UAE's Free Zone Tax Regulations Update

The UAE Ministry of Finance (MoF) released Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023, effective from June 1, 2023, amending the rules for Free Zone Persons. Here are the major changes:

Key Changes and Amendments:

1.Extended Scope of Qualifying Income: 

Now includes income from Qualifying Intellectual Property, excluding marketing-related assets like trademarks.

2.Expansion of Qualifying Activities:

• Addition of Trading of Qualifying Commodities, encompassing physical trading of metals, minerals, energy, and agricultural commodities traded on recognized stock exchanges, along with associated derivative trading for risk hedging.

• Inclusion of specific guidelines for Holding Activities, requiring assets to be held for      investment for at least 12 months, with examples of qualifying shares and securities.

3.Clarifications on Distribution and Manufacturing:

• Distribution activities should occur in or from a Designated Zone, with examples provided. Importation through a Designated Zone is required when goods enter the UAE.

• Clarity on manufacturing activities includes production, improvement, or assembly of products/materials from raw materials/components. Income from distribution should be identified and treated separately.

4.Changes in Ancillary Income:

• Incidental Income is no longer considered part of Qualifying Income. The criteria    for ancillary activities have been revised, focusing on activities closely related to the main activity.

5.Substance Requirements Clarification:

• Full-time employees are now considered for meeting qualified employee requirements.

• Outsourcing activities within FZ or Designated Zones is permitted, and for Qualifying Intellectual Property, outsourcing is allowed to entities outside the UAE.

6.Meaning of Qualifying and Excluded Activities: Largely aligned with the previously released Public Consultation Document in July 2023.

Free Zone entities should consider the updated legislation and reassess their tax position accordingly.