In the expanding landscape of global commerce, tax structures play a pivotal role in shaping a nation's economic roadmap. For many years, Dubai, the dynamic nucleus of the United Arab Emirates, thrived on a largely tax-free environment, distinguishing itself as a global investment haven. However, in an unprecedented move that signifies a major regulatory shift, Dubai has introduced a corporate income tax from June 1st 2023.

 

This article proposes to demystify the recently established corporate income tax landscape in Dubai. We will delve into understanding its implications, exploring the probable consequences for the freezones companies. We aspire to equip you with a comprehensive understanding of this milestone policy shift, enabling informed business decisions in a dynamically evolving economic landscape.

The corporate income tax in UAE :

The Federal Decree-Law No. 47 of 2022 published on December 9, 2022 set up a 9% corporate income tax on the income exceeding 375 000 AED. This law provides that the corporate income tax shall be imposed on a Qualifying Free Zone person at 0% on the Qualifying income and 9% on the taxable income that is not Qualifying income.

If the law is quite clear for the mainland companies, it raised a lot of questions for the FZ companies about what qualifying income is and whether they will also fall under the application of the corporate income tax.

The source of the income :

The Cabinet Decision No. 55 of 2023 published on June 1^st, 2023 provide guidance on these aspects and clarify how to identify the Qualified income for the FZco. Understanding what constitutes ‘Qualifying income’ in the UAE’s Free Zones is paramount, as it directly sets the course for tax liabilities under the new UAE CT law. 

For a qualifier freezone person (‘QFZP’), Qualifying Income includes:

1. Income from FZ Person transactions, excluding Excluded Activities.
2. Income from Non-FZ Person transactions, limited to Qualifying Activities (excluding Excluded Activities).
3. Other income provided the QFZP meets "De Minimis Requirements."

As to the Cabinet decision, the income earned can arise from different categories:

1. Income from Non-FZ Person
2. Income from FZ Person
3. Income from Real Estate
4. Income from permanent Establishment
   

 

 

Income earned from a Non-FZ person

For the income earned by a QFZP from a Non-FZ Person, the distinction to be made is between Qualifying Activities, Excluded Activities and Non-Qualifying Activities:

• If the source of income arises from a Qualifying Activity of an FZ Person, the income will be considered as Qualifying Income and is subject to 0%.
• If the source of income arises from an Excluded Activity or a non-Qualifying Activity of an FZ Person, the income will be considered Taxable Income and is subject to 9%. However, this is subject to the so-called “De Minimis Requirements” rule (explained below).

 As per Ministerial Decision No. 139 of 2023, Qualifying Activities include:

• Manufacturing of goods or materials;
• Processing of goods or materials;
• Holding of shares and other securities;
• Ownership, management and operation of ships;
• Reinsurance services;
• Fund management services subject to UAE regulatory oversight;
• Wealth and investment management services subject to UAE regulatory oversight;
• Headquarter services to related parties;
• Treasury and financing services to related parties;
• Financing and leasing of aircraft, including engines and rotatable components;
• Distribution in or from a Designated Zone that meets relevant conditions;
• Logistics services;
• Any activities ancillary (qualified as such if it has no independent function but is necessary to perform the main Qualifying Activity) to the above activities.

Excluded Activities cannot benefit from a 0% tax rate, relate to:

• Banking activities subject to UAE regulatory oversight;
• Insurance activities subject to UAE regulatory oversight;
• Finance and leasing activities subject to UAE regulatory oversight;
• Ownership and exploitation of immovable property (other than Commercial Property located in an FZ);
• Ownership and exploitation of intellectual property assets;
• Any transactions with a natural person, except certain transactions in relation to Qualifying Activities;
• Any activities ancillary (qualified as such if it has no independent function but is necessary to perform the main Excluded Activity) to the above activities.

There is no definition of non-Qualifying activities but we understand that it concerns all the categories that does not fall under the definition of Qualifying activity.

“De Minimis Requirements” are fulfilled where Non-Qualifying Revenue derived by a QFZP are:

• Up to 5% of total revenue earned in a tax period by the QFZP; or
• Up to AED 5 million of revenue earned in a tax period by the QFZP;

If the Excluded Activity or Non-Qualifying Activity income level is above the “De Minimis Requirements” threshold, then the FZ Person be subject to tax at the standard 9% CT rate in the relevant tax period.

Summary of application of the CIT where the source of income derives from non-FZ persons:

Qualifying activities	Excluded activities	Non-qualifying activities
0%	9% unless de minimis requirements threshold	9% unless de minimis requirements threshold

 

Income earned from a FZ person :

For the FZ persons the distinction should be made between Excluded and non-Excluded activities. The excluded activities are those indicates above. Thus, if the income derives from Excluded activities it should be subject to 9% corporate income tax. Otherwise, the income is exempted.

Excluded activities	Non-excluded activities
9%	0%

.

Income attributable to Real Estate

As to the above-mentioned Cabinets decision, the tax treatment is different whether the income derives from a real estate property located in the FZ is a Commercial Property or a Non-Commercial Property.

If the transaction of the Commercial Property is with a Non-FZ Person, the income derived from the transaction will be taxable at 9%. If the transaction of the Commercial Property is with an FZ Person, the income derived from the transaction will be subject to a 0% tax rate.

Any transaction or dealing with Non-Commercial Property by any other person will result in the income being taxed at 9%.

	With FZ-person	With non-FZ person
Commercial property	0%	9%
Non-Commercial property	9%	9%

 

Income attributed to a permanent establishment :

When a business activity of a non-UAE resident enterprise amounts to a certain threshold of presence or activity in the UAE, the PE definition becomes crucial. Non-UAE resident businesses with a PE in the UAE are subject to 9% UAE CT on the profits allocated to that PE.

UAE CT Law provides a definition of PE under Article 14. The PE definition under UAE CT Law shows similarities and differences with the related concepts in the OECD Model Tax Convention on Income and Capital 2017 (OECD MC) and the United Nations Model Double Taxation Convention between Developed and Developing Countries 2017 (UN MC).

A PE refers to a place of business through which the business of an FZ Person is wholly or partly conducted. 

• If the source of income is derived from a UAE PE, the income is taxed at 9%.
• If the income is derived from a non-UAE PE, the income is also taxable at 9%. However, pursuant to applicable double tax treaties, foreign tax credit may be available.
  • Adequate substance and outsourcing:

Article 7 of the Cabinet Decision No. 55 of 2023 indicates that a FZ person to be considered as Qualified shall have substance (adequate assets, adequate number of qualified employees and incur an adequate number of expenditures).

Activities can be outsourced to a Related Party in a Free Zone or a third party in a Free Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.

Consequences :

The corporate income tax will introduce a lot of changes in the UAE taxation. Therefore, freezones falling under this new tax should comply with different filling obligations, audit their financial statements, etc.

This can also have an impact for the group structuring.

Our team can help you to do the right choice when setting up your business and structuring your activity.