Updated rules of the Corporate Tax regime for Free Zone Persons

PGP Tax Consultancy advises that the earlier published Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023 concerning the Corporate Tax regime for Free Zone Persons have been repealed and replaced by:

  • Cabinet Decision No. 100 from 25 October 2023 on Determining Qualifying Income for a Qualifying Free Zone Person;
  • Ministerial Decision No. 265 from 27 October 2023 regarding Qualifying Activities and Excluded Activities.

Both decisions partially reproduce the provisions of the previous decisions, at the same time significantly supplementing the corporate tax rules for free zone persons. The decisions came into effect on 1 June 2023.
We would like to draw your attention to the several new changes for free zone business.






Income Derived from Qualifying Intellectual Property

Income derived from the ownership or exploitation of Intellectual Property, previously attributed by Ministerial Decision No. 139 to Excluded Activities, has ceased to be such. In the new Ministerial Decision No. 265 this type of activity is no longer mentioned in the list of Excluded Activities.

Moreover, now, if certain conditions are met, this income can become Qualifying Income.

Qualifying Intellectual Property includes Patents, Copyrighted Software and any right functionally equivalent to a Patent, but does not include any marketing related intellectual property assets, such as trademarks.

Not all income will be taxed at a zero rate, but only the part of it that is localized in the free zones of the UAE. In the terminology of BEPS Action 5 Report (2015) this is the ‘nexus ratio’. It is defined as follows:

  1. the taxpayer's R&D costs incurred in the UAE (not necessarily in the free zones) but paid to independent parties abroad are taken to be treated as Qualifying Expenditures;
  2. an additional 130% of Qualifying Expenditures (Up-lift Expenditures) are to be added to Qualifying Expenditures (but so that the total is smaller than the Overall Expenditures) to give in total 230% of the Qualifying Expenditures;
  3. the amount of expenses received at Step (2) is to be divided by the Overall Expenditures. The nexus ratio is thus obtained;
  4. Overall Income from the corresponding IP asset is to be multiplied by the nexus ratio. This will be the Qualifying income.

It is remarkable that the general rules on economic substance do not allow businesses with patent and similar assets to conduct R&D abroad. But this will not prevent companies that violate these rules from applying a zero rate in the UAE. If all candidates for a zero rate must carry out Core Income-Generating Operations in a free zone or a designated zone, then an IP business can retain contractors in the mainland and independent contractors abroad for this.


Trading of Qualifying Commodities

The Qualifying Activity list has been updated with a new one – the Trading of Qualifying Commodities (Article 2(1)(с) of Ministerial Decision No. 265).

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

The same article defines a ‘Recognised 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 recognised outside the State of equal standing’.

The above provisions allow us to conclude that making transactions on a recognized exchange will be a Qualifying Activity for the purposes of applying a zero rate. In the case of a transaction not on an exchange, but with a commodity that is traded on a recognized exchange, the qualification is not so obvious.

In Article 1 of the Decision cited above, the expression ‘are traded on’ is used on a recognized commodity exchange market. There are two possible interpretations of this expression:

Option  1 assumes that it refers to goods that are traded on the stock exchange, that is, if identical goods are sold on the stock exchange, then goods sold outside the exchange fall within qualified commodities.

Option 2 proceeds from the conception that goods actually sold by the taxpayer on the exchange fall within qualified commodities, that is, if, for example, the taxpayer sold part of the goods on the exchange, and the other part outside it, then only the first part falls within qualified commodities.

Explanations as to which interpretation option is correct will have to be awaited from the MoF or FTA.


Distribution in or from a Designated Zone

This type of Qualifying Activity deserves separate comment, having drawn so much attention during the Public Consultations of the MoF. The new Decisions have not made any changes to the distribution rules.

With regard to this, many experts commented that, as a result of Public Consultations, the Ministry of Finance had concluded that distribution from a Designated Zone confers an entitlement to a zero corporate tax rate only if goods are imported into the UAE through a Designated Zone.

