The long-awaited changes in legislation in the United Arab Emirates came into force. On 1 June 2023, the UAE Ministry of Finance released Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities.
The applicable tax rates for Qualifying Free Zone Persons (QFZP) are as follows:
-Qualifying Income: QFZP are taxed at a rate of 0% on income that qualifies as Qualifying Income.
-Taxable Income which is non-Qualifying Income: QFZP are taxed at a rate of 9%.
The definition of Qualifying Income has been prescribed to encompass the following:
-Income derived from transactions with other Free Zone Persons, except for income arising from Excluded Activities. In considering goods transactions that are provided to another Free Zone Person, the Free Zone Person recipient must be the beneficial owner of those goods;
-Domestic and foreign-sourced income which is derived from conducting any of the Qualifying Activities;
-Any other income, provided that the QFZP satisfies the de minimis requirements.
Qualifying Activities, which are considered eligible for favorable tax treatment, include the following:
-Manufacturing of goods or materials;
-Processing of goods or materials;
-Holding of shares and other securities;
-Ownership, management and operation of ships;
-Reinsurance services that are subject to regulatory oversight of the competent authority in the UAE;
-Fund management services that are subject to regulatory oversight of the competent authority in the UAE;
-Wealth and investment management services that are subject to regulatory oversight of the competent authority in the UAE;
-Headquarter services to related parties;
-Treasury and financing services to related parties;
-Financing and leasing of aircraft, including engines and rotable components;
-Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale;
-Logistics services;
-Any activities that are ancillary to the activities listed above.
On the other hand, Excluded Activities include the following:
-Transactions involving natural persons, with certain exceptions for Qualifying Activities;
-Banking activities, insurance activities and finance and leasing activities that are subject to regulatory oversight in the UAE unless they are specifically permitted as a Qualifying Activity under Article 2(a);
-Ownership or exploitation of immovable property, other than commercial property that is located in a Free Zone where the transaction is with other Free Zone Persons;
-Ownership or exploitation of intellectual property assets;
-Any activities that are ancillary to the activities listed above.
In order to satisfy the de minimis requirements, the following conditions need to be met:
-Non-qualifying Revenue, which refers to revenue derived from Excluded Activities or activities that do not fall under Qualifying Activities, should not exceed either 5% of the total revenue or AED 5,000,000, whichever is lower.
It is important to note that Non-qualifying Revenue is generated from Excluded Activities or activities that do not qualify as Qualifying Activities when the counterparty involved is a non-Free Zone Person.
To ascertain this, the calculation does not incorporate income derived from a domestic permanent establishment (such as a branch located in the UAE mainland) or a foreign permanent establishment. If the De Minimis threshold is exceeded or the QFZP fails to meet the eligibility criteria stated in Article 18 of the UAE Corporate Tax Law, the Free Zone Person will no longer qualify as a QFZP for the current tax year and the following 4 tax years. This income will be subject to Corporate Tax at a rate of 9%. However, it is important to note that the existence of a Domestic PE will not disqualify the Free Zone Person from benefiting from a 0% Corporate Tax rate on Qualifying Income. Additionally, the income from the Domestic PE will not be factored into the de minimis test mentioned earlier.
A mainland branch of a Qualifying Free Zone Person will generally be considered a Domestic PE and will be subject to corporate tax at a rate of 9%.
It is worth mentioning that the introduction of a de minimis threshold will have implications for Free Zone entities, as it could potentially subject them to full taxation under the new rules. For further assistance, you can contact us by sending an email to office@petroviclegal.com.