The Corporate Tax (CT) Law allows a Qualifying Free Zone Person (QFZP) to benefit from a 0% CT rate on its Qualifying Income. The other income, which is not Qualifying Income, is subject to CT at the standard rate of 9%. Hence, it is important to understand the activities which can be considered as Qualifying Activities and those that are considered as Excluded Activities.
Cabinet Decision No. 265 of 2023 provides detailed description of such activities.
Qualifying Activities
Income of a QFZP from the following activities is considered as ‘qualifying income’ and is eligible for the 0% CT rate:
- Manufacturing, processing of goods or materials;
- Trading (physical and derivative trading) of qualifying commodities;
- Holding of shares and other securities for investment purposes (i.e. where such shares and securities are held for an uninterrupted period of at least 12 months);
- Wealth and investment management services, fund management services;
- Ownership, management and operation of ships;
- Financing and leasing of aircrafts;
- Reinsurance services;
- Headquarter services, treasury and financing services to related parties;
- Distribution of goods or materials in or from a designated zone;
- Logistics services; or
- Any activities that are ancillary to the above.
The Cabinet Decision 265 provides a detailed overview of each of these categories. A wide array of activities are covered under wealth, investment and fund management services. As a result, a 0% CT rate offers substantial advantages to investment funds and wealth managers which they can pass on to their investors.
Excluded Activities
Certain activities are not considered as Qualifying Activities. These include the following activities, unless they are specifically covered under Qualifying Activities:
- Transactions with natural persons, except where the transactions pertain to wealth and investment management services, fund management services or to ships and aircrafts as specified under Qualifying Activities;
- Banking activities;
- Insurance activities;
- Finance and leasing activities;
- Ownership or exploitation of immovable property, other than commercial property located in a free zone;
- Any other ancillary activities.
Classification of Activities
This Cabinet Decision provides a useful guidance for segregating Qualifying Activities from the Excluded Activities. However, real-life scenarios may often pose a challenge in distinguishing them and convincing the tax authorities.
For instance, classification of ancillary activities under either category may be prone to litigation. Likewise, the activities of fin-tech companies may be covered under banking activities (Excluded Activities) as well as wealth management activities (Qualifying Activities) depending on the nature of services provided to its customers. It is important for such companies to seek professional tax advice on classification of its activities to avoid tax litigation and penalties in the future.
Further, the decision provides a wide definition of shares and securities held as investments. It includes shares of any class or any other equitable interest in the share capital of a company. It also includes negotiable or non-negotiable financial instruments, including, derivative instruments, financial commodities, and other investment instruments that can be traded or that are convertible or exchangeable into a security at a later date. Modern investment instruments can be complex. While equity share, preference shares, convertible shares and debentures etc. may be considered qualifying, it may be important to ascertain whether digital assets or digital currency are covered in this category.
Conclusion
The wide array of activities covered under Qualifying Activities indicates the UAE’s commitment to extend the benefit of the 0% CT rate to a large range of business activities. While the taxpayers can take benefit of the QFZP regime, the onus lies on them to ensure that they take its benefit from Qualifying Activities alone and not from Excluded Activities. Complex activities and investment instruments must be approved by tax advisors or if required by approaching the FTA.
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