UAE issues rules for zero tax ‘Qualifying Income’ for Free Zone companies
The UAE Ministry of Finance issued, on 30 May, Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities under the new UAE Corporate Tax Law.
The Corporate Tax Law – Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses – provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the UAE for the first time and is effective for financial years starting on or after 1 June 2023.
The introduction of corporate income tax is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty provided by a competitive corporate income tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment.
Qualifying Income
Under the new Corporate Tax Law, a Qualifying Free Zone Person (QFZP) will be taxed at 0% on qualifying income and 9% on taxable income that is not qualifying income. Cabinet Decision No 55 clarifies the definition of ‘Qualifying Income’ to include:
- Income derived from transactions with other Free Zone Persons, except for income derived from ‘Excluded Activities’.
- Income derived from transactions with a Non-Free Zone Person, but only in respect of ‘Qualifying Activities’ that are not Excluded Activities.
- Any other income provided that the QFZP satisfies the de minimis requirements.
Qualifying Activities
Qualifying activities for QFZPs include the following:
- Manufacturing and processing of goods or materials.
- Holding of shares and other securities.
- Ownership, management and operation of ships.
- Regulated reinsurance services.
- Fund / Wealth / Investment management services.
- Headquarter services.
- Treasury and financing services.
- Financing and Leasing aircraft
- Logistics services.
- Distribution of goods in or from designated zones.
- Any activity that is ancillary to the above.
Excluded Activities
Certain ‘Excluded Activities’ will not be included as ‘Qualifying Income’, whether the income is from a Free Zone or as part of undertaking a ‘Qualifying Activity’. These include:
- Income derived from transactions with natural persons.
- Income from certain regulated financial services activities.
- Income from intangible assets.
- Income from immovable property.
- Other transactions from Freezones related to commercial immovable property within the Free Zone.
Any income earned from ‘Excluded Activities’ or any other income that is not a ‘Qualifying Income’ disqualifies the Free Zone entity from the 0% regime, subject to the minimum requirements. To satisfy the minimum requirements, the non-qualifying revenue earned by a Free Zone entity must not exceed the lowest of either 5% of total revenue or AED5 million.
Revenue from a domestic or foreign permanent establishment of a Free Zone entity and revenue from immovable property in a Free Zone are not permitted to benefit from the regime but is not counted toward the minimum requirements threshold.
If the minimum requirements are not met or a Free Zone entity does not continue to meet any qualifying conditions, it cannot benefit from the 0% corporate tax exemption and will therefore be subject to corporate tax of 9%, for a minimum of five years, on any income over AED375,000.
