The Ministry of Finance in the UAE recently announced updates to the corporate tax framework for free zone companies, aligning more closely with international standards.
This initiative includes Cabinet Decision No. 100 of 2023, focusing on defining qualifying income, and Ministerial Decision No. 265 of 2023, detailing qualifying and excluded activities.
Younis Haji Al Khoori, the Ministry’s undersecretary, emphasised that these changes underscore the vital role of free zones in the UAE’s economic diversification and its commitment to global tax norms. He highlighted that a competitive corporate tax regime, particularly for free zones, enhances the UAE’s status as a prime destination for business and investment, furthering its sustainable development goals.
Starting from the financial year commencing on or after June 1, the UAE has implemented a federal corporate tax at a standard rate of 9 percent. However, companies in free zones can benefit from a zero percent tax on income from specified qualifying activities.
These qualifying activities span various sectors, including fund, wealth, and investment management services, goods manufacturing and processing, reinsurance services, shareholding, ship management and operations, and headquarters services to related parties. Additionally, it covers Treasury and financing services for related entities, aircraft financing and leasing, logistics services, and transactions within designated zones, along with related ancillary activities.
Moreover, free zone companies are exempt from tax on income earned through dealings with mainland UAE businesses or foreign entities. The updated cabinet decision has broadened the scope of qualifying income to include earnings from owning or using qualifying intellectual property, adhering to the OECD’s modified nexus approach.
The ministerial decision also introduces qualifying commodities trading as an eligible activity for corporate tax exemption. This provision includes income from physical trading of various commodities on recognised exchanges and derivative trading for hedging purposes.
The decisions also clarify the parameters of qualifying and excluded activities, providing more clarity to businesses operating in free zones.
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