Ministerial Decision No. 265 of 2023: Updated List of Qualifying and Excluded Activities for Free Zone Corporate Tax Regime (Effective from 1 June 2023)
Date of Issue: 27 October 2023
Effective Date: 1 June 2023
The UAE Ministry of Finance has issued Ministerial Decision No. 265 of 2023, amending and clarifying the list of Qualifying and Excluded Activities for Qualifying Free Zone Persons (QFZP) under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law). This Decision replaces Ministerial Decision No. 139 of 2023 and provides additional guidance for Free Zone entities seeking to benefit from the 0% Corporate Tax regime.
Key Highlights of Ministerial Decision No. 265 of 2023:
1. Qualifying Activities
- Manufacturing and Processing of goods or materials.
- Trading of Qualifying Commodities (metals, minerals, energy, agriculture commodities traded on recognized exchanges).
- Holding shares and securities for investment purposes.
- Ownership, management, and operation of ships.
- Reinsurance services.
- Fund management, wealth, and investment management services.
- Headquarter services and Treasury & financing services to related parties.
- Financing and leasing of aircraft.
- Distribution of goods or materials in/from a Designated Zone.
- Logistics services.
- Ancillary activities supporting the above.
2. Excluded Activities
- Transactions with natural persons, except in limited cases.
- Banking and insurance activities (with specific exceptions for reinsurance and headquarter services).
- Finance and leasing activities, except permitted aircraft financing and intra-group treasury activities.
- Ownership or exploitation of immovable property, except commercial property in Free Zones transacted with other Free Zone Persons.
- Ancillary activities to the above Excluded Activities.
3. Clarifications on Specific Qualifying Activities
- Manufacturing includes production, improvement, or assembly of goods.
- Processing involves transformation of goods into different forms for industrial/commercial use.
- Trading of Qualifying Commodities includes physical and associated derivative trading for risk management.
- Holding of shares/securities must be for at least 12 months to be considered an investment activity.
- Ship management applies to ships used in international transport, excluding leisure or local vessels.
- Fund and wealth management services must be licensed and regulated within UAE.
- Headquarter and treasury services include comprehensive group management, risk, and financing functions.
- Aircraft financing and leasing includes sale/leaseback and advisory services on aircraft and components.
4. De Minimis Threshold for Non-Qualifying Income
- Non-Qualifying Revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower, per Tax Period.
5. Income from Qualifying Intellectual Property (IP)
- Clarifies how to calculate Qualifying Income from IP based on Qualifying Expenditures and Overall Expenditures.
- Requires proper documentation to prove ownership, rights, and linkage of income and expenses to IP development.
- 30% uplift on Qualifying Expenditures allowed but capped at total Overall Expenditures.
6. Additional Compliance Requirements
- Audited financial statements are mandatory for QFZPs.
- Breach of conditions leads to loss of QFZP status for five years starting from the breach year.
7. Repeal and Effective Date
- Ministerial Decision No. 139 of 2023 is repealed.
- Effective retroactively from 1 June 2023, impacting Tax Periods commencing from that date.
Conclusion:
Ministerial Decision No. 265 of 2023 provides comprehensive guidance and updates for Free Zone entities on what qualifies as a Qualifying or Excluded Activity, affecting their eligibility for the 0% Corporate Tax rate. Free Zone businesses must carefully assess their business activities and transactions to ensure compliance and maintain their tax benefits.
KGRN Chartered Accountants is available to assist Free Zone entities in evaluating their compliance status, interpreting complex provisions under the Corporate Tax Law, and providing tailored corporate tax planning and advisory services.
