On 3rd November, 2023, UAE Ministry of Finance has issued new Cabinet Decision (CD) No. 100 of 2023 on Determining Qualifying Income, as well as Ministerial Decision (MD) No. 265 of 2023 on Qualifying Activities and Excluded Activities. These decisions are applicable retrospectively from 1st June, 2023 and has replaced previous Cabinet Decision No. 55 of 2023 and Ministerial Decision No.139 of 2023.
Below are the key highlights of the new decisions-
- The new decision now includes Trading of Qualified Commodities as a Qualifying activity subject to Corporate Tax @0%, where income is earned from physical trading of metals, minerals, energy and agricultural commodities in raw form that are traded on a recognized stock exchange, as well as the associated derivative trading income used to hedge against, the risk of such trading activities.
- The scope of Qualifying income is extended to include Income derived from the ownership or exploitation of Qualifying Intellectual Property thereby removing the said activities from Excluded Activities. Qualifying Intellectual Property has been defined in Cabinet Decision No. 100 of 2023, as patents, copyrighted software and any right functionally equivalent to a patent but does not include marketing related intellectual property assets, such as trademarks.
- Free Zone Person will be required to undertake its core Income Generating Activities (CIGA) in a Free Zone/Designated zone in order to be a Qualifying Free Zone Person (QFZP). Under this new decision, it is expressly provided that CIGA can be outsourced to another person in a free zone or Designated Zone, provided QFZP has adequate supervision of the outsourced activity.
- Under Cabinet Decision No. 55 of 2023, it was not clear whether High Seas Sales (Third port shipment) is covered under distribution of goods undertaken to and from Designated Zones, as goods do not physically enter UAE. Later on, in Public Consultation Document (PCD) on Free Zones by way of illustration and in various awareness sessions, it was mentioned that High Seas Sales (Third Port Shipment) if undertaken from Designated Zones shall be covered under Qualifying Activities. However, this new decision has not clarified the tax position with respect to High-sea sales. We still await further clarity in this regard.
- It is still not clarified if Free zone which is not a Designated Zone (For instance DMCC) can benefit from Distribution of goods or materials activity.
- As per MD 265 of 2023, definition of “Distribution of goods or material in or from a Designated Zone” includes buying and selling of goods, materials, component parts or any other items that are tangible or movable. Accordingly, distribution of intangible products and services such as licenses, software and financial products/ services may not be covered under distribution activity.
- Further, MD 265 has renamed the Qualifying activity “Holding of shares and other securities”to “Holding of shares and other securities for investment purpose”. One critical condition has been included in new Ministerial Decision No.265 of 2023, which states that the shares and other securities shall be deemed to be held for investment purposes if it is held for uninterrupted 12 months period. Hence, solely active trading of shares and other securities cannot not be regarded as a Qualifying activity. There is no other condition that needs to be satisfied in case of holding of other securities (which was earlier mentioned in the PCD. For instance, the Free zone Person was to be regulated by DFSA or FSRA etc.)
- Under Qualifying activity “Wealth and investment management services”, earlier in PCD on Free Zone, for claiming benefit of CT@0%, one of the requirements for a Free zone person was to either be established as Single Family Office (SFO) or Multi Family Office (MFO), but now under this new decision, SFO or MFO are not included. Hence, Free zone person established as a SFO or MFO and providing Wealth and investment management services will not be regarded as Qualifying activity.
- “Incidental income” has been removed from the scope of “Qualifying income”. This has further restricted the scope of “Ancillary income” which is explained as an activity shall be considered ancillary where it is necessary for the performance of the main activity or where it makes a minor contribution to it an is so closely related to the main activity that it should not be regarded as a separate activity.