The UAE Ministry of Finance (MoF) has released two new decisions that together specify the main features of the corporate tax regime as it applies to juridical persons operating out of free zones in the UAE.

These include Cabinet Decision No. 55 of 2023 on Determining Qualifying Income, as well as Ministerial Decision No 139 of 2023 on Qualifying Activities and Excluded Activities.

The Free Zone Corporate Tax regime is available to 'Free Zone Persons', which refers to a juridical person that is incorporated or otherwise formed or registered in a Free Zone. The Free Zone Corporate Tax regime is applicable only within the prescribed areas of the Free Zones.

Businesses can contact their Free Zone Authority to confirm whether that Free Zone is eligible for the 0% rate. 

The Free Zone CT regime is intended to apply only to income derived from activities that are performed exclusively in or from within a Free Zone.

According to the MoF, this is reflected in the definition of 'Qualifying Income' which includes income derived from transactions with other Free Zone Persons as well as domestic and foreign sourced income derived from conducting any of the 'Qualifying Activities' listed in the related ministerial decision.

In summary, the 'Qualifying Activities' include manufacturing of goods or materials; processing of goods or materials; holding of shares and other securities; ownership, management, and operation of ships; reinsurance services; fund management services that are subject to the regulatory oversight of the competent authority in the UAE; and wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE.

They also include headquarter services to related parties; treasury and financing services to related parties; financing and leasing of aircraft, including engines and rotable components; logistics services; distribution in or from a designated zone that meets the relevant conditions; and any activities that are ancillary to the above-mentioned activities.

Income from certain specific 'Excluded Activities' will not be treated as 'Qualifying Income' regardless of whether the income is derived from a Free Zone Person or as part of undertaking a 'Qualifying Activity'.

Subject to certain exceptions, this includes income derived from transactions with natural persons, income derived from certain regulated financial services activities, income derived from intangible assets, and income derived from immovable property, other than transactions with Free Zone Persons in relation to commercial immovable property located in a Free Zone.

Earning income from 'Excluded Activities' or earning any other income that is not 'Qualifying Income' will disqualify the Free Zone Person from the regime, subject to de minimis requirements.

To satisfy the de minimis requirements, the non-qualifying revenue earned by a Free Zone Person must not exceed the lower of either 5% of their total revenue or AED5,000,000.

(Writing by Seban Scaria; editing by Daniel Luiz)