UAE issues 2 new decisions on corporate tax regime in free zones

The UAE’s Ministry of Finance on Thursday released two new decisions related to qualifying income and qualifying activities for corporate tax in free zones.

Cabinet Decision No. 55 of 2023 determines ‘qualifying income’ while Ministerial Decision No 139 of 2023 highlights qualifying activities and excluded activities.

Haji Al Khouri, undersecretary of the Ministry of Finance, said the corporate tax, which came into effect on June 1, will diversify the federal government’s revenues and help construct and develop strategic projects for a sustainable future.

The ministry said the free zone tax regime is applicable only within the prescribed geographical areas of the free zone and applies only to income derived from activities performed in or from within a free zone.

It further explained that the qualifying free zone firms will benefit from the zero per cent corporate tax rate on income earned from transactions with a person located in the mainland UAE or a foreign jurisdiction as well.

This qualifying income also includes the income derived from transactions with other free zone persons as well as domestic and foreign-sourced income derived from conducting any of the qualifying activities listed in the ministerial decision.

However, all free zone companies should register as they will be subject to penalties after a year for failure to do so.

Exemptions

The ministry listed nearly a dozen qualifying activities which include the manufacturing of goods or material; the processing of goods or material; reinsurance services; holding of shares and other securities; ownership, management and operation of ships; fund management services; wealth and investment management services; headquarter services to related parties; treasury and financing services to related parties; financing and leasing of aircraft including engines and retables; distribution of goods or materials in or from a designated zone; logistics services; and any ancillary activities to the activities listed above.

However, the companies can contact free zone authorities for more details and clarifications, said Shabana Begum, executive director of the tax policies sector at the Ministry of Finance.

The ministry added that income from certain specific excluded activities will not be treated as qualifying income regardless of whether the income is derived from a free zone person or as part of undertaking a qualifying activity.

The ministry has set a de minimis requirement of Dh5 million or five per cent of total revenues for qualifying firms.

Arun Leslie John, chief market analyst at Century Financial, said giving exemptions to free zones will help the UAE retain competitiveness, as its GCC neighbours are offering incentives to lure international firms to their countries.

“This will particularly help Dubai retain its status as an international trade and finance hub. By providing a conducive business environment and facilitating access to the market, companies can freely transfer funds in and out of the country without any restrictions or limitations,” he said.

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