UAE CORPORATE TAX: THE UAE GOVERNMENT ISSUED MUCH AWAITED MINISTERIAL DECISION AND CABINET DECISION CONCERNING QUALIFYING INCOME EMANATING FROM QUALIFYING ACTIVITIES AND ALSO EXCLUDED ACTIVITIES IN RESPECT OF FREE ZONE PERSONS.

UAE CORPORATE TAX: THE UAE GOVERNMENT ISSUED MUCH AWAITED MINISTERIAL DECISION AND CABINET DECISION CONCERNING QUALIFYING INCOME EMANATING FROM QUALIFYING ACTIVITIES AND ALSO EXCLUDED ACTIVITIES IN RESPECT OF FREE ZONE PERSONS.

The UAE Govt. on 01^st June 2023, issued a Ministerial Decision and cabinet decision concerning qualifying income emanating from qualifying activities and also excluded activities in respect of free zone persons.

According to the Cabinet decision No.55 of 2023, the Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income, provided that such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment or to the ownership or exploitation of immovable property:

1. Income derived from transactions with other Free Zone Persons, except for income derived from Excluded Activities.
2. Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
3. Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements (up to 5% of total revenue or AED 5,000,000, whichever is lower).

According to the Ministerial Decision No. 139 of 2023, for the purpose of Qualifying Income as per Cabinet decision No.55 of 2023, the following activities conducted by a Qualifying Free Zone Person shall be considered Qualifying Activities and accordingly shall be qualified for zero-rated corporate tax.

1. Manufacturing of goods or materials
2. Processing of goods or materials
3. Holding of shares and other securities.
4. Ownership, management and operation of Ships
5. Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
6. Fund management services that are subject to the regulatory oversight of the competent authority in the State.
7. Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
8. Headquarters services to Related Parties.
9. Treasury and financing services to Related Parties.
10. Financing and leasing of Aircraft, including engines and rotable components
11. Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods of materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale
12. Logistics services.
13. Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.

Further, For the purpose of Qualifying Income as per Cabinet decision No.55 of 2023, the following activities shall be considered Excluded Activities:

1. Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) specified above.
2. Banking activities that are subject to the regulatory oversight of the competent authority in the State.
3. Insurance activities that are subject to the regulatory oversight of the competent authority in the State, other than the Qualifying activity specified under paragraph (e) specified above.
4. Finance and leasing activities that are subject to the regulatory oversight of the competent authority in the State, other than those qualifying activities specified under paragraphs (i) and (j) specified above.
5. Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
6. Ownership or exploitation of intellectual property assets.
7. Any activities that are ancillary to the activities listed in paragraphs (a) to (f) of this Clause.

The ministerial decision imposed further conditions that the non-qualifying Revenue derived by the Qualifying Free Zone Person shall not exceed 5% (five per cent) of the total Revenue or AED 5,000,000 (five million dirhams) in that Tax Period, whichever is lower.

Further, in addition to the conditions set out in Clause (1) of Article (18) of the Federal Decree-Law No. 47 of 2022, a Free Zone Person must meet the following additional two conditions to be a qualifying free zone person and derive the benefit of zero-rated tax i.e.:

1. Its non-qualifying Revenue does not exceed the de minimis requirements specified in the above para. (i.e. up to 5% of total revenue or AED 5,000,000, whichever is lower).
2. It prepares audited financial statements in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the Corporate Tax Law.

If a Qualifying Free Zone Person that at any particular time during a Tax Period fails to meet any of the conditions shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent (4) four Tax Periods.

Non-qualifying Revenue is Revenue derived in a Tax Period from any of the following:

• Excluded Activities
• Activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person

Further, Income attributable to immovable property located in a Free Zone that is derived from the below transactions shall be considered Taxable Income:

1. Transactions with Non-Free Zone Persons in Respect of Commercial Property.
2. Transactions with any Person in respect of immovable property that is not Commercial Property.

Also, Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person shall be considered Taxable Income. The income is calculated as if the establishment was a separate and independent Person that is a Related Party of the Qualifying Free Zone Person.

For further information, please contact Kamal k Arora at info@luthraadvisors.com.