The UAE Government issues revised decisions and guidelines for availing 0% Corporate Tax benefit by ‘Qualifying Free Zone Persons’

Ministry of Finance has today released the much-awaited decisions from UAE Corporate Tax perspective with regard to Qualifying Free Zone persons (‘QFZP’).

  1. Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the QFZP for the Purposes of Federal Decree-Law 47 of 2022 on the Taxation of Corporations and Businesses; and
  2. Ministerial Decision No. 265 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law 47 of 2022 on the Taxation of Corporations and Businesses,

Key highlights:

  • Both the decisions will come into effect from June 1,
  • Earlier Cabinet Decision 55 of 2023 and Ministerial Decision 139 of 2023 have been repealed.
  • Definition of Qualifying income expanded to include ‘Income derived from the ownership or exploitation of Qualifying Intellectual Property (‘QIP’)’.
    • QIP is defined as patents, copyrighted software and any right functionally equivalent to a Patent. However, any marketing related intellectual property assets, such as trademarks is not included
    • Qualifying Income calculation formula in this regard is provided in the new Ministerial
    • Income derived from non- qualifying Intellectual Property and income in excess of qualifying Income calculated as per the prescribed formula shall be taxable at 9% and shall not be considered for the de-minimis
  • Definition of ‘Non-qualifying Revenue’ is expanded to include transactions with a Free Zone Person where such Free Zone Person is not the Beneficial Recipient of the relevant services or Goods”.
  • With regard to the condition of maintaining adequate substance for the QFZP, the following is provided:
  • a QFZP shall undertake its core income-generating activities (‘CIGA’) in a Free Zone or a Designated Zone (‘DZ’), depending on where such activities are required to be conducted.
  • CIGA can be outsourced to another Person in a Free Zone or a DZ depending on where such activities are required to be conducted, provided the QFZP has adequate supervision of the outsourced
  • Also, without prejudice to the above, CIGA in respect of QIP can be outsourced to any other Person in the UAE or to a non-related party outside UAE.
  • CIGA is explained stating that it can vary according to the specific activity but mainly consist of those significant functions that drive the business value for each activity carried out by a QFZP and are not exclusively or mostly support
  • Trading of Qualifying Commodities’ is added to the list of qualifying activities. Qualifying Commodities is defined as ‘Metals, minerals, energy and agriculture commodities that are traded on a Recognised Commodities Exchange Market in raw form’.
  • With regard to the ‘Holding of shares and other securities’ qualifying activity, it is provided that it should be for investment purposes and the period of holding should be for an uninterrupted period of at least 12
  • ‘Insurance activities’ in the excluded activities, shall not cover activities specified under qualifying activity of ‘Headquarter services to Related parties’, in addition to the activities covered
  • ‘Finance and leasing activities’ in the excluded activities, shall not cover activities specified under qualifying activity of ‘Ownership, management and operations of ships’, in addition to the activities covered
  • Meaning of term ‘ancillary’ explained as an activity shall be considered ancillary where it is necessary for the performance of the main activity or where it makes a minor contribution to it and is so closely related to the main activity that it should not be regarded as a separate activity.
  • Scope / meaning of all the ‘Qualifying activities’ and ‘Excluded activities’ provided.

Conclusion:

The above is a preliminary overview of the key points in the decisions released today. A detailed comprehensive analysis in this is required to done to assess the impact of the same and possible actions to be taken in this regard for optimizing the free zone tax benefit.

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