0% for the Trading of Commodities. A designated zone is not required. But do you have to sell your goods on an exchange to qualify?

On 27 October 2023, the UAE’s Minister of Finance released Decision No. 265 replacing Decision No. 139 of 1 June 2023, previously in effect, with an updated list of Qualifying Activities. The replacement shall be applied retroactively from 1 June 2023.

Paragraph (с) of Cl. 1 of Art. 2 of Decision No. 265 of 27 October 2023  qualifies the ‘Trading of Qualifying Commodities’ for the 0% Corporate Tax rate.

Deciphering what this trading is, para (c) of Cl. 3 of the same Article specifies: ‘Trading of Qualifying Commodities means the physical trading activities of Qualifying Commodities and associated derivative trading used to hedge against risks involved in such activities’.

Article 1 of the Decision includes in Qualifying Commodities ‘Metals, minerals, energy and agriculture commodities that are traded on a Recognized Commodities Exchange Market in raw form’.

The same Article defines “Recognized Commodities Exchange Market” as ‘any commodities exchange market established in the State that is licensed and regulated by the relevant Competent Authority, or any commodities exchange market established and recognized outside the State of equal standing’.

Let’s determine which activity with the above Commodities is Qualified.

Option 1. Top clarity

The execution of transactions on a recognized exchange will definitely be qualified for the purposes of applying the zero rate. A dispute in this case can be based only on the status of the exchange platform.

Option 2. The Next best thing

These rules allow the disqualification of income from those transactions that are made outside of recognized exchanges with commodity items that are not traded on recognized exchanges. This is sad but clear.

Option 3. The Commodities are traded on a Recognized exchange. But we traded them outside of any exchange

In this scenario the qualification will not be as obvious.

In the definition cited above, Article 1 of the Decision states ‘Metals, minerals, energy and agriculture commodities that are traded on a Recognized Commodities Exchange Market in raw form’. There are two possible interpretations of the bold text:

1st version

Commodities that have been traded or are being traded on the exchange, i.e., if identical Commodities are sold on the exchange, then Commodities sold outside the exchange are also categorized as qualified commodities.

2nd version

Only Commodities that are sold on the exchange by the taxpayer are categorized as Qualified Commodities, that is, if, for example, the taxpayer sold part of the Commodities on the exchange and the other part outside it, then only the first part falls within Qualified Commodities.

The inclusion of the feature “are traded on a Recognized Commodities Exchange Market” in the definition of Qualified Commodities points in favor of the 1st version. This feature is an attribute of the product, but not what needs to be done with it.

In the description of the Qualified Activity, Art. 2(3)(c) does not include trading of the Commodities on an exchange. Indeed, the Minister doesn’t require a Qualifying Commodity to be sold on an exchange.

Taking into account the above, it seems that trading with those commodity items that are traded on a Recognized Commodities Exchange Market in the UAE or on foreign exchanges with a similar status is qualified – even if a taxpayer sold these commodity items outside of any exchange.

For example, Dubai Gold & Commodities Exchange (DGCX) does not trade in ferrous metallurgy products. 

However, the London Metal Exchange (LME) trades:

  • Hot-rolled coil (HRC),
  • Steel Rebar;
  • Steel Scrap.

Steel scrap sold from a designated zone or from regular free zone is qualifying regardless of the fact that it sold outside of the LME.

The definition of Recognized Commodities Exchange Market does not prevent the qualification of these metals even if they are not shipped under the terms of the relevant LME contracts. For example, hot rolled coil (HRC) contracts are traded on FOB China, NW Europe, N America terms. If the delivery does not fit within the specifications of these contracts, then this does not affect whether HRC is recognized as a qualified exchange commodity.

Disclaimer   

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law.

See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have status of the author’s opinion only. Like any human job, it may contain inaccuracy and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

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