Introduction 

UAE MOF has come up with a decision specifying the activities that are to be considered as Qualifying Activities for the purposes of Qualifying Free Zone Persons. Further, it specifies the de minimis limit for the non-Qualifying Revenue along with Excluded Activities and additional conditions for Qualifying Free Zone Persons. 

What are the Qualifying Activities under UAE Corporate Tax Law? 

The following list of activities are considered to be a Qualifying Activities which are conducted by a Qualifying Free Zone: 

1. Manufacturing of goods and materials
2. Processing of goods and material  
3. Holding shares and other securities 
4. Ships ownership, management and operation 
5. Reinsurance services, subjected to regulatory oversight of the competent authority in the UAE. 
6. Services of fund management, subjected to regulatory oversight of the competent authority in the UAE 
7. Services of wealth and investment management services, subjected to regulatory oversight of the competent authority in the UAE. 
8. Headquarter services to Related Parties 
9. Treasury and financing services of Related Parties 
10. Aircraft financing and leasing which includes engines and rotable components 
11. Distribution of goods or material in or from Designated Zone to the customer who resells such goods or materials or its parts 
12. Services of logistics 
13.  Ancillary Activities to the above-mentioned ones 

Note: In the application of goods or material distribution services from designated zone to the customer, the activity of goods or material distribution services must be done by the Designated Zone and the goods or material must be imported through the Designated Zone. 

Ancillary Activity: An activity shall be considered ancillary when it serves no independent function and necessary to performance of the main Qualifying Activity. 

The activities shall have the meaning provided under the respective laws regulating these activities unless otherwise prescribed by any other decision issued by Minister.  

What are the Excluded Activities? 

The following list of activities are considered to be excluded activities: 

1. Transaction with natural person other than transaction related to Qualifying Activities like:  

• • Ships ownership, management and operation 

• • Services of fund management 

• • Services of wealth and investment management services, subjected to regulatory oversight of the competent authority in the UAE 

• • Aircraft financing and leasing which includes engines and rotable components. 

2. Banking Activity, subjected to regulatory oversight of the competent authority in the UAE. 

3. Insurance Activity, subjected to regulatory oversight of the competent authority in the UAE (except reinsurance services, subjected to regulatory oversight of the competent authority in the UAE). 

4. Activity of finance and leasing, subjected to regulatory oversight of the competent authority in the state except:  

• • Services of Treasury and financing services of Related Parties
  • Aircraft financing and leasing which includes engines and rotable components.

5. Ownership or exploitation of immovable property except Commercial Property situated in the Free Zone where transactions of such Commercial Property is conducted with the other Free Zone Persons. 

6. Ownership or exploitation of Intellectual Property Assets. 

7. Any activities that are ancillary to the above. 

Note: The activity shall be considered ancillary where it serves no independent function but is essential for the performance of the main Excluded Activity. 

The activities will have the meaning provided under the respective laws regulating these activities. 

What is the De Minimis Requirements? 

The requirement of de minimis is satisfied when the non-qualifying Revenue obtained by the Qualifying Free Zone Person in a Tax Period is not more than: 

1. 5% of the total Revenue of the Qualifying Free Zone Person in that Tax Period, or
2. AED 5,000,000

whichever is lower.  

Additional Conditions to be met by Qualifying Free Zone Person 

The Qualifying Free Zone Person has to meet the following two conditions:  

1. a) Its non-qualifying Revenue does not exceed the de minimis requirements.
2. b) It prepares audited financial statements as per the decision issued by the Minister.

Ceases to be Qualifying Free Zone Person: A Qualifying Free Zone Person that at any particular time during a Tax Period fails to meet any of the conditions shall cease to be a Qualifying Free Zone Person from the beginning of the Tax Period and for the four Tax Periods subsequently.  

Unsure if you have to prepare audited financial statements? Read our article here. 

Publication and Application 

This Decision shall be published and applicable on 1 June 2023. 

Conclusion 

It can be concluded that the new Ministerial Decision related to the Qualifying Free Zone Person is an important one as it clarifies what all will constitute as the Qualifying Activities and Excluded Activities. Additionally, it also sets the de minimis limit. 

FAQs

1. What is the meaning of “Ship”? 

Ship refers to any structures operating or set for operating in maritime navigation, regardless of power and tonnage. 

2. What is an “Aircraft”? 

Aircraft is defined as any machine that can derive support in the atmosphere from the reactions of the air, excluding reactions against the surface of the earth. 

3. What does “Designated Zone” mean? 

Designated Zone refers to a zone specified as a Free Zone for the purposes of the UAE Corporate Tax Law. 

4. What are the requirements for distributing goods or materials in or from a Designated Zone? 

The distribution of goods or materials must be carried out in or from a Designated Zone, and the goods or materials entering the State must be imported through the Designated Zone. 

5. What is considered an ancillary activity in relation to the Qualifying Activities? 

An activity is considered ancillary when it serves no independent function but is necessary for the performance of the main Qualifying Activity. 

6. How is an ancillary activity defined for Excluded Activities? 

An activity is considered ancillary when it serves no independent function but is necessary for the performance of the main Excluded Activity. 

7. What are the de minimis requirements for a Qualifying Free Zone Person? 

The de minimis requirements are considered satisfied when the non-qualifying revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed 5% of the total revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000, whichever is lower. 

8. What are the additional conditions for a Qualifying Free Zone Person? 

In addition to the conditions specified in Clause (1) of Article (18) of the UAE Corporate Tax Law, a Qualifying Free Zone Person must meet two conditions:  

(a) Its non-qualifying revenue should not exceed the de minimis requirements, and  

(b) It should prepare audited financial statements in accordance with the decision issued by the Minister. 

9. What happens if a Qualifying Free Zone Person fails to meet the conditions? 

If a Qualifying Free Zone Person fails to meet any of the conditions set out in Clause (1) of Article (18) of the Corporate Tax Law, this Decision, or any other prescribed conditions, they will cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent four Tax Periods (total 5 Tax Periods).