The UAE Ministry of Finance has revealed two main features that provide a clear roadmap for the revamped Corporate Tax regime, which has officially kicked off this month.
The ministry, alongside relevant tax authorities, shared these decisions during a press conference held in Abu Dhabi. The first decision, Cabinet Decision No. 55 of 2023, focuses on the determination of Qualifying Income, while the second decision, Ministerial Decision No. 139 of 2023, outlines the Qualifying Activities and Excluded Activities.
Under this regime, the Freezone Corporate Tax provisions are applicable to entities known as “Free Zone Persons.” These are juridical persons that have been incorporated, formed, or registered within a Free Zone. It’s important to note that the benefits of this regime can only be availed within the designated areas of the Free Zones. To determine eligibility for a zero percent tax rate, businesses can reach out to their respective Free Zone Authority for clarification.
Moreover, the tax will solely be applied to income generated from activities conducted exclusively within a Free Zone. This condition is reflected in the definition of “Qualifying Income,” which encompasses income derived from transactions with other Free Zone Persons, as well as income from domestic and foreign sources resulting from engaging in any of the activities specified as “Qualifying Activities” in the related Ministerial Decision.
The Qualifying Activities include a range of operations, such as the manufacturing and processing of goods or materials, holding of shares and securities, ship ownership and operation, reinsurance services, regulated fund management services, and wealth and investment management services. Additionally, headquarter services to related parties, treasuring and financing services to related parties, financing and leasing of aircraft, logistics services, distribution from designated zones meeting specific conditions, and ancillary activities are also included.
Excluded activities
However, income derived from certain “Excluded Activities” will not be considered as “Qualifying Income,” regardless of whether it originates from a Free Zone Person or is part of a Qualifying Activity. These excluded activities include income from intangible assets, and income from immovable property, except for transactions involving Free Zone Persons related to commercial immovable property located within a Free Zone.
In order to maintain eligibility for the Free Zone Corporate Tax regime, Free Zone Persons must meet the de minimis requirements, with some exceptions. Engaging in Excluded Activities or earning income that does not qualify as Qualifying Income will disqualify a Free Zone Person from the regime. To meet the de minimis requirements, non-qualifying revenue should not exceed the lower of either 5 percent of total revenue or AED 5 million.
It’s worth noting that revenue attributed to a domestic or foreign permanent establishment of the Free Zone Person, as well as revenue related to immovable property situated in a Free Zone that does not fall under the Free Zone Corporate Tax regime, will not count towards the de minimis threshold. Instead, such associated taxable income will be subject to the regular UAE Corporate Tax regime at a rate of 9 percent.
Failure to meet the de minimis requirements or comply with any other qualifying conditions will result in the loss of benefits from the Free Zone Corporate Tax regime for a minimum period of five years. During this period, the Free Zone Person will be treated as a regular Taxable Person and will be subject to a Corporate Tax rate of 9 percent on their Taxable Income exceeding AED 375,000.
The newly introduced decisions by the UAE Ministry of Finance provide a clear framework for the Corporate Tax regime, delineating the criteria for eligibility, the types of qualifying activities, and the repercussions of not meeting the requirements. As businesses navigate this new regime, adherence to the guidelines set forth by the ministry will ensure compliance and allow them to make informed decisions regarding their tax obligations.
