Cabinet Decision No. 100 of 2023: Clarification on Determining Qualifying Income for Free Zone Entities (Effective from 1 June 2023)
Date of Issue: 25 October 2023
Effective Date: 1 June 2023
The UAE Cabinet has issued Cabinet Decision No. 100 of 2023, providing comprehensive guidance on the Determination of Qualifying Income for Qualifying Free Zone Persons (QFZPs) under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law). This Decision replaces Cabinet Decision No. 55 of 2023, introducing clear parameters for income eligibility, de minimis thresholds, and compliance obligations for Free Zone companies seeking to benefit from the 0% Corporate Tax regime.
Key Highlights of Cabinet Decision No. 100 of 2023:
1. Scope of Application
- Applies to all Qualifying Free Zone Persons (QFZPs) as defined under Corporate Tax Law.
2. Categories of Qualifying Income
- Income from transactions with other Free Zone Persons, provided it is not from Excluded Activities.
- Income from transactions with Non-Free Zone Persons, but only for Qualifying Activities.
- Income from ownership or exploitation of Qualifying Intellectual Property (IP).
- Other income, subject to de minimis requirements (explained below).
3. De Minimis Requirements for Non-Qualifying Income
- Non-Qualifying Revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower, during any Tax Period.
- Non-Qualifying Revenue includes:
- – Income from Excluded Activities.
- – Income from non-Qualifying Activities with Non-Free Zone Persons.
- – Income from Free Zone Persons not being Beneficial Recipients of the service or goods.
- Revenue from certain real estate transactions and income attributable to Domestic/Foreign Permanent Establishments are excluded from total and non-qualifying revenue calculations.
4. Treatment of Income from Permanent Establishments and Real Estate
- Income from Domestic or Foreign Permanent Establishments is fully taxable under regular Corporate Tax rules.
- Income from immovable property located in Free Zones:
- – Taxable if leased or sold to Non-Free Zone Persons (in respect of Commercial Property).
- – Taxable if related to non-commercial property transactions.
5. Qualifying Intellectual Property (IP) Income
- Includes income from patents, copyrighted software, and functionally equivalent rights.
- Income derived must comply with guidelines issued by the Ministry, including nexus-based rules.
6. Substance and Economic Presence in Free Zones
- QFZPs must maintain adequate economic substance by:
- – Having sufficient assets, qualified employees, and expenditures within the Free Zone or Designated Zone.
- Core income-generating activities may be outsourced within Free Zones or Designated Zones, with adequate supervision.
- For Qualifying IP, outsourcing outside the UAE is allowed if not to a Related Party and under supervision.
7. Compliance and Record-Keeping
- QFZPs must maintain:
- – Records demonstrating the nature of income and compliance with de minimis and qualifying income rules.
- – Evidence of substance and economic activity in the Free Zone.
- Proper segregation of income attributable to Permanent Establishments and Immovable Property is mandatory.
8. Repeal and Effective Date
- Cabinet Decision No. 55 of 2023 is repealed.
- Cabinet Decision No. 100 of 2023 is effective retroactively from 1 June 2023.
Conclusion:
Cabinet Decision No. 100 of 2023 provides definitive clarity on what constitutes Qualifying Income for Free Zone companies and ensures alignment with international tax principles such as substance and nexus requirements. Free Zone entities intending to benefit from the 0% Corporate Tax rate must carefully review their transactions, income streams, and internal processes to ensure compliance with these updated provisions.
KGRN Chartered Accountants is well-equipped to assist Free Zone companies in understanding and applying the provisions of Cabinet Decision No. 100 of 2023, including tax planning, compliance assessment, and advisory on structuring Free Zone operations.
