Excluded And Qualifying Activities

Corporate Tax In Freezone Person 

A Cabinet resolution made at the Minister's request designates a free zone as a recognized and defined geographic area inside the state. There are several Free Zones in the United Arab Emirates, namely the Emirates of Dubai and Abu Dhabi. The majority of free zones have an impact on businesses, and many multinational corporations as well as small and medium-sized businesses have registered subsidiaries that are 100% foreign-owned and independent of domestic shareholders. Businesses operating in UAE Free Zones must be aware of the corporate tax ramifications because their tax structures may differ from those of mainland companies. In order to guarantee regulatory compliance and maximize their tax planning tactics, businesses must remain up to date on corporate tax in the United Arab Emirates.

What Is Qualifying Income

The income that qualifies for the 0% corporate tax rate is known as qualifying income. 

Qualifying Free Zone Persons are not entitled to a 0% rate on their first AED 375,000 of Taxable Income that is not deemed qualifying income, in contrast to regular Taxable Persons. Consequently, the general rate of 9% tax will be applied to any Taxable Income that does not qualify as qualifying income.

Qualifiable Income consists of: 

• Revenue from dealings with other individuals in the free zone, excluding revenue from excluded activities;
• Revenue from dealings with any international or domestic non-free zone person, provided that the activities are qualifying and not excluded; and
• Any additional revenue that satisfies the de minimis requirement

What Are The Qualifying Activities

Income received only in connection with Qualifying Activities from transactions with Non-Free Zone Persons is considered Qualifying Income. 56 According to Ministerial Decision No. 139 of 2023, these activities consist of the following:57

• Producing products or materials;
• The preparation of materials or merchandise;
• Keeping securities, such as shares;
• Ship ownership, control, and operation;
• Reinsurance services governed by regulations overseen by the UAE's appropriate regulatory body;
• Fund management services governed by regulatory scrutiny from the UAE's appropriate regulatory body;
• Wealth and investment management services governed by regulatory scrutiny from the UAE's appropriate regulatory body;
• Related Parties' access to headquarters services;
• Services related to financing and treasury for related parties;
• Leasing and financing of aircraft, including rotable parts and engines;
• The transfer of products or materials into or out of a designated zone to a client who plans to resell the items or portions of them, or who plans to process or modify the items or parts of them in order to resell them;
• Services related to logistics; and
• Any additional activities to the ones listed above that don't have a stand-alone purpose. 

What Are The Excluded Activities

Activities that yield income that does not qualify as qualifying income are referred to as excluded activities. The following are among the prohibited activities, per the ministerial decision:

• Any deal involving a natural person, barring those involving qualifying activity
• Subject to specific exceptions, any banking, insurance, financing, or leasing business in the UAE is subject to any applicable oversight by the relevant regulator.
• Any type of ownership or use of any type of immovable property, other than commercial property, located in a free zone where commercial property transactions are carried out with other individuals within the free zone
• Any possession of or use of different types of intellectual property
• Any such activity ancillary to the above activities.           

Conclusion 

Choose Reyson Badger for corporate tax regulations. Our team provides you with pertinent updates on Corporate Tax in Free Zones and the Qualifying Income of the Free Zone Person. Assess how the new regime will affect your company in the UAE and establish the most effective compliance framework to stay out of trouble. Contact us today to find out more about our services.