New Corporate Tax decisions related to free zones announced

The UAE Ministry of Finance has issued Cabinet Decision No. 100 of 2023 on Determining Qualifying Income, as well as Ministerial Decision No.265 of 2023 on Qualifying Activities and Excluded Activities.

Younis Haji Al Khoori, Under-Secretary of the Ministry of Finance, said, “Free zones are central to the UAE’s economic growth, attracting foreign direct investment as well as fostering a favourable business environment. These new decisions reflect the continued significant role of free zones in the UAE’s economic diversification strategies and commitment to aligning with international taxation standards. The certainty of a competitive Corporate Tax regime and offering a special regime for free zones cements the UAE’s position as a leading global hub for business and investment and drives its sustainable development agenda.” Under the revised Cabinet Decision, the scope of Qualifying Income is extended to include the amount of Qualifying Income derived from the ownership or exploitation of Qualifying Intellectual Property calculated based on the methodology of the OECD’s modified nexus approach, which is prescribed in Ministerial Decision No.265 of 2023.

Ministerial Decision 265 of 2023 on Qualifying Activities and Excluded Activities also lists the trading of Qualifying Commodities as a Qualifying Activity, which allows for the free zone 0% corporate tax rate to apply to income earned from the physical trading of metals, minerals, energy, and agricultural commodities that are traded on a recognised stock exchange, as well as the associated derivative trading income used to hedge against, the risk of such trading activities.

Additionally, the Ministerial Decision clarifies the intended scope of Qualifying Activities and Excluded Activities thereby providing clarity and certainty to free zone businesses.

All Cabinet Decisions and Ministerial Decisions relating to the Corporate Tax Law are available on the Ministry of Finance’s website.

In July, the UAE Ministry of Finance (MoF) announced Cabinet Decision No. (81) of 2023, outlining additional conditions for Qualifying Investment Funds under the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses. The Cabinet Decision stipulates additional conditions that investment funds must meet to be treated as a Qualifying Investment Fund and be exempt from Corporate Tax. The decision upholds the integrity of the Corporate Tax system, while bolstering the UAE’s competitiveness as an investment hub.

According to the Cabinet Decision, the additional conditions for investment funds, other than Real Estate Investment Trusts (REITs), to be exempt from Corporate Tax, include being primarily engaged in investment business activities, with ancillary or incidental activities not exceeding 5 percent of their total annual revenue; the share of ownership interests in the investment fund held by a single investor and its related parties not exceeding 30 percent or 50 percent, depending on the number of investors in the investment fund; being overseen by an investment manager employing a minimum of three investment professionals; and the day-to-day management of the fund not being controlled by investors.

To ensure the flexibility of the Corporate Tax system, the diversity of ownership criteria for investment funds other than REITs will be non-binding for the first two financial years of the fund’s establishment, provided that the intent to diversify its ownership after the first two financial years is substantiated.

Regarding REITs, the exemption conditions include the necessity for real estate assets, excluding land held by the REIT, to exceed Dhs100 million in value, a minimum of 20 percent of its share capital being publicly listed or wholly owned by two or more institutional investors, and an average real estate asset percentage of at least 70 percent maintained annually.

Younis Haji Al Khoori said, “The additional conditions set forth through this new Cabinet Decision are clear and simple to apply, and serves the UAE to retain its position as a leading investment hub. This Cabinet Decision balances the UAE remaining competitive as an investment hub, while maintaining the integrity of the Corporate Tax system.”

Separately, the Ministry of Finance, in collaboration with the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), held two workshops at the headquarters of the Chambers of Commerce in Dubai and Abu Dhabi.

The workshops, which were organised as part of the Ministry’s efforts to enhance the business environment in the UAE, gathered government officials, businessmen, and investors from the UAE private sector.

MIGA presented its comprehensive suite of financial products and services, including the insurance solutions and guarantees it provides to enhance credit for businessmen and lenders to facilitate business set-up in emerging economies. It also addressed concerns regarding value and investment products, and the optimal capital obtained from financial institutions at the lowest possible cost.

The workshop included a session titled ‘Applications of innovative products: Commercial financing products and the latest renewable energy solutions’.