Two new decisions announced relating to Corporate Tax for UAE Free Zones

The UAE Ministry of Finance has released two new decisions that specify the main features of the Corporate Tax regime as it applies to juridical persons operating out of free zones in the UAE. Cabinet Decision No. 55 of 2023 focuses on Determining Qualifying Income, while Ministerial Decision No 139 of 2023 is on Qualifying Activities and Excluded Activities.

His Excellency Younis Haji Al-Khoori, Undersecretary of the Ministry of Finance, addressed the most important aspects of the Corporate Tax legislative phase, which was marked by the issuance of Federal Decree-law on Taxation of Corporations and Businesses, followed by relevant Cabinet and Ministerial Decisions. His Excellency stressed the strategic importance of Corporate Tax in supporting the financial and economic sectors in the country.

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. Businesses can contact their Free Zone Authority to confirm whether that Free Zone is eligible for the 0 percent rate.  The Free Zone CT regime is intended to apply only to income derived from activities that are performed exclusively in or from within a Free Zone. This is reflected in the definition of 'Qualifying Income' which includes income derived from transactions with other Free Zone Persons as well as domestic and foreign sourced income derived from conducting any of the 'Qualifying Activities' listed in the related Ministerial Decision.

In summary, the '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 services that are subject to the regulatory oversight of the competent authority in the UAE; and 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; treasury and financing services to related parties; financing and leasing of aircraft, including engines and rotable components; logistics services; distribution in or from a designated zone that meets the relevant conditions; 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'. Subject to certain exceptions, this includes income derived from transactions with natural persons, income derived from certain regulated financial services activities, income derived from intangible assets, and income derived from immovable property, other than transactions with Free Zone Persons in relation to commercial immovable property located in a Free Zone.

Earning income from 'Excluded Activities' or earning any other income that is not 'Qualifying Income' will disqualify the Free Zone Person from the regime, subject to de minimis requirements. To satisfy the de minimis requirements, the non-qualifying revenue earned by a Free Zone Person must not exceed the lower of either 5 percent of their total revenue or AED5,000,000.

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 Corporate Tax regime will not count towards the de minimis threshold. Instead, the associated taxable income will be subject to the regular UAE Corporate Tax regime at 9 percent.

Where the de minimis requirements are not met or the Free Zone Person does not continue to meet any of the other qualifying conditions, the Free Zone Person will no longer be able to benefit from the Free Zone Corporate Tax regime for a minimum period of five (5) years. During this period, the Free Zone Person will be treated as an ordinary Taxable Person and be subject to Corporate Tax at the rate of 9 percent on their Taxable Income above AED 375,000.

All Cabinet Decisions and Ministerial Decisions and guidelines relating to the Corporate Tax Law are available on the Ministry of Finance's website.