2 new decisions on corporate tax regime in free zones

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The UAE's Ministry of Finance recently introduced two significant decisions related to qualifying income and qualifying activities for corporate tax in free zones. These decisions aim to enhance the corporate tax regime in free zones and reinforce the UAE's goal to create an ideal corporate tax environment. It is important to know the ins and outs of corporate tax to employ the right accounting services in Dubai to prepare for it.

Cabinet Decision No. 55 of 2023 defines the concept of "qualifying income," while Ministerial Decision No. 139 of 2023 outlines the qualifying and excluded activities. These decisions are part of the government's ongoing efforts to diversify revenue sources and support strategic projects that contribute to a sustainable future.

According to Haji Al Khouri, the undersecretary of the Ministry of Finance, the new corporate tax regulations, which took effect on June 1, will play a crucial role in diversifying the federal government's revenue streams. These tax reforms will also fortify the corporate tax regime in free zones, solidifying the UAE's competitive advantage in business taxation.

The Ministry of Finance clarified that the free zone tax regime is applicable within the prescribed geographical areas of the free zones. It applies exclusively to income generated from activities conducted within or from these free zones. This focused approach ensures that free zone businesses benefit from favourable taxation policies, strengthening the UAE's competitive edge in attracting international companies.

Qualifying free zone companies will enjoy a zero percent corporate tax rate on income derived from transactions with individuals or entities located in the mainland UAE or foreign jurisdictions. This encourages business growth and stimulates economic activity within free zones, enhancing the country's position as a global business hub.

In addition to income from transactions with entities in other free zones, qualifying income includes domestic and foreign-sourced income resulting from engaging in any of the qualifying activities specified in the ministerial decision. These activities encompass various sectors and industries, creating a diverse and vibrant business environment within the free zones.

To ensure compliance and maximize the benefits of the corporate tax regime, it is crucial for all free zone companies to register. Non-compliance may result in penalties after one year, underscoring the importance of adhering to the UAE tax regulations.

Qualifying Activities

The Ministry of Finance has outlined nearly a dozen qualifying activities that make companies eligible for tax benefits in free zones. These activities span manufacturing, processing, reinsurance, securities holding, ship ownership and management, fund management, wealth and investment management, headquarter services, treasury and financing services, aircraft financing and leasing, distribution of goods or materials, logistics services, and ancillary activities. These qualifying activities contribute to the growth and development of various sectors.

Companies seeking further details or clarifications on the tax regulations and exemptions can reach out to the respective free zone authorities. Shabana Begum, the executive director of the tax policies sector at the Ministry of Finance, emphasized the importance of proactive engagement with the authorities to ensure compliance and make the most of the available tax benefits.

Qualifying Income

It's worth noting that income derived from specific excluded activities, as outlined by the ministry, will not be considered qualifying income, regardless of whether the income is generated by a free zone entity or as part of a qualifying activity. This ensures that the tax incentives are directed towards activities that align with the UAE's economic goals and strategic priorities.

To be eligible for tax benefits, qualifying firms must meet a de minimis requirement of Dh5 million or five percent of their total revenues. This threshold ensures that businesses actively participating in the economy can avail themselves of the advantages offered by the corporate tax regime in free zones.

In conclusion, the UAE's recent decisions regarding qualifying income and activities for corporate tax in free zones underscore the government's commitment to fostering a favorable business environment. These decisions strengthen the corporate tax regime, solidify the UAE's competitive advantage in business taxation, and enhance the country's attractiveness to both local and international businesses. By outsourcing bookkeeping and accounting needs to professional service providers, businesses can ensure compliance with the UAE tax regulations and focus on their core activities, driving growth and profitability in the dynamic UAE market.

UAE is witnessing massive changes in tax and related economic matters and you need to be well informed and prepared for the upcoming changes. You can prepare yourself by hiring a trusted and reliable accounting firm in UAE, Alchemist accounting is here to fill that role for your business. To know more about corporate tax, call us at +971582660929 and our expert financial consultant will start guiding you.