Qualifying income of free zones - Introduction
So, on 1 June 2023, the UAE began its new life with a brand, spanking new corporate income tax.
However, right up until the last minute, we were still left waiting for the final pieces in the legislative jigsaw.
These have now been revealed.
The final pieces of the jigsaw?
The Ministry shared the details of this new tax framework during a press conference held in Abu Dhabi. This included:
(1) Cabinet Decision No. 55 of 2023 on Determining Qualifying Income; and
(2) Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities.
Free zone corporate tax
One of the key highlights of the new tax regime is the introduction of the Free Zone Corporate Tax, which applies to "Free Zone Persons."
This term refers to juridical entities that are incorporated or registered within a Free Zone.
However, it's important to note that this tax regime is only applicable within the designated areas of the Free Zones.
Businesses can contact their respective Free Zone Authority to confirm whether the Free Zone qualifies for zero percent tax.
Free zone Corporate Tax regime
Under the Freezone Corporate Tax regime, only income derived from activities exclusively conducted within the Free Zone will be subject to taxation.
This concept is reflected in the definition of "Qualifying Income," which includes income generated from transactions with other Free Zone Persons, as well as domestic and foreign sourced income resulting from the performance of any "Qualifying Activities" listed in the related Ministerial Decision.
Qualifying income of free zones - Qualifying Activities
The Qualifying Activities encompass various sectors, such as manufacturing of goods or materials, processing of goods or materials, holding of shares and other securities, ship ownership and operation, reinsurance services, fund management services subject to UAE regulatory oversight, and wealth and investment management services also subject to UAE regulatory oversight.
Other qualifying activities include headquarter services to related parties, treasury and financing services to related parties, financing and leasing of aircraft, logistics services, distribution within or from a designated zone meeting specific conditions, and any activities ancillary to the aforementioned sectors.
Excluded activities
However, income derived from certain specific "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.
Excluded Activities encompass 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, excluding transactions with Free Zone Persons involving commercial immovable property located within a Free Zone.
De minimis
To ensure compliance with the tax regime, there are de minimis requirements in place.
If a Free Zone Person earns income from Excluded Activities or any other income that does not qualify as Qualifying Income, they will be disqualified from the tax regime unless the non-qualifying revenue remains below the lower of either 5 percent of their total revenue or AED 5 million.
It's worth noting that revenue attributed to a Free Zone Person's domestic or foreign permanent establishment, as well as revenue from immovable property within a Free Zone that does not qualify for the tax regime, will not be considered for the de minimis threshold. Instead, the associated taxable income will be subject to the regular UAE Corporate Tax rate of 9 percent.
Breaching the de minimis
In cases where the de minimis requirements are not met, or if a Free Zone Person no longer satisfies other qualifying conditions, they will lose the benefits of the Free Zone Corporate Tax regime for a minimum period of five years.
During this period, they will be treated as an ordinary Taxable Person and subjected to Corporate Tax at a rate of 9 percent on their Taxable Income exceeding AED 375,000.
Qualifying income of free zones - Conclusion
The implementation of the UAE Corporate Tax regime and the introduction of the Freezone Corporate Tax mark significant developments in the country's tax landscape.
These changes aim to ensure clarity and fair taxation practices while providing opportunities for businesses to thrive within the Free Zones.
If you have any queries about Qualifying income and free zones or UAE tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article