Unravelling the Intricacies of Qualifying Income: An In-Depth Analysis of Cabinet Decision No. 55 of 2023

As a tax professional, I have often been asked and continue being asked the impacts on free zones as that is a common confusing item amongst businesses operating in one of the FZs. I delve into the Cabinet Decision No. 55 of 2023, a pivotal piece of legislation that provides clarity on the determination of qualifying income for Qualifying Free Zone Persons (QFZPs) in the UAE.

Scope and Application of the Decision

The Cabinet Decision No. 55 of 2023 applies to QFZPs, which are entities operating within the Free Zone. The decision provides a framework for these entities to determine their qualifying income for tax purposes under the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law).

Defining Qualifying Income

One of the key aspects of the decision is the definition of "Qualifying Income". This includes income derived from transactions with other Free Zone Persons, except for income derived from "Excluded Activities". It also includes income derived from transactions with a Non-Free Zone Person, but only in respect of "Qualifying Activities" that are not Excluded Activities. Additionally, any other income that satisfies the de minimis requirements is also considered as qualifying income.

Understanding Excluded Activities and Qualifying Activities

The decision provides a clear distinction between "Excluded Activities" and "Qualifying Activities". Excluded Activities include transactions with natural persons, regulated banking, finance, leasing and insurance activities, ownership or exploitation of intellectual property assets, and ownership or exploitation of immovable property. On the other hand, Qualifying Activities include manufacturing and processing of goods or materials, holding of shares and other securities, ownership and operation of ships, regulated reinsurance and fund/wealth management, financing and leasing of aircraft, logistics, and the distribution of goods in or from a designated zone subject to certain conditions.

The Concept of a Domestic Permanent Establishment

The decision introduces the concept of a Domestic Permanent Establishment (PE), where a QFZP has a place of business or other form of presence outside the Free Zone in the State. Income attributable to a Domestic PE is considered Taxable Income and is taxed at 9%. However, it does not disqualify the Free Zone Person from benefitting from a 0% CT rate on Qualifying Income, or be factored into the de minimis test.

Maintaining Adequate Substance in a Free Zone

To maintain adequate substance, a QFZP should undertake its core income-generating activities in a Free Zone. They should also maintain adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures with regards to the level of activities in the Free Zone.

Conclusion: Navigating the New Tax Landscape

The release of Cabinet Decision No. 55 of 2023 marks a significant shift in our understanding of the Free Zone regime within the UAE CT framework. With the new rules and regulations, it is crucial for companies to assess their readiness to register and comply with the new regime. As always, it is advisable to seek professional advice to navigate these changes and ensure compliance with the new rules.

Stay tuned for more updates and insights on the evolving tax landscape in the UAE. Your thoughts and questions are always welcome.

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