However, this conclusion does not seem to be entirely correct.

First of all, literally, Art. 2(1)(l) and Art. 2(3)(l) of Decision No. 256 (and Decision No. 139) can be interpreted in two different ways:

  • the activity of distributing goods or materials falls under Qualifying Activity if:
  • this activity is undertaken in or from a Designated Zone, and
  • the goods or materials entering the State are imported through the Designated Zone;
  • the activity of distributing goods or materials falls under Qualifying Activity if:

- this activity is undertaken in or from a Designated Zone, and

- if the goods or materials enter the State they are imported through the Designated Zone.

The second option seems quite reasonable.

According to the rules of the Designated Zone VAT Guidea supply of goods within a Designated Zone is treated as made outside the UAE’, and ‘a movement of goods from a Designated Zone into the mainland UAE is treated as an import of goods into the UAE’.

That is, the words ‘entering the State’ and ‘are imported’ used in Decisions No. 256 and No. 139 allow the distributor, having bought goods outside the UAE or in the Designated Zone, to move them only in one direction – for sale to a new distributor or retailer on the mainland (then both the entry and import of goods are possible), unless the second broad interpretation of the rule is applied.

At the same time, aside from the above, there are situations such as:

  • the goods are moved to the Designated Zone and then are exported from there, without them ‘entering’ and being ‘imported’ into the territory of the UAE;
  • goods are moved to the Designated Zone and sold other than to an end user in the Designated Zone, without them ‘entering’ and being ‘imported’ into the territory of the UAE;
  • the goods are purchased in the UAE and then exported through the Designated Zone abroad;
  • the goods are purchased and sold abroad by a Designated Free Zone Person, without them being physically moved to the Designated Zone territory.

Despite the ambiguity of the latter situation, it is unlikely that the Ministry of Finance wanted to deny the benefits to the first three distributors, who carry out physical distribution of goods to or from the Designated Zone.

Secondly, let's take a close look at the text of the Public Document. In it, the MoF simply illustrates, with examples, distribution ‘in or from a Designated Zone’, explaining how to interpret the rule written in Decision No. 139. If the Ministry of Finance planned to change the previously existing rule, then new rules would appear. But the definition of distribution has remained unchanged.

Finally, only an expansive interpretation of the rule makes it possible to understand why Article 2(3)(l) of the new Decision lists ‘exportation’ among the key activities of the distributor. After all, if a zero rate was possible only for goods entering the State and imported through the Designated Zone, then this type of activity should not be mentioned at all.

The final point in this dispute will again have to be put to the MoF or the FTA.


Holding shares and other securities for investment purposes

Essentially important changes have been made to such a Qualifying Activity as the ‘holding of shares and other securities'. Now ownership should be carried out for an investment purpose. Shares and other securities are deemed to be held for investment purposes when held for an uninterrupted period of at least twelve (12) months.


Detailed definitions of Qualifying Activities

The new Ministerial Decision No. 256 describes in more detail what is meant by certain Qualifying Activities. Moreover, some of the wording found its way into the Decision from a public document.

For example, ‘treasury and financing services to Related Parties’ includes ‘the provision of cash and liquidity management, financing, debt management, and financial risk management and related advisory services to Related Parties, including centralised payment and collection activities for or on behalf of Related Parties’. Definitions of headquarters services and others are given.


The new Decisions do not mention ‘incidental’ in relation to Qualifying Income

Such income was mentioned in Decision No. 55 as income that was equated to Qualified Income. But it has disappeared from the new Decision No. 100.

However, in Ministerial Decision No. 256, a more detailed definition of ancillary activity is given, the income from which is also considered Qualifying Income.

According to the Article 2(4) of the Decision ‘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 and is so closely related to the main activity that it should not be regarded as a separate activity’.



Business will have to re-do the work on analyzing the types of activities it carries out in order to classify them as Qualifying, and assess whether it is possible to apply the 0% rate to income, taking into account the new Decisions of the Ministry of Finance.

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