.jpg "comprehensive-analysis-for-qualifying-income")
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:
- Income from Transactions with Free Zone Persons
This category includes income from transactions with other entities operating within Free Zones, excluding income from Excluded Activities.
- Income from Transactions with Non-Free Zone Persons
Limited to Qualifying Activities that are not on Excluded Activities, this category encompasses income from interactions with entities outside Free Zones.
- Income from Qualifying Intellectual Property
Qualifying Income extends to revenue generated from the ownership or exploitation of Qualifying Intellectual Property, subject to specific conditions.
- Other Qualifying Income
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
- Income attributable to a Domestic or Foreign Permanent Establishment of the Qualifying Free Zone Person is regarded as Taxable Income and is subject to taxation as outlined in the Corporate Tax Law.
- For each Tax Period, the income linked to a Domestic or Foreign Permanent Establishment of the Qualifying Free Zone Person is computed as the Taxable Income associated with that establishment. This computation assumes the establishment's independence, treating it as a distinct entity, while recognizing it as a Related Party of the Qualifying Free Zone Person.
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:
- Manufacturing of Goods or Materials
Encompasses the production, improvement, or assembly of products and materials from raw materials or components.
- Processing of Goods or Materials
Involves the preparation, treatment, transformation, or conversion of goods or materials for commercial or industrial use or sale.
- Trading of Qualifying Commodities
Qualifying Commodities includes metals, minerals, energy and agriculture commodities, that are traded on a Recognized Commodities Exchange Market in raw form.
- Holding of Shares and Other Securities for Investment
Includes the holding of shares or other types of equitable interests for an uninterrupted period of at least twelve months.
- Ownership, Management, and Operation of Ships
Pertains to the international transportation of passengers, goods, or livestock, towing activities, and related operations.
- Reinsurance Services
Covers reinsurance operations regulated under Federal Law No. 6 of 2007.
- Fund Management Services
Encompasses portfolio management, risk management, and other related services subject to regulatory oversight.
- Wealth and Investment Management Services
Involves providing investment management and advisory services, and wealth and investment advisory services subject to regulatory oversight.
- Headquarter Services to Related Parties
Administers, oversees, and manages business activities of Related Parties.
- Treasury and Financing Services to Related Parties
Provides cash and liquidity management, financing, debt management, and related advisory services to Related Parties.
- Financing and Leasing of Aircraft
Covers the financing, leasing, and securitization of Aircraft, engines, or rotable components.
- Distribution of Goods or Materials in or from a Designated Zone
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.
- Logistics Services
Includes storage and transportation of goods or materials without taking title to the good or material of that other person .
- Ancillary Activities
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:
- Transactions with Natural Persons
Except for few defined Qualifying Activities, transactions with natural persons are excluded.
- Banking Activities
All regulated financial activities are specified under Federal Decree-Law No. 14 of 2018 (Central Bank & Organization of Financial Institutions and Activities).
- Insurance Activities
Insurance operations regulated under the UAE Insurance Law are excluded.
- Finance and Leasing Activities
Provision of credit, financing, or leasing for any consideration, subject to regulatory oversight, is excluded except for specified Qualifying Activities.
- Ownership or Exploitation of Immovable Property
Excludes ownership or exploitation of immovable property, excluding Commercial Property located in a Free Zone.
- Activities that are ancillary to the Excluded Activities
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:
- Its non-qualifying Revenue should meet the de minimis requirements.
- It prepares audited financial statements as per the Minister's requirements.
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.
-
Read More: Corporate Tax Federal-Decree-Law-No.-On 47-of-2022
-
Read More: Impact of UAE corporate tax reform on businesses in free zones
-
Read More: Corporate Tax in the UAE: Frequently Asked Questions
.png "Approved Auditors In Dubai Design District- AMCA AUDITING")