The Ministry of Finance has recently released two important decisions. These decisions aim to provide clarity on the corporate tax applicable to juridical persons operating within free zones in UAE. The first decision is Cabinet Decision No. 55 of 2023, which specifies the concept of qualifying income. The second decision is Ministerial Decision No. 139 of 2023, which outlines the qualifying and excluded activities under the tax.
According to the Ministry, the free zone tax regime has a specific scope of application. It is specifically applicable within the designated geographical areas of the free zones in the UAE. It applies solely to income derived from activities conducted within or from these free zones. Businesses have the option to contact the free zone authorities to determine whether a particular free zone is eligible for the zero percent tax rate. They can reach out to these authorities for confirmation and to obtain accurate information regarding the tax rate applicability.
The free zone corporate tax regime provides a significant advantage to qualifying free zone entities by offering a zero percent corporate tax rate. This favorable tax rate is applicable to the income they earn from transactions with individuals or entities located in mainland UAE or foreign jurisdictions. However, it is crucial to highlight that this tax regime has a specific focus. It aims to apply solely to the income that companies generate from activities conducted within the free zone.
Qualifying Income
The definition of “qualifying income” under the regime is broad and covers various sources. This includes income derived from transactions with other free zone entities, as well as domestic and foreign-sourced income obtained from engaging in any of the qualifying activities listed in the ministerial decision. The Ministry has identified nearly a dozen qualifying activities. These activities include manufacturing of goods or materials, processing of goods or materials, reinsurance services, holding of shares and securities, ship ownership and operation, fund management services, wealth and investment management services, headquarters services to related parties, treasury and financing services to related parties, aircraft financing and leasing, distribution of goods or materials from designated zones, logistics services, and ancillary activities associated with the aforementioned activities.
On the other hand, the Ministry determines that certain specific excluded activities will not qualify as income. This applies regardless of whether a free zone entity derives the income or it is part of undertaking a qualifying activity.
The Ministry of Finance has released these decisions. The aim is to provide clarity and guidance to juridical persons operating within the free zones in the UAE. These decisions define the qualifying income and activities, ensuring a transparent and well-defined corporate tax regime. This framework facilitates smooth business operations within the free zones while upholding compliance with tax regulations.
Businesses operating within the free zones should take proactive measures by reviewing these decisions and seeking professional advice. This will enable them to gain a comprehensive understanding of their tax obligations and effectively utilize the benefits provided by the free zone corporate tax regime.
The Ministry’s commitment to streamlining the tax framework for free zone companies is a significant step. It aims to foster a favorable business environment. These efforts contribute to the overall promotion of economic growth within the UAE.
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