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The Ministry of Finance of the UAE has issued two new ministerial resolutions that specify the tax regime for legal entities operating in the UAE’s free economic zones. These resolutions are Resolution No. 55 of 2023 “On the determination of relevant income” and Resolution No. 139 of 2023 “On relevant activities and excluded types of activities.”
Who can benefit from the tax regime for Free Zones?
The corporate tax regime for free economic zones is available to companies registered within the free economic zone. Such a corporate tax regime is applicable only within the designated boundaries of the free economic zones. The profit tax regime for Free Zone enterprises is applicable only to income derived from activities carried out within or from the free economic zone.
What income is considered “qualifying” for the application of the tax regime in Free Zones (at a 0% tax rate)?
The resolution provides a definition of the term “qualifying income,” to which the special tax regime for companies in Free Zones (tax rate of 0%) will apply.
qualifying income includes:
• Income derived from transactions with other entities within the free economic zone.
• Income derived from domestic and international activities related to any of the “qualifying activities.”
What are “qualifying activities”?
“Qualifying activities” include:
• Production of goods or materials.
• Processing of goods or materials.
• Ownership of shares and other securities.
• Ownership, management, and operation of vessels.
• Reinsurance services.
• Fund management services subject to regulation by a competent authority in the UAE.
• Capital and investment management services subject to regulation by a competent authority in the UAE.
• Headquarter services for related parties.
• Financing services for related parties.
• Financing and leasing of aircraft, including engines and spare parts.
• Logistics services.
• Distribution from a designated zone that meets the required conditions.
• Any ancillary activities related to the aforementioned activities.
Excluded Activities
Income derived from engaging in “excluded activities” will not be considered as “qualifying income,” regardless of whether it is obtained by a person registered in a Free Zone or even if it is obtained as a result of “qualifying activities.”
Excluded activities include:
• Income from transactions with individuals.
• Income derived from certain regulated financial services.
• Income derived from intangible assets.
• Income derived from real estate, excluding transactions with entities in the Free Zone concerning commercial real estate located within the free economic zone.
A person registered in a Free Zone but receiving income from “excluded activities” or income that is not “qualifying” will not be able to benefit from the special tax regime for Free Zones, even if such person meets the minimum income threshold requirements (de minimis).
What should be the “minimum income” of a company to qualify for the Free Zone tax regime?
To meet the requirements, the income earned by a resident entity in a Free Zone must not exceed the lesser of two amounts: either 5% of the total income or AED 5,000,000.
Income related to the internal or overseas permanent establishment of a Free Zone company and income derived from real estate located within the free economic zone, which is not subject to the Free Zone tax regime, are not considered when determining the minimum income. Instead, the associated taxable income will be subject to the regular corporate tax regime of the UAE, at a rate of 9%.
If the minimum income requirements are not met or if a Free Zone resident entity fails to meet other conditions for the application of the special tax regime, such entity will not be able to benefit from the special tax regime in the Free Zone for a period of five (5) years. During this period, the entity registered in the Free Zone will be considered a regular taxpayer, subject to a tax rate of 9% on all income exceeding AED 375,000.
