The UAE Ministry of Finance (MoF) has released two new decisions that together specify the main features of the corporate tax regime as it applies to juridical persons operating out of free zones in the UAE.
The Free Zone Corporate Tax regime is available to ‘Free Zone Persons’, which refers to a juridical person that is incorporated or otherwise formed or registered in a Free Zone.
The Free Zone CT regime is intended to apply only to income derived from activities that are performed exclusively in or from within a Free Zone. This is reflected in the definition of ‘Qualifying Income’ which includes income derived from transactions with other Free Zone Persons as well as domestic and foreign sourced income derived from conducting any of the ‘Qualifying Activities’ listed in the related Ministerial Decision.
Income from certain specific ‘Excluded Activities’ will not be treated as ‘Qualifying Income’ regardless of whether the income is derived from a Free Zone Person or as part of undertaking a ‘Qualifying Activity’. Subject to certain exceptions, this includes income derived from transactions with natural persons, income derived from certain regulated financial services activities, income derived from intangible assets, and income derived from immovable property, other than transactions with Free Zone Persons in relation to commercial immovable property located in a Free Zone.
Earning income from ‘Excluded Activities’ or earning any other income that is not ‘Qualifying Income’ will disqualify the Free Zone Person from the regime, subject to de minimis requirements. To satisfy the de minimis requirements, the non-qualifying revenue earned by a Free Zone Person must not exceed the lower of either 5% of their total revenue or AED5,000,000.
Where the de minimis requirements are not met or the Free Zone Person does not continue to meet any of the other qualifying conditions, the Free Zone Person will no longer be able to benefit from the Free Zone Corporate Tax regime for a minimum period of five (5) years. During this period, the Free Zone Person will be treated as an ordinary Taxable Person and be subject to Corporate Tax at the rate of 9% on their Taxable Income above AED 375,000.
