The Ministry of Finance of the United Arab Emirates has announced the issuance of two new decisions that specify the key features of the corporate tax system for legal entities operating within free zones in the country. This includes Cabinet Decision No. (55) of 2023 regarding the determination of qualifying income and Ministerial Decision No. 139 of 2023 regarding qualifying activities and excluded activities.
Corporate tax system for free zones.
The tax system applies only to the free zones for income generated from activities carried out exclusively within or through the free zones. This includes the definition of “qualified income,” which includes income generated from transactions with individuals within the free zones, as well as domestic and foreign income generated from any “qualified activities” established in the appropriate department’s decision.
Companies subject to corporate tax system in the free zones.
The system of corporate tax applies only to income generated from activities exclusively carried out within the free zone or from within it. The term “qualified income” is defined by the concerned party, and includes income generated from transactions with individuals operating within the free zone, as well as local and foreign income resulting from any of the “qualified activities” specified in the relevant ministerial decision.
When is a person considered qualified to operate in a free zone?
As a person who is in the free zone and enjoys the authorization to operate there, certain criteria must be met:
- They must maintain the appropriate and real presence of the given country.
- They must achieve the “competent income”.
- They cannot choose the default corporate tax rate.
- They must adhere to the conversion requirements under corporate tax in accordance with legal requirements.
Qualified activities in free zones.
The “Qualified Activities” specified in the ministerial decision include:
manufacturing goods or materials, processing goods or materials, owning stocks and other securities, owning and operating ships, reinsurance services, financial asset management services subject to regulatory supervision by the relevant state authority, wealth and investment management services subject to regulatory supervision by the relevant state authority, in addition to the services of the main headquarters of related parties, treasury and financing services for related parties, aircraft financing and leasing, including engines and rotating components, logistics services, distribution in or from a specific area that meets the relevant conditions, and any other activities supporting the mentioned activities.
The excluded activities.
The income derived from certain “excluded activities” will not be considered “qualifying income”, regardless of whether this income comes from a person working in a free zone or is part of the practice of a “qualifying activity”. With a few exceptions, this includes income generated from transactions with individuals, income generated from certain regulated financial services activities, income generated from non-material assets, and income generated from intangible property, except for transactions with individuals based in the free zone regarding non-transferable money located within the free zone.
If an employee in a free zone earns profits from “excluded activities” or any other income that is not considered “qualifying income”, this may result in their exclusion from the corporate tax system in free zones according to minimum requirements. In order to not exceed the minimum requirements, the non-qualifying revenue earned by the employee in a free zone must not exceed 5% of their total revenue or AED 5,000,000, whichever is less.
According to the issued decisions, if a permanent local or foreign entity does not meet the minimum criteria in addition to the revenue related to non-transferable funds present in the free zone and does not benefit from the corporate tax system in the free zones, it will not be included in it. Therefore, the relevant income will be subject to a 9% corporate tax in the country. If the minimum requirements are not met or the individual does not continue to meet any other eligible conditions in the free zone, they will not be entitled to benefit from the corporate tax system in the free zones for a period of not less than five years. During this period, the individual in the free zone will be considered a normal person subject to a 9% corporate tax on income exceeding AED 375,000.
Discover the details of the decision: Ministerial Council Decision No. 55 of 2023 which defines qualified income for individuals residing in the Free Zone.
AHG is a leading regional auditing and legal accounting firm present in the Gulf Cooperation Council and North Africa. Since 2014, AHG has helped businesses operating in the United Arab Emirates achieve maximum success. We are fully prepared to assist your business in the UAE through a team of trained tax experts to prepare your business for corporate tax in the UAE.
AHG-Dubai serves a wide range of multinational clients and companies. This comes in light of the company’s strategy to focus on two core pillars: geographical expansion in border markets and leading a positive community culture. By combining our strengths and experiences in the region, we provide our clients with the best services in their category designed to maximize their investment goals in a fast-changing environment