A bank-managed portfolio and the 0% Corporate Tax Rate


The facts

A company is operating in a UAE free zone. Upon agreement with a bank, the latter invests in shares and other securities on behalf of the Company to earn income associated with the holding and sale of these securities.


The question

Does income earned on securities purchased to be held for over 12 months qualify for the 0% Corporate Tax rate in the UAE?


The analysis

  1. To become a Qualifying Free Zone Person, one must comply with a number of conditions for which Art. 18(1) of the Corporate Tax Law provides and as additionally prescribed by Art. 5(1) of Ministerial Decision No. 265 of 27 October 2023. One of them is to maintain an adequate substance in a Free Zone.

    Article 8 of Cabinet Decision No. 100 of 25 October 2023 sets forth that

    a Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone or a Designated Zone, depending on where such activities are required to be conducted, and having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified full-time employees in a Free Zone or a Designated Zone depending on where such activities are required to be conducted…
  2. Core income-generating activities (CIGA) can be outsourced to another Person. In doing so, a Qualifying Free Zone taxpayer has to ensure that:

    • the outsourced provider is a Free Zone Person,
    • he conducts the outsourced operations in a Free zone.
  3. For the purposes of Corporate Tax, CIGAs

    may vary according to the specific activity but mainly consist of those significant functions that drive the business value for each activity carried out by a Qualifying Free Zone Person and are not exclusively or mostly support activitiesClause 2 of Article 8 of Cabinet Decision No. 100  .


  4. CIGAs for holding business include

    independent consideration, deliberation and making of investment and divestment decisions.

    See details in the research ‘How to “maintain adequate substance” in a free zone to enjoy a 0% Corporate Tax rate?’ published here.

    If a taxpayer authorizes a bank to decide what and when to buy/sell, CIGAs are conducted by this bank. All three of the above conditions must be secured and evidenced to keep the qualification.

  5. Earlier, we proposed a solution for bank deposit incomes to qualify for the 0% Corporate Tax rate: deal with a bank registered in a free zone. You may find details here.

    However, this solution doesn’t require the bank to locate its CIGA in a free zone. A deposit arrangement is not one where the bank is outsourced to conduct a CIGA.

    In contrast, being assigned to manage a portfolio, the bank is outsourced. Hence, the free zone venue of the bank’s operations related to CIGA becomes relevant.

  6. The outsourcing issues are disclosed in the MoF’s Decision No. 100 of 19 August 2020. This Decision targets ESR compliance. Unless other criteria are specified to address Corporate taxation, the Ministerial clarification for the same wording is relevant for Corporate Tax.

    As you may see below, it is not easy to evidence that a provider undertook outsourced activity in a free zone.

    The substance (e.g. employees and physicalCrossed out because Article 8(1) of Cabinet Decision No. 100/2023 doesn’t circumscribe demonstrating substance by physical assets. Hence, the physical attribute is effective for the ESR, but irrelevant for Corporate Tax. assets) of the Outsourcing Provider in the UAE free zone will be taken into account when determining the substance of the taxpayer for the purpose of the Economic Substance Test. The following conditions must be met:

    1. The Outsourcing Provider to whom all or part of the taxpayer’s CIGAs is outsourced must have, at all times in the UAE free zone, levels of:

      • employees;

      • expenditures; and

      • physical assets (e.g. premises), which are, individually and in the aggregate, adequate in relation to the CIGAs being undertaken.

      The ESR Regulations prohibit double counting by Licensees when utilizing Outsourcing Providers to carry out a CIGA.

      Therefore, where an Outsourcing Provider is providing services to one or more Licensee, the time spent by employees and the use of assets of the Outsourcing Provider cannot be counted for more than one Licensee at any given time.

      For example, if an employee of an Outsourcing Provider spends an hour performing CIGAs for a taxpayer, the same employee cannot spend the same hour performing CIGA for a different client). The obligation is on the taxpayer to ensure that no such double counting occurs.

    2. The taxpayer must at all times be able to demonstrate its ability to supervise in the UAE the carrying out of the CIGAs by the Outsourcing Provider.

    3. The taxpayer’s CIGAs that are outsourced must be undertaken in the free zone.

    4. The taxpayer remains responsible for ensuring accurate information is collected, and this will include precise details of the level of resources employed by the Outsourcing Provider, for example based on the use of timesheets.

      The taxpayer should consider service agreements it enters into for the purposes of outsourcing to ensure that such agreements include mechanisms for sharing information relating to the employees, expenditures and physical assets of the Outsourcing Provider (as applicable).

    This looks quite unrealistic to comply with in a relationship with banks managing a portfolio, for the most part.


The conclusions

In view of the above, we believe that:

  1. A taxpayer may outsource CIGAs but the provider has to conduct them in a free zone. Therefore, there is a substantial risk of failing the test if the bank managing the portfolio is not a Free Zone Person or if this bank conducts management with employees and assets outside of a free zone.
  2. To mitigate this risk the Company may:
    1. exclude the decision-making component from the bank’s responsibility and take it on itself. This may deprive the bank of outsourcing provider status, or
    2. deal with a bank registered in a free zone but in this case have evidence that:
    • its portfolio is managed by the bank (or by its branch) registered in a free zone, and
    • the bank assigned the management of the portfolio to its employees located in a free zone. 


The 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 the status of the author’s opinion only. Like any human job, it may contain inaccuracies 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.


Maria Nikonova
Head of PGP Tax Consultancy in the UAE, PhD in Law

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