The UAE Ministry of Finance has newly revealed two noteworthy conclusions that summarize the critical elements of the Corporate Tax system for juridical entities working within the country’s free zones.
These decisions comprise Cabinet Decision No. 55 of 2023, which focuses on the determination of Qualifying Income, and Ministerial Decision No. 139 of 2023, which delineates the Qualifying Activities and Excluded Activities.
Throughout a press conference carried by the Ministry, attended by both local and international media, Younis Haji Al-Khoori, the Undersecretary of the Ministry of Finance, delivered an opening speech expressing gratitude to the media for their invaluable role in raising understanding and disseminating real statement about Corporate Tax in the past months.
During the conference, the Undersecretary highlighted the crucial elements of the Corporate Tax legislative phase, which saw the introduction of the Federal Decree-law on the Taxation of Corporations and Businesses, accompanied by appropriate Cabinet and Ministerial Decisions.
Emphasizing the strategic significance of Corporate Tax in bolstering the financial and monetary industries of the country, the conference featured a comprehensive exhibition by Shabana Begum, Executive Director of the Tax Policies Sector. The presentation shed light on the implementation of Corporate Tax within free zones, taking into account the newly issued decisions pertaining to this matter.
Under the Free Zone Corporate Tax regime, the benefits are extended to entities classified as ‘Free Zone Persons,’ denoting juridical persons that are incorporated, formed, or registered within a Free Zone.
To benefit from the Free Zone Corporate Tax regime, businesses should note that it is useful solely within the designated areas of the Free Zones. To verify if a specific Free Zone qualifies for the 0% tax rate, it is recommended to reach out to the respective Free Zone Authority for confirmation.
It is important to understand that the Free Zone Corporate Tax regime is designed to cover income generated exclusively from activities conducted within a Free Zone. This is echoed in the description of ‘Qualifying Income,’ which encompasses revenue emanating from dealings with other Free Zone Persons, as well as revenue emanating from local and international sources through the execution of any of the ‘Qualifying Activities’ specified in the relevant Ministerial Decision.
The following are the “Qualifying Activities,” in brief: ownership, management, and operation of ships; production of products or materials; the processing of goods or materials; holding of shares and other securities, re-insurance services, budget control services under the regulatory supervision of the competent authority in the UAE, and capital and acquisition management services subject to the regulatory supervision of the UAE’s appropriate authorities.
Furthermore, the list of ‘Qualifying Activities’ encompasses additional categories such as headquarter services provided to affiliated groups, banking and financing services provided to affiliated groups, financing, and leasing of aircraft, logistics services, distribution activities carried out within or from a specified location that satisfies the specified prerequisites, and any activities that serve as a complement to the aforementioned activities.
It’s important to note that certain types of income, known as ‘Excluded Activities,’ do not fall under the classification of ‘Qualifying Income,’ irrespective of whether the income is generated by a Free Zone Person or as part of undertaking a ‘Qualifying Activity.’ However, there are exceptions to this rule. Excluded Activities include revenue emanating from dealings with natural individuals, income arising from specific regulated financial services activities, revenue emanating from immaterial assets, and the revenue emanating from unmovable property, except for transactions with Free Zone Persons concerning commercial immovable property discovered within a Free Zone.
Participating 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 certain de minimis requirements. In order to meet the de minimis criteria, the non-qualifying income generated by a Free Zone Person should not surpass the more inferior of either 5% of their overall earnings or AED 5,000,000.
It’s important to note that the de minimis calculation excludes revenue attributed to a local or international permanent structure of the Free Zone Person, as well as revenue derived from unmovable property discovered within a Free Zone that does not qualify for the benefits of the Free Zone Corporate Tax regime. Rather, the related taxable earnings will be subject to the standard UAE Corporate Tax regime, which stands at 9%.
If the de minimis prerequisites are not fulfilled or if the Free Zone Person fails to fulfill any other qualifying prerequisites, they will lose eligibility for the Free Zone Corporate Tax regime for a minimum duration of five (5) years. During this period, the Free Zone Person will be regarded as a regular Taxable Person and will be subject to Corporate Tax at a rate of 9% on their Taxable Income exceeding AED 375,000.
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