UAE Corporate Tax Update

Introduction

Previously, lecocqassociate analysed the new United Arab Emirates (“UAE”)corporate tax regulations further to Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “UAE Tax Law”). It left off with a number of questions related to how “Qualifying Income” would be defined, and the impact this would have on free zone entities.

In the last couple of months, the UAE Ministry of Finance released Cabinet Decision No. 55 of 2023 on ‘Determining Qualifying Income for the Qualifying Free Zone Person (“QFZP”) for the Purposes of the UAE Tax Law and Ministerial Decision No. 139 of 2023 on ‘Qualifying Activities and Excluded Activities for the Purposes of the UAE Tax Law’ (together, the “Decisions”).

The Decisions provide a guideline on who is to be taxed as a QFZP, and to what extent the UAE Tax Law shall apply. All capitalised terms herein, unless otherwise stated, shall be as defined in the UAE Tax Law and Decisions.

Background

The UAE issued the UAE Tax Law on 9 December2022 that came into force on 1 June 2023, imposes a 9% Corporate Tax (“CT”) rate on Taxable Income exceedingAED375,000 and income below this threshold will be subject to a 0% tax rate of corporate tax.

Taxable Persons

CT applies to the following Taxable Persons:

1. UAE companies or other juridical persons that are incorporated in the UAE.
2. UAE companies or other juridical persons that are effectively managed or controlled from the UAE.
3. Natural persons (individuals) who conduct a Business or Business Activity in the UAE.
4. Foreign legal entities that have a Permanent Establishment in the UAE.

Certain entities such as government or government-controlled entities are automatically exempted from CT, whereas others, such as Qualifying Investment Funds, are only exempt if an application is made to the Federal Tax Authority and they have approved such exemption.

Financial year

For businesses with a financial year from 1 June – 31 May, the first tax return filing date is 28 Feb 2025.

For businesses with a financial year from 1 January – 31 December, the first tax return filing date is 30 September 2025.

What falls under Qualifying Income?

1. Income derived from transactions with other Free Zone Persons, only in regards to activities that are not listed as Excluded Activities.‍
2. Income derived from transactions with non-Free Zone Persons, only with respect to Qualifying Activities that are not Excluded Activities.
3. Other forms of income provided that the QFZP meets the specified De Minimis Requirements.

What are Qualifying Activities

The UAE Tax Law stipulates the following as Qualifying Activities:

1. manufacturing of goods or materials;
2. processing of goods/materials;
3. holding of shares/other securities;
4. ownership, management, operation of ships;
5. reinsurance services subject to regulatory oversight of the competent authority in the UAE;
6. fund management services which are subject to the regulatory oversight of the competent authority in the UAE;
7. wealth and investment management services which are subject to the regulatory oversight of the competent authority in the UAE;
8. headquarter services related to related parties;
9. treasury and financing services to related parties;
10. financing and leasing of aircraft, including engines and rotable components;
11. distribution of goods/materials in or from a ‘’designated zone’’ to a customer that resells such goods/materials, or parts thereof or processes or alters such as goods/materials or parts thereof for the purposes of sale or resale;
12. logistics services; and
13. any activities that are ancillary to the activities listed above.

What are Excluded Activities?

The UAE Tax Law stipulates the following as Excluded Activities:

1. any transaction with natural persons, except transactions in relation to Qualifying Activities specified under points (4), (6), (7), (10) of the Qualifying Activities mentioned above;
2. banking activities that are subject to the regulatory oversight of the competent authority in the UAE;
3. insurance activities that are subject to the regulatory oversight of the competent authority in the UAE, other than the activity specified under paragraph (5) of Qualifying Activities as mentioned above;
4. finance and leasing activities that are subject to the regulatory oversight of the competent authority in the UAE, other than those specified under points (9) and (10) of the Qualifying Activities mentioned above;
5. ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons;
6. ownership or exploitation of intellectual property assets; and
7. any activities that are ancillary to the activities listed in the above paragraphs listed in paragraphs1 to 6 above – meaning that it serves no independent function but is necessary for the performance of the main Excluded Activity.

The De Minimis Requirements

Non-qualifying Revenue derived by the QFZP in a Tax Period does not exceed 5% of the total Revenue of the QFZP in that tax period; or AED 5 million, whichever is lower.

Additionally, a QFZP must also meet two conditions:

1. its non-qualifying Revenue does not exceed the de minimis requirements; and
2. it prepares audited financial statements in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the UAE Tax Law.

It is essential that Free Zone Persons review the conditions of being treated as a QFZP for the purposes of the UAE Tax Law.

lecocqassociate maintains the latest information and updates in relation to corporate taxation in the UAE. Please feel free to get in touch with us if you have any queries.