The United Arab Emirates (UAE) Ministry of Finance (MoF) has recently unveiled two significant decisions that outline the key aspects of the corporate tax framework concerning juridical persons operating within the country’s free zones. These developments, including Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities, shed light on the specific rules and guidelines governing corporate tax within the UAE’s free zones.
The Free Zone Corporate Tax regime is exclusively applicable to entities classified as “Free Zone Persons.” This category refers to juridical persons that are incorporated, formed, or registered within a Free Zone, a designated economic zone in the UAE. It is important to note that the Free Zone Corporate Tax regime is only applicable within the prescribed areas of these Free Zones.
To determine the eligibility for the 0% tax rate, businesses are advised to reach out to their respective Free Zone Authority for confirmation regarding the Free Zone’s eligibility.
The Free Zone Corporate Tax regime is designed to encompass income derived exclusively from activities performed within a Free Zone. The definition of “Qualifying Income,” as laid out by the Ministry of Finance, includes income generated from transactions with other Free Zone Persons, as well as domestic and foreign sourced income resulting from any of the “Qualifying Activities” specified in the related ministerial decision.
In summary, the “Qualifying Activities” comprise a range of operations, such as manufacturing of goods or materials, processing of goods or materials, shareholding and securities management, ship ownership and operation, reinsurance services, fund management services subject to UAE regulatory oversight, and wealth and investment management services subject to UAE regulatory oversight.
The list of Qualifying Activities also encompasses headquarter services to related parties, treasury and financing services to related parties, aircraft financing and leasing (including engines and rotable components), logistics services, distribution from designated zones meeting the required conditions, and any ancillary activities related to the aforementioned operations.
Notably, income derived from specific “Excluded Activities” will not be classified as “Qualifying Income,” regardless of whether it originates from a Free Zone Person or is part of a Qualifying Activity. These excluded activities encompass income earned from transactions with natural persons, income derived from certain regulated financial services activities, income from intangible assets, and income generated from immovable property, except for commercial immovable property transactions with Free Zone Persons located within a Free Zone.
It is crucial to mention that engaging in Excluded Activities or earning income that does not qualify as Qualifying Income will render the Free Zone Person ineligible for the Free Zone Corporate Tax regime, subject to specific de minimis requirements.
To satisfy the de minimis requirements, the non-qualifying revenue earned by a Free Zone Person must not exceed the lower of either 5% of their total revenue or AED 5,000,000.
These latest decisions from the UAE Ministry of Finance bring greater clarity to the corporate tax landscape within the country’s free zones, ensuring that businesses operating within these zones understand the qualifying criteria and comply with the established regulations.
