The UAE Ministry of Finance (MoF) has recently announced two new judgments detailing the corporate tax regime’s fundamental characteristics that will apply to legal entities operating out of free zones in the UAE.
These include Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities and Cabinet Decision No. 55 of 2023 on Determining Qualifying Income.
“Free Zone Persons,” a juridical body incorporated, otherwise formed/registered in a ‘Free Zone’, are eligible for the ‘Free Zone Corporate Tax Regime’. Only the designated territories of the free zones are subject to the tax scheme.
To find out if a ‘Free Zone’ is qualified for the 0% rate, businesses can contact the authority. The Free Zone CT regime only applies to revenue earned solely within or from a ‘Free Zone’.
According to the UAE MoF, “qualifying income” reflects this and includes income from dealings with other Free Zone persons and income from domestic and foreign sources from engaging in any of the “qualifying activities” detailed in the relevant ministerial decision.
Reinsurance services, fund management services that are subject to the regulatory oversight of the competent authority in the UAE, wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE, and manufacturing of goods or materials that are processed into goods or materials are all examples of “qualifying activities.”
The list also includes providing related parties with headquarters services, treasury and financing services, financing and leasing aircraft, including engines and rotatable components, logistics services, distribution to or from a designated zone that satisfies the requirements, and any additional activities to the activities above.
Whether the money comes from a free zone person or is earned while engaging in a “qualifying activity,” certain specific “excluded activities” will not be considered “qualifying income.”
This includes income from specific regulated financial services activities, intangible assets, and property dealings, with a few exceptions, except deals with ‘Free Zone Persons’ about commercial real estate situated in a ‘Free Zone’.
Depending on the de minimis standards, generating money from “excluded activities” or any other type of income that is not “qualifying income” will exclude the free zone person from the regime.
A Free Zone Person’s non-qualifying revenue must not be more than AED 5,000 or 5% of their total revenue, to meet the de minimis standards.