11 Jul 2023
The recently published Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses provides guidelines for Qualifying Free Zone Persons. This decision relates to Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for Qualifying Free Zone Person.
The following article aims to shed light on the qualifying and excluded activities defined by this decision, along with the de minimis requirements and additional conditions Qualifying Free Zone Persons must meet.
Qualifying Activities:
1. The following activities conducted by a Qualifying Free Zone Person are considered Qualifying Activities:
- 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.
- Fund management services that are subject to regulatory oversight.
- Wealth and investment management services that are subject to regulatory oversight.
- Headquarters 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 from a Designated Zone to customers for resale or further processing.
- Logistics services.
- Ancillary activities that support the main Qualifying Activities.
2. Unless stated otherwise in this Decision or other relevant regulations, the activities mentioned above should be interpreted as per the respective laws governing them.
3. The distribution of goods or materials must occur within a Designated Zone, and the goods or materials entering the State must be imported through the Designated Zone.
4. Ancillary activities refer to activities that do not have an independent function but are necessary to perform the primary Qualifying Activity.
Excluded Activities:
1. The following activities are considered Excluded Activities for Qualifying Free Zone Persons:
- Transactions with natural persons, except for certain Qualifying Activities.
- Banking activities that are subject to regulatory oversight.
- Insurance activities that are subject to regulatory oversight, excluding reinsurance services.
- Finance and leasing activities that are subject to regulatory oversight, excluding certain Qualifying activities.
- Ownership or exploitation of immovable property, except Commercial Property within Free Zone and where the transaction is conducted with a free zone person as well.
- Ownership or exploitation of intellectual property assets.
- Ancillary activities supporting the main Excluded Activities.
2. Ancillary activities do not have an independent function but are necessary to perform the primary Excluded Activity.
3. Unless specified otherwise, the activities mentioned above should be understood according to the relevant laws governing them.
De Minimis Requirements:
- To satisfy the de minimis requirements outlined in Article (4) of Cabinet Decision No. 55 of 2023, i.e. (De minimis Requirements), the non-qualifying revenue derived by a Qualifying Free Zone Person in a Tax Period must not exceed 5% of the total revenue in that tax period or AED 5,000,000, whichever is lower.
Other Conditions:
- In addition to the conditions stated in Clause (1) of Article (18) of the Corporate Tax Law, Qualifying Free Zone Persons must meet the following two conditions:
- Non-qualifying revenue must not exceed the de minimis requirements.
- Prepare audited financial statements per the Minister's decision on financial statement requirements for Corporate Tax Law compliance.
2. Failure to meet any of the conditions specified in Clause (1) of Article (18) of the Corporate Tax Law, this Decision, or other prescribed conditions will result in the cessation of Qualifying Free Zone Person status from the beginning of the relevant Tax Period and for the subsequent four Tax Periods.
Understanding the qualifying and excluded activities, de minimis requirements, and additional conditions for Qualifying Free Zone Persons is crucial for compliance with Cabinet Decision No. 55 of 2023. By adhering to these guidelines, Free Zone entities can ensure their eligibility for benefits and exemption.
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