UAE: New Corporate Taxation Rules for Free Zones and Financial Reporting Requirements

16th of June, 2023

The UAE government and the Ministry of Finance have announced long-awaited decisions regarding the taxation rules for corporations operating in free zones.

On May 30, 2023, Cabinet Resolution No. 55 of 2023 was issued, which defines the qualifying income for entities registered in free zones in accordance with Federal Law No. 47 of 2022 on corporate taxation.

Additionally, on June 1, 2023, the Ministry of Finance issued Ministerial Decision No. 139 of 2023, which establishes the qualifying and excluded activities under the Corporate Tax Law.

Both decisions came into effect upon their publication.

Key Highlights: Under the UAE Corporate Tax Law, entities registered in free zones that meet the qualifying requirements are subject to the following tax rates:

  • 0% on qualifying income.
  • 9% on taxable income that is not qualifying income.

One of the most anticipated aspects was the definition of "qualifying income," which has now been clarified and includes:

  • Income derived from transactions with other entities registered in free zones, excluding income from "excluded activities."
  • Income derived from transactions with entities not registered in free zones, but only in relation to "qualifying activities" that are not excluded activities.
  • Any other income, provided that the entity registered in the free zone meets the de minimis requirements.

Excluded activities include:

  • Dealings with individuals (with certain exceptions related to qualifying activities in shipping, aviation, funds, wealth management, and investments).
  • Regulated banking, financial, leasing, and insurance operations.
  • Ownership or use of intellectual property.
  • Ownership or use of immovable property, except for transactions with entities registered in the free zone regarding commercial property located within the free zone.

Qualifying activities include:

  • Manufacturing and processing of goods or materials.
  • Ownership of shares and other securities.
  • Ownership and operation of vessels.
  • Regulated reinsurance and fund/wealth management.
  • Headquarter services and financing for related parties.
  • Financing and leasing of aircraft, logistics.
  • Distribution of goods from a specific zone or into that zone, subject to certain conditions.

The terms "excluded activities" and "qualifying activities" should have the same meaning as in the relevant laws governing these activities, unless otherwise specified.

The de minimis requirements are considered met if the non-qualifying income does not exceed 5% of the total income or AED 5,000,000, whichever is lower.

Non-qualifying income includes income derived from excluded activities or activities that are not qualifying, provided that the counterparty is a non-free zone entity.

Certain incomes are not included in the calculation of non-qualifying income and total income. This includes incomes related to specific real estate within the free zone (non-commercial real estate and commercial real estate in transactions with non-free zone entities). It also includes incomes related to a domestic permanent establishment or foreign permanent establishment.

It is important to note that, according to the de minimis requirements, if an entity registered in a free zone does not meet any of the qualifying conditions established by the UAE Corporate Tax Law and the aforementioned decisions, it will be treated as a taxpayer subject to a 9% tax rate for a minimum of five years.

The introduction of the concept of "Domestic Permanent Establishment" (PE) is another novelty. If an entity registered in a free zone has a place of business or any other form of presence outside the free zone, the income attributable to the Domestic PE should be calculated as if it were a separate and independent entity and subject to a 9% tax rate. However, this does not deny the individual registered in a Free Zone the opportunity to avail themselves of the 0% tax rate on their qualifying income. Despite the introduction of the Domestic Permanent Establishment (PE) concept, individuals operating in Free Zones can still benefit from the favorable tax rate for income generated within the Free Zone.

The Domestic PE provision primarily applies to situations where an individual registered in a Free Zone has a business presence or establishment outside the Free Zone. In such cases, the income attributable to the Domestic PE will be treated separately and subject to the standard 9% tax rate.

Nevertheless, any income earned within the Free Zone that meets the qualifying criteria outlined in the Corporate Tax Law and associated decisions can still be subject to the 0% tax rate. This means that individuals engaged in qualifying activities, such as manufacturing, securities ownership, vessel operation, and other eligible endeavors, can continue to enjoy the tax benefits offered by the Free Zone regime.

It is important to note that the specific details and conditions for applying the 0% tax rate on qualifying income may vary depending on the nature of the business, the type of activity, and other relevant factors. Therefore, individuals registered in Free Zones should consult with tax advisors or relevant authorities to ensure compliance with the tax regulations and to maximize the benefits available to them.

Intelligent Solution Group offers accounting support for an UAE company. Controls and reporting for the company in UAE will be strengthened according to the new provisions of the Law, therefore we recommend to take into consideration all the risks and prevent possible losses for the business in future. We have a team of experienced accountants with knowledge of local accounting standards, legislation and tax regulations.