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VAT’s UP

UAE: Free zone Businesses to Satisfy De Minimis Requirements ‘5% of Total Revenue or AED 5 Million’ To Benefit from Zero percent Corporate Tax

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Dubai June 03 2023:

Ministry of Finance clarifies that companies operating in free zones can pay zero per cent tax on income from certain qualifying activities and transactions,.

UAE’s Ministry of Finance issued Ministerial Decision No. 139 regarding qualifying activities and excluded activities. A qualifying company can benefit from zero per cent corporate tax rate on qualifying income provided it is incorporated, established or registered in a free zone. It can also benefit from a tax exemption on income earned from transactions with mainland UAE businesses or those in a foreign jurisdiction. For your understanding:

  • Qualifying income is defined as income from transactions with other free zone entities, as well as domestic and foreign-sourced income derived from conducting any of the qualifying activities. This is except for income from excluded activities.
  • Excluded activities are transactions with natural persons; regulated banking, insurance, financing and certain leasing activities; ownership or use of intellectual property assets and ownership or use of UAE immovable property.

Earning income from excluded activities or earning any other income that is not a qualifying income will result in the free zone company being disqualified from the corporate tax regime, subject to de minimis requirements. This requirements allows a qualifying free zone person to earn a small or incidental amount of non-qualifying income without being disqualified from the free zone CT regime.

Now that free zone businesses are clear on what their ‘qualifying income’ should be, they must through any future tax period satisfy the de minimis requirements i.e ‘non-qualifying’ revenues must not exceed the lower of 5 percent of their total revenue or AED 5 million.

If these numbers are breached, the free zone business will no longer benefit from 0 percent corporate tax for a minimum period of five years. During this period they’ll be treated as an ordinary taxable person subject to corporate tax of nine percent on their taxable income above AED 375,000.

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