June 2023: UAE Free Zone Tax Regime Updates on Qualifying Income, Exemptions & More

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June 02, 2023: On the D-day, Thursday, Jun 01, 2023, The UAE’s Ministry of Finance released two new decisions related to qualifying income and qualifying activities for corporate tax in free zones.

These three latest back to back updates in the Corporate Tax Rollout across the UAE comes as a sigh of relief for Free Zone entities across the emirates. In addition, it sets the record straight, once and for all, on several aspects related to being eligible for paying for Corporate Taxes.

This clarity further influences strategic decisions related to Corporate Tax Group Structuring, and the tax liabilities thus ensued. What’s more critical is that it gives Free Zone entities across the UAE a free hand to transact with other Free Zone entities.

Now, we know why this is the “Biggest Such Update Ever” let’s get down to specific details.
This update, the Cabinet Decision No. 55 of 2023 determines ‘qualifying income’ while Ministerial Decision No 139 of 2023 highlights qualifying activities and excluded activities.

Who is the Free Zone tax regime available to?

The Free Zone Corporate Tax regime is available to ‘Free Zone Persons’, which refers to a juridical person that is incorporated or otherwise formed or registered in a Free Zone. The Free Zone Corporate Tax regime is applicable only within the prescribed areas of the Free Zones.

Why it matters that it is applicable to Juridical Persons?

Considering the talent from across the globe that UAE attracts, especially, entrepreneurs and senior professionals based in South Asian countries such as India, Pakistan, Bangladesh, Nepal and others, it is important that the tax eligibility of Non Resident Persons is considered.

In addition, young entrepreneurs prefer to test waters and decide to set up a Free Zone business to start with, and so, it is crucial to get the nuances of the changing tax eligibilities right.

It also matters because foreign companies and other juridical persons may also be treated as Resident Persons for Corporate Tax purposes where they are effectively managed and controlled in the UAE.

A Non-Resident Person, which is a UAE Taxable Person, is a Person who is not considered a Resident Person and that either:

  • Has a Permanent Establishment in UAE;
  • Derives state sourced income; and
  • Has a nexus in UAE as specified in a Cabinet decision.

About Corporate Tax Registration for Non Resident Persons

Additionally, the Cabinet Decision No. 56 of 2023, article 4 on the requirement of the registration of the Corporate Tax, a Non-Resident Person that has a nexus in the State in accordance with Article (2) of this Decision must register with the Authority in accordance with Article (51) of the Corporate Tax Law.

What You Should Know About Free Zone Qualifying Income

Cabinet Decision No. 55 of 2023 determines the Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

We have earlier in this article established the requirements for a Qualifying Free Zone person (cabinet decision no. 56 of 2023), and now we must understand what constitutes the Qualifying Income for Free Zone Person.

The Cabinet Decision No. 55 of 2023 provides regulations regarding the tax obligations of Qualifying Free Zone Persons under the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

Key definitions are provided for terms like

  • Domestic Permanent Establishment,
  • Qualifying Activities,
  • Excluded Activities,
  • Non-Free Zone Person, and
  • Commercial Property.

The provisions of this Decision apply exclusively to Qualifying Free Zone Persons.

The qualifying income includes income from transactions with other Free Zone Persons and Non-Free Zone Persons, pertaining to non-Excluded Activities.

It also includes any income that meets de minimis requirements.

Income from transactions is only considered if the Free Zone Person is the beneficial recipient of relevant services or goods.

This “beneficial recipient” is a person who has the right to use and enjoy the service or good without the obligation to pass it on.

About De Minimis Requirements for Free Zone Persons Qualifying Income

The same decision also clarifies de minimis requirements, indicating that these are met “when the non-qualifying revenue does not exceed 5% of the total revenue in a tax period or 5 million whichever is lower.”

Income attributable to a Domestic or Foreign Permanent Establishment or income attributable to immovable property in a Free Zone from certain transactions will be considered taxable income.

The Decision mandates that Qualifying Free Zone Persons carry out their core income-generating activities within a Free Zone, having sufficient assets, qualified employees, and operating expenses. Outsourcing to a related or third party within the Free Zone is allowed, provided there is adequate supervision.

What are the Free Zone Qualifying and Excluded Activities for Corporate Tax UAE?

Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses

Qualifying Activities

The following activities conducted by a Qualifying Free Zone Person shall be considered Qualifying Activities

  1. Manufacturing of goods or materials.
  2. Processing of goods or materials.
  3. Holding of shares and other securities.
  4. Ownership, management and operation of Ships.
  5. Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
  6. Fund management services that are subject to the regulatory oversight of the competent authority in the State.
  7. Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
  8. Headquarter services to Related Parties.
  9. Treasury and financing services to Related Parties.
  10. Financing and leasing of Aircraft, including engines and rotable components.
  11. Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
  12. Logistics services.
  13. Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.

Excluded Activities

  1. Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of Clause (1) of Article (2) of this Decision.
  2. Banking activities that are subject to the regulatory oversight of the competent authority in the State.
  3. Insurance activities that are subject to the regulatory oversight of the competent authority in the State, other than the activity specified under paragraph (e) of Clause (1) of Article (2) of this Decision.
  4. Finance and leasing activities that are subject to the regulatory oversight of the competent authority in the State, other than those specified under paragraphs (i) and (j) of Clause (1) of Article (2) of this Decision.
  5. Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
  6. Ownership or exploitation of intellectual property assets.
  7. Any activities that are ancillary to the activities listed in paragraphs (a) to (f) of this Clause.

De Minimis Requirements for Qualifying Activities

The de minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed 5% (five percent) of the total Revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000 (five million dirhams), whichever is lower.

Other Conditions

  1. In addition to the conditions set out in Clause (1) of Article (18) of the Corporate Tax Law, a Qualifying Free Zone Person must meet the following two conditions:
    1. Its non-qualifying Revenue does not exceed the de minimis requirements set out in Article (4) of this Decision.
    2. It prepares audited financial statements in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the Corporate Tax Law.
    3. A Qualifying Free Zone Person that at any particular time during a Tax Period fails to meet any of the conditions set out in Clause (1) of Article (18) of the Corporate Tax Law and this Decision and any other conditions prescribed by the Minister shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent (4) four Tax Periods.

    How should you go about navigating Corporate Tax?

    While the taxation dynamics for Free Zone entities have been clarified to a great extent with these updates, many questions still prevail. Understanding the fine print of these recent updates is critical for businesses. The nuances could significantly impact tax liabilities and influence strategic decisions. Hence, it’s important to seek expert guidance for tax planning and compliance.

    Whether you’re a tax group, a free zone entity, a mainland business or a Non Resident person or all of these together, it is important to consult an experienced corporate tax consultant Dubai to chart a careful course forward for your specific scenario.

    Get in touch for a free 30 minutes’ consultation on this today itself – call +9715 010 42665 or email us on [email protected]

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