New corporate tax decision for freezone companies

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The UAE Ministry of Finance made significant corporate tax announcements on Friday in its effort to harmonize regulations with international standards, specifically targeting companies operating within free zones.

These fresh decisions are designed to bring more clarity to the corporate tax system in relation to both qualifying and excluded activities. Cabinet Decision No. 100 of 2023 focuses on identifying income that qualifies, while Ministerial Decision No. 265 of 2023 delves into the particulars of both qualifying and excluded activities.

Younis Haji Al Khoori, the undersecretary at the Ministry of Finance, emphasized the importance of these new measures, stating, “These decisions underscore the ongoing pivotal role of free zones in the UAE’s economic diversification strategy and its commitment to align with international tax standards.

By establishing a robust and competitive corporate tax structure and creating a dedicated regime for free zones, the UAE is reinforcing its position as a premier global destination for business and investment. These steps are instrumental in advancing its sustainable development goals.

The UAE introduced a federal corporate tax with a fixed rate of 9 percent, effective from the start of the financial year commencing on or after June 1. Under these regulations, companies based in free zones can enjoy a zero percent tax rate on income generated from specific qualifying activities and transactions.

These qualifying activities encompass various sectors such as fund and wealth management services, the manufacturing and processing of goods and materials, reinsurance services, shareholding and securities management, as well as ship ownership, management, and operation.

Additionally, they include services provided by headquarters to affiliated entities, treasury and financing services offered to related parties, aircraft financing and leasing (including engines and rotable components), logistics services, and distributions within or from designated zones that meet specified conditions, along with related ancillary activities.

Furthermore, companies can benefit from a tax exemption on income derived from transactions with mainland UAE businesses or those located in foreign jurisdictions. The recent cabinet decision expands the definition of qualifying income to encompass revenue generated from owning or utilizing qualifying intellectual property, following the methodology outlined by the Organization for Economic Co-operation and Development’s modified nexus approach.

In parallel, the ministerial decision introduces qualifying commodities trading as an eligible activity for corporate tax benefits. This includes the application of a zero percent corporate tax rate to income derived from the physical trading of metals, minerals, energy, and agricultural commodities listed on recognized stock exchanges. It also covers income generated from derivative trading used for hedging against associated risks.

The ministerial decision provides comprehensive guidelines on the specific boundaries of qualifying and excluded activities, ensuring clarity and adherence to these tax regulations.