The United Arab Emirates (UAE) has implemented major changes regarding taxation with the implementation of Federal Decree-Law No. 47 of 2022 for the Taxation of Corporations and Businesses. To provide further clarity on this regard, concerning specific business activities, Ministerial Decision No. 265 of 2023 was issued by the Ministry of Finance to clarify Qualifying and Excluded Activities.
Overview of Federal Decree-Law No. 47 of 2022
The legal framework for corporations and business profit taxation has been provided by Federal Decree-Law No. 47 of 2022. This law shall apply for financial years beginning on or after 1st June 2023. The main purpose of this decree is to diversify the national income sources and to bring the UAE tax system in line with international standards.
It provides for a corporate tax rate that will apply to taxable income over a certain threshold, to strengthen the country’s fiscal framework.
Introduction to Ministerial Decision No. 265 of 2023
To further elaborate on Ministerial Decision No. 265 of 2023, it was issued to specify which activities are eligible for the 0% corporate tax rate and which are excluded from it, under the new tax regime. This decision is very significant for businesses operating in Free Zones, because it defines the criteria for tax incentives.
Qualifying Activities Defined
The following activities conducted by a Qualifying Free Zone Person shall be considered Qualifying Activities:
| Activity | Description |
| Manufacturing of Goods or Materials | Engaging in the production of physical items. |
| Processing of Goods or Materials | Transforming raw materials into finished products. |
| Trading of Qualifying Commodities | Engaging in the physical trading of metals, minerals, energy, and agricultural commodities traded on recognized stock exchanges. |
| Holding of Shares and Other Securities | Owning equity interests in other entities for investment purposes, provided they are held for at least 12 months. |
| Ownership, Management, and Operation of Ships | Involves maritime business activities, specifically in international transportation of passengers, goods, or livestock, and excluding local transportation or leisure use. |
| Reinsurance Services | Providing insurance to other insurance companies. |
| Fund Management Services | Managing investment funds on behalf of clients. |
| Wealth and Investment Management Services | Offering financial planning and asset management. |
| Headquarter Services to Related Parties | Providing centralized management functions to affiliated entities, including senior management, administrative, procurement, and other group coordination services. |
| Treasury and Financing Services to Related Parties | Managing financial resources, cash, liquidity, and funding for related companies. |
| Financing and Leasing of Aircraft, including Engines and Rotables | Leasing and financing aviation equipment such as aircraft, engines, and rotable components. |
| Logistics Services | Managing the flow of goods from origin to consumption, including storage, transportation, freight forwarding, and customs services. |
| Distribution of Goods or Materials in or from a Designated Zone to a Customer | Supplying products within or from specific Designated Zones, including buying, selling, storing, handling, and transporting goods to customers for resale or processing. |
Excluded Activities Outlined
Excluded Activities are those which if carried out may render a Free Zone Person unable to qualify for the 0% corporate tax exemption. The following activities shall be considered Excluded Activities:
| Excluded Activity | Description |
| Transactions with Natural Persons | Except for transactions related to qualifying activities such as ownership, management, and operation of ships, reinsurance services, fund management services, wealth and investment management services, and financing and leasing of aircraft. |
| Banking Activities | Regulated financial activities specified under Article (65) of Federal Decree-Law No. 14 of 2018. |
| Insurance Activities | Insurance operations regulated under Federal Law No. 6 of 2007, except for reinsurance services. |
| Finance and Leasing Activities | Provision of credit or financing for any kind of consideration, and the letting or otherwise granting the right to use an asset in exchange for rental or other consideration, subject to regulatory oversight. |
| Ownership or Exploitation of Immovable Property | Except for commercial property located in a free zone, where the transaction is conducted with a free zone person. |
| Support activities | Any activity that is directly connected with the implementation of the Excluded Activities listed above. |
Effects on Free Zone Entities
Free Zone Persons must know what business activities they are engaging in to determine if they are eligible for the 0% corporate tax rate. Participation in Excluded Activities may put this benefit at risk.
Nevertheless, income from transactions with Non-Free Zone Persons can still be classified as 0% if it is derived from the Qualifying Activities that are not Excluded Activities.
De Minimis Requirement
The Ministerial Decision No. 265 has also defined the de minimis requirements, which provide that a qualifying free zone person shall ensure that its:
- non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed 5% (five percent) of the total Revenue of the Qualifying Free Zone Person in that Tax Period, or
- AED 5,000,000 (five million dirhams), whichever is lower.
Income from Qualifying Intellectual Property
To determine what income from Qualifying Intellectual Property is to be considered Qualifying Income, the Qualifying Free Zone Person must maintain all records, books and documents that prove the following and make them available to the Authority:
- Ownership and the right to exploit the Qualifying Intellectual Property.
- Qualifying Expenditures and Overall Expenditures incurred.
- Overall Income derived from the Qualifying Intellectual Property.
- The link between Qualifying Expenditures and Overall Income derived from Qualifying Intellectual Property.
Ministerial Decision No. 265 of 2023 is very important in that it specifies which activities are exempt from tax as per Federal Decree-Law No. 47 of 2022. The UAE has therefore aimed at creating a more transparent tax environment that will make businesses rearrange their operations accordingly.
How Farahat & Co. Can Assist You
Understanding corporate tax laws and making sure that the company is compliant with Ministerial Decision No. 265 can be complicated. At Farahat & Co., our expert tax consultants offer complete advisory services to help you navigate through the UAE corporate tax regulations without any hassles. Our services include:
- Tax Advisory: We offer professional services in tax compliance and optimization.
- Compliance Management: We offer services that include registration, returns, and regulatory adherence.
- Free Zone Expertise: We also provide services on Qualifying/Excluded Activities and how to be eligible for 0% tax.
- Tax Planning: Reducing tax liabilities through the use of planning strategies.
- Audit Support: Offering auditing services to guarantee that financial information is correct for tax purposes.
Get in touch with Farahat & Co. now for professional corporate tax advisory services and make sure that your business is compliant with the UAE tax laws.
