the regulatory oversight of the competent authority in the UAE, and wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE are all examples of "Qualifying Activities." In conclusion, the "Qualifying Activities" include all of the aforementioned activities.
In addition, they include services provided to related parties by the company's headquarters, such as treasury and financing services; the financing and leasing of aircraft, such as engines and rotable components; logistics services; distribution in or from a designated zone that satisfies the relevant conditions; and any activities that are ancillary to the activities described above.
Regardless of whether the money is earned from a Free Zone Person or as a result of participating in a "Qualifying Activity," it will not be counted as "Qualifying Income" if it is earned from any of a number of activities that fall under the category of "Excluded Activities."
This includes income derived from transactions with natural persons, income derived from certain regulated financial services activities, income derived from intangible assets, and income derived from immovable property, excluding transactions with Free Zone Persons in relation to commercial immovable property located in a Free Zone. Certain exceptions apply. Income derived from intangible assets and income derived from immovable property are not included.
Earning revenue from "Excluded Activities" or any other income that is not "Qualifying Income" will exclude the Free Zone Person from the regime, subject to the rules for the de minimis amount of income earned.
To be considered compliant with the de minimis standards, the amount of a Free Zone Person's non-qualifying revenue cannot exceed the lesser of either five percent of their total revenue or five million Emirati Dirhams.
