Free Zone Business gets the much-awaited Clarity on Qualifying Income

The Ministry of Finance has released two new decisions: Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities.

As per Article 3 of the Corporate Tax Law, Corporate Tax will be imposed on a Qualifying Free Zone Person at 0% on ‘Qualifying Income’ and 9% on income that is not Qualifying Income.

Article 18 of the Corporate Tax Law provides the conditions to be met by a Free Zone Person to be eligible for 0% tax rate on Qualifying Income. These conditions require the taxable person to:

1. Maintain adequate substance in the UAE.
2. Derive Qualifying Income.
3. Not elect to be subject to Corporate Tax.
4. Comply with transfer pricing provisions and maintain transfer pricing documentation, if applicable.
5. Meet any other conditions as may be prescribed.

The Decisions that have now been released build in this and define Qualifying Income, Qualifying Activities and Excluded Activities, as summarised below:

• ‘Qualifying Income’ includes i) income derived from transactions with other Free Zone Persons (being a beneficial recipient) ii) Income derived from transactions with a Non-Free Zone Person in respect of any of the ‘Qualifying Activities’ listed in the Decision and any incidental income thereto.
• A Free Zone Person’s income from a domestic or foreign permanent establishment or from immovable property will not be ‘Qualifying Income’.
• ‘Qualifying Activities’ include manufacturing of goods or materials, processing of goods or materials, holding of shares and other securities, ownership, management and operation of ships, reinsurance services, fund management, wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE. They also include headquarter services to related parties; treasuring and financing services to related parties; financing and leasing of aircraft, including engines and notable components; logistics services; distribution in or from a designated zone that meets the relevant condition; and any activities that are ancillary to the above-mentioned activities.
• Income from certain specific ‘Excluded Activities’ will not be treated as ‘Qualifying Income’ regardless of whether the income is derived from a Free Zone Person or as part of undertaking a ‘Qualifying Activity.’
• The Decisions include a de minimis threshold which restricts the availability of relief if Non-Qualifying revenue (i.e. Excluded Activities plus income that is not a ‘Qualifying Income’) exceeds the lower of 5% of total revenue or AED 5 million. In calculating revenue for the de minimis requirement, revenue attributable to a domestic or foreign permanent establishment of the Free Zone Person and revenues attributable to immovable property located in a Free Zone that cannot benefit from the Free Zone exemption will be ignored. Such income will be taxable at 9% tax rate.

 The Cabinet decision also specifies the requirements relating to maintaining adequate substance in a Free Zone. These requirements allow outsourcing of activities to related parties subject to adequate supervision. 

Key takeaways

These Decisions have been highly anticipated, and their publication will be welcomed by many businesses. However, they are more complex that had been expected and businesses will need to carefully map their activities and revenues against the conditions in order to establish whether they qualify for the relief.

The Decisions do not provide any guidance on procedural requirements for claiming Free Zone reliefs. 

How can we help?

Our tax experts can help businesses to evaluate whether they can meet the conditions for the 0% tax rate on Qualifying Income and can advise on any associated compliance matters.

If you would like help with this or any other tax matter, please contact our tax team.