0% CT rate for free entities key conditions 

1)  Introduction

The long-awaited Cabinet Decisions on the tax treatment of free zones in the UAE have been released. Ministerial Decision No. 139/2023 and Cabinet Decision no. 55/2023 clarify the criteria for determining qualifying income that is eligible for beneficial tax rate of 0%. We have provided below the key highlights of the conditions to benefit from the 0% tax rate.

2)  Qualifying income – Taxable at 0%

i. Transactions with FZ Persons

• All incomes except income from “Excluded activities”

ii.  Transactions with Non-FZ Persons

• All income from “Qualifying activities” other than excluded activities.

iii. Other income

     De minimis rules - Non qualifying revenue < lower of the below

• 5% of total revenue
• AED 5 Mn
  

3)  Deemed non-qualifying income - Taxable at 9%

• Revenue attributable to domestic PE or a foreign PE.
• Revenue from any person in respect of non-commercial property in a FZ.
• Revenue from non-free zone person in respect to commercial property in FZ.

4)  Non-qualifying revenue

• Revenue from excluded activities
• Revenue from non-qualifying activities with non-freezone person.

5)  Qualifying activities

• Manufacturing and processing of goods/ material;
• Holding of shares and other securities;
• Ownership, management and operation of ships;
• Headquarter/ Treasury and financing services to related parties;
• Reinsurance/ Fund management / Wealth and investment management services;
• Distribution of goods/ material in or from designated zone;
• Logistics services.

6)  Excluded activities

• Transactions with natural person subject to certain exceptions.
• Ownership and exploitation of intellectual property.
• Immovable property transactions, excluding those with FZ persons, related to commercial property in FZ.
• Regulated banking, insurance, finance and leasing activities.
  

7)   How can Crowe help?

• Evaluating whether a free zone entity is eligible for preferential tax treatment.
• Analyzing income streams to identify and classify income streams to determine which activities qualify 0% tax rate benefit.
• Reviewing the existing practices and assisting in implementation of new policies and practices to align to the tax requirements.