The UAE Ministry of Finance has made significant strides in defining the Corporate Tax regime for juridical persons operating within free zones in the country. Two crucial decisions, namely Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities, have been released to establish the main features of the tax framework.
- "Free Zone Persons," which are juridical entities incorporated or registered in a Free Zone, are eligible for specific tax benefits under the Free Zone Corporate Tax regime.
- The tax benefits apply only within the designated areas of the Free Zones, and businesses should contact their Free Zone Authority to determine eligibility for the 0% tax rate.
- The Free Zone Corporate Tax regime exclusively applies to income generated from activities conducted within a Free Zone.
- "Qualifying Income" includes income from transactions with other Free Zone Persons and domestic and foreign-sourced income derived from conducting "Qualifying Activities" listed in the Ministerial Decision.
- Various sectors fall under "Qualifying Activities," such as manufacturing, processing, holding of shares and securities, ship operations, reinsurance services, regulated fund management, and more.
- Income derived from "Excluded Activities," including transactions with natural persons, certain regulated financial services, income from intangible assets, and income from immovable property (except commercial immovable property transactions within a Free Zone), is not considered "Qualifying Income."
- Free Zone Persons earning income from excluded activities or non-qualifying sources will lose the benefits of the Free Zone Corporate Tax regime, subject to meeting de minimis requirements.
- De minimis requirements specify that non-qualifying revenue must not exceed the lower of 5% of the total revenue or AED 5,000,000.
- Revenue from domestic or foreign permanent establishments and revenue from immovable property within a Free Zone not covered by the Free Zone Corporate Tax regime are subject to the regular UAE Corporate Tax at a rate of 9%.
- Failure to meet de minimis requirements or other qualifying conditions results in the loss of Free Zone Corporate Tax benefits for a minimum of five (5) years.
- During this period, the Free Zone Person is treated as an ordinary taxable entity and is subject to Corporate Tax at a rate of 9% on taxable income exceeding AED 375,000.
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