UAE Introduces New Free Zone Corporate Tax Regime, Offering Benefits to Juridical Persons

In a recent development, the United Arab Emirates (UAE) Ministry of Finance (MoF) has announced significant decisions that outline the key aspects of the corporate tax regime applicable to juridical persons operating within the country’s free zones. These decisions, namely 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 regulations surrounding corporate taxation within these designated zones.

The Free Zone Corporate Tax regime, designed specifically for “Free Zone Persons,” encompasses juridical entities that are incorporated or registered in any of the UAE’s Free Zones. It is important to note that this tax regime applies solely within the prescribed areas of these Free Zones. Businesses seeking clarity regarding their eligibility for the 0% tax rate can reach out to their respective Free Zone Authorities.

The fundamental principle underlying the Free Zone Corporate Tax regime is that it pertains solely to income generated from activities carried out exclusively within the Free Zones. The Ministry of Finance emphasizes this by defining “Qualifying Income” as comprising revenue derived from transactions involving other Free Zone Persons, in addition to both domestic and foreign-sourced income resulting from the execution of any of the activities categorized as “Qualifying Activities” as specified in the corresponding ministerial decision.

The Qualifying Activities eligible for this favorable tax treatment include the manufacturing and processing of goods or materials, holding of shares and securities, ship ownership, management, and operation, reinsurance services, fund management services subject to regulatory oversight by the competent authority in the UAE, and wealth and investment management services similarly regulated in the country.

Furthermore, the list encompasses headquarter services provided to related parties, treasury and financing services offered to related entities, aircraft financing and leasing (including engines and rotable components), logistics services, distribution from designated zones meeting specific conditions, and ancillary activities related to the aforementioned Qualifying Activities.

Notwithstanding these provisions, income derived from specific “Excluded Activities” will not qualify as “Qualifying Income,” irrespective of whether it originates from a Free Zone Person or is associated with the undertaking of a Qualifying Activity. The Excluded Activities comprise revenue generated from transactions involving natural persons, regulated financial services activities, income derived from intangible assets, and income arising from immovable property, except when such transactions involve Free Zone Persons engaged in commercial immovable property within a Free Zone.

It is crucial to note that engaging in Excluded Activities or earning income that does not fall under the purview of Qualifying Income will disqualify a Free Zone Person from the regime, unless they satisfy the de minimis requirements. To meet these requirements, non-qualifying revenue must not exceed either 5% of the total revenue or AED 5,000,000, whichever is lower.

This recent development in the UAE’s tax landscape showcases the government’s ongoing efforts to create an attractive business environment within Free Zones, enticing juridical persons to operate within these designated areas. The introduction of the Free Zone Corporate Tax regime is expected to stimulate economic growth, encourage investment, and enhance the competitiveness of the country’s Free Zones on the global stage.

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