Corporate Tax for Free Zones: New Rules for Qualifying Income

Qualifying Income is the prime factor determining the eligibility of a free zone person to enjoy 0% corporate tax in the UAE. Cabinet Decision No. 100 of 2023 provides you with an updated and expanded definition of a free zone person’s Qualifying Income as per the UAE Corporate Tax Law.

The new decision repeals the previously issued ‘Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person’. Corporate tax advisers in Dubai can help free zone persons accurately interpret the definitions and provisions in Cabinet Decision No. 100 of 2023.

This blog sheds light on the key highlights from Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person. Let us dive in:

What is a Free Zone Person’s Qualifying Income?

The New Decision describes the categories of income that come under the definition of Qualifying Income of a Qualifying Free Zone Person. However, such an income should not be attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment, or derived from the ownership or exploitation of immovable property.

The following types of income will be treated as the Qualifying Income of a Qualifying Free Zone:

• Income generated from transactions with a Free Zone Person. However, this income should not be derived from an excluded activity
• Income generated from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities
• Income earned from owning or exploiting Qualifying Intellectual Property
• Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements

Qualifying Intellectual Property

Qualifying Intellectual Property under the UAE corporate tax regime includes patents, Copyrighted Software and any right functionally equivalent to a Patent that is both legally protected and subject to a similar approval and registration process to a Patent.

However, it does not include any marketing-related intellectual property assets such as trademarks. Corporate tax consultants in Dubai can advise you on the type of assets that qualify as ‘Qualifying Intellectual Property’.

Income Attributable to a Domestic Permanent Establishment

Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person will be treated as taxable income as per the UAE corporate tax law.

The income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person for a Tax Period is the Taxable Income attributable to any such establishment for that period calculated as if the establishment was a separate and independent Person that is a Related Party of the Qualifying Free Zone Person.

De minimis Requirements

To meet the de minimis requirements, the non-qualifying Revenue generated by the Qualifying Free Zone Person in a Tax Period should not exceed a percentage of the total Revenue of the Qualifying Free Zone Person in that Tax Period as specified by the Minister of Finance, or an amount specified by the Minister of Finance, whichever is lower.

Substance Requirements for Free Zone Persons

A qualifying free zone shall carry out its core income-generating activities in a Free Zone or a Designated Zone, depending on where such activities are required to be conducted. To meet the substance requirements, the qualifying free zone should carry out an adequate level of activities, have adequate assets, and have an adequate number of qualified full-time employees in a Free Zone or a Designated Zone depending on where such activities are required to be conducted, and incur an adequate amount of operating expenditures, in relation to each activity.

Qualifying Free Zones are allowed to outsource the core income-generating activities to another person in a Free Zone or a Designated Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity. The activities related to Qualifying Intellectual Property can also be outsourced to any other Person in the UAE and to any other Person who is not a Related Party outside the UAE. However, the Qualifying Free Zone Person should have adequate supervision of the outsourced activity.

Hire the Best Corporate Tax Consultants in Dubai, UAE

Free Zone Persons with a strategy for UAE corporate tax should consider the changes mentioned in the updated legislation and reassess their tax position accordingly. If you are confused about how to assess your company’s tax position, consult with the top corporate tax advisers in Dubai such as Tax Gian, which is a brand of Jitendra Tax Consultants (JTC).

We are one of the leading providers of corporate tax advisory services in Dubai with more than two decades of experience. Tax Gian’s tax experts are highly qualified and well-versed in UAE Corporate Tax Law and VAT Law. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end tax solutions to its clients locally and globally. Call us today to avail yourself of our comprehensive corporate tax services in Dubai, UAE.