04 Jan 2024
The United Arab Emirates (UAE) has lately implemented crucial tax reforms through Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023, significantly impacting the taxation landscape for corporations and businesses. These decisions, introduced under Federal Decree-Law No. 47 of 2022, aim to clarify and streamline processes and foster compliance among Qualifying Free Zone Persons.
Let's delve into the intricate details of these decisions to understand their implications comprehensively.
Cabinet Decision No. 100 of 2023: Determining Qualifying Income
1. Categorizing Qualifying Income
Cabinet Decision No. 100 of 2023 delineates the scope of Qualifying Income for Qualifying Free Zone Persons under Article 18 of the Corporate Tax Law. The decision specifies various categories of income that qualify, provided they meet specific criteria:
This category includes income from transactions with other entities operating within Free Zones, excluding income from Excluded Activities.
Limited to Qualifying Activities that are not on Excluded Activities, this category encompasses income from interactions with entities outside Free Zones.
Qualifying Income extends to revenue generated from the ownership or exploitation of Qualifying Intellectual Property, subject to specific conditions.
Any other income qualifies if the Qualifying Free Zone Person satisfies the de minimis requirements outlined in Article 4 of the decision.
2. De Minimis Requirements
The decision stipulates that the De minimis requirement should be fulfilled for the non-qualifying income of a Qualifying free zone person.
3. Income Attributable to Establishments
4. Taxation of Income attributable to immovable property
Cabinet Decision No. 100 outlines the taxation framework for income derived from immovable property in a Free Zone. Specific provisions differentiate between transactions with a Free Zone Person and those with a Non-Free Zone Person.
5. Taxation of Income Derived from Qualifying Intellectual Property
Income derived from the ownership or exploitation of Qualifying Intellectual Property shall be calculated in accordance with a decision issued by the Minister. Additionally, income from the ownership or exploitation of intellectual property that does not qualify as Qualifying Intellectual Property and any income exceeding the Qualifying Income will be deemed Taxable Income and subject to taxation as per the Corporate Tax Law.
6. Substance Requirements and Outsourcing
Ensuring adequate substance, Qualifying Free Zone Persons must conduct core income-generating activities in a Free Zone or Designated Zone. Outsourcing of core activities is permissible within specified zones, provided adequate supervision is maintained.
Ministerial Decision No. 265 of 2023: Qualifying and Excluded Activities
1. Qualifying Activities
Ministerial Decision No. 265 comprehensively defines Qualifying Activities for Qualifying Free Zone Persons.
For an activity to qualify as a Qualifying Activity, it must be conducted by a Qualifying Free Zone Person. These activities include:
Encompasses the production, improvement, or assembly of products and materials from raw materials or components.
Involves the preparation, treatment, transformation, or conversion of goods or materials for commercial or industrial use or sale.
Qualifying Commodities includes metals, minerals, energy and agriculture commodities, that are traded on a Recognized Commodities Exchange Market in raw form.
Includes the holding of shares or other types of equitable interests for an uninterrupted period of at least twelve months.
Pertains to the international transportation of passengers, goods, or livestock, towing activities, and related operations.
Covers reinsurance operations regulated under Federal Law No. 6 of 2007.
Encompasses portfolio management, risk management, and other related services subject to regulatory oversight.
Involves providing investment management and advisory services, and wealth and investment advisory services subject to regulatory oversight.
Administers, oversees, and manages business activities of Related Parties.
Provides cash and liquidity management, financing, debt management, and related advisory services to Related Parties.
Covers the financing, leasing, and securitization of Aircraft, engines, or rotable components.
Involves the buying and selling tangible or movable goods or materials in or from a Designated Zone. Further the goods entering the state must be imported through the Designated Zone.
Includes storage and transportation of goods or materials without taking title to the good or material of that other person .
Encompasses any activities 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.
2. Excluded Activities
Ministerial Decision No. 265 specifies activities that are excluded for Qualifying Free Zone Persons:
Except for few defined Qualifying Activities, transactions with natural persons are excluded.
All regulated financial activities are specified under Federal Decree-Law No. 14 of 2018 (Central Bank & Organization of Financial Institutions and Activities).
Insurance operations regulated under the UAE Insurance Law are excluded.
Provision of credit, financing, or leasing for any consideration, subject to regulatory oversight, is excluded except for specified Qualifying Activities.
Excludes ownership or exploitation of immovable property, excluding Commercial Property located in a Free Zone.
Any activities that are ancillary to the Excluded Activities specified in the above excluded activities.
3. De Minimis Requirements
De minimis requirements are considered satisfied when non-qualifying Revenue does not exceed a specified percentage (5%) of total Revenue or a specified amount (AED 5 Million), whichever is lower.
4. Income Derived from Qualifying Intellectual Property
The decision outlines the method in calculating Qualifying Income from Qualifying Intellectual Property, involving Qualifying Expenditures, Overall Expenditures, Overall Income, and Uplift Expenditures.
5. Other Conditions
In addition to the conditions set out in the Corporate Tax Law, a Qualifying Free Zone Person must meet the following two conditions:
6. Compliance Requirements
Failure to meet the outlined conditions results in the cessation of Qualifying Free Zone Person status from the beginning of the relevant Tax Period and the subsequent Four Tax Periods.
Final Insights into the Tax Scenario
The combined impact of Cabinet Decision No. 100 and Ministerial Decision No. 265 introduces a more structured and transparent tax landscape for Qualifying Free Zone Persons in the UAE. Understanding the nuances of Qualifying Income, Qualifying Activities, and Excluded Activities is crucial for businesses operating within the Free Zone.
For further clarification or detailed insights, consulting with relevant authorities or professional advisors is recommended. As the UAE continues to evolve its tax framework, staying informed and proactive will be key for businesses navigating this dynamic landscape.