Under the UAE Corporate Tax Law, the Qualifying Income (QI) of a Qualifying Free Zone Person (QFZP) is exempt from taxation. Income derived from Qualifying Activities that qualify as QI is not subject to tax liability. Conversely, income from other activities, including Excluded Activities, constitutes Non-Qualifying Income, which is subject to a 9% tax liability as per Article 3 of the Corporate Tax Law.

What are Qualifying Activities under UAE Corporate Tax Law?

Article 2 of the Ministerial Decision outlines the activities classified as Qualifying Activities for Qualifying Free Zone Persons:

1. Manufacturing of Goods or Materials:

• Production of goods or materials from raw materials.
• Improvement of goods or materials from raw materials.
• Assembly of goods or materials from raw materials or components.

2. Processing of Goods or Materials:

• Preparation, treatment, transformation, or conversion of goods or materials for commercial, industrial, or sales purposes.

3. Trading of Qualifying Commodities:

• Includes trading in metals, minerals, energy, and agricultural commodities in their raw form within recognized commodity exchange markets. Physical trading (buying and selling) and associated derivative trading to mitigate risk are considered Qualifying Activities.

4. Holding of Shares and Other Securities for Investment Purposes:

• Involves holding shares of any class and negotiable or non-negotiable financial instruments. If a QFZP holds these shares or securities continuously for 12 months, they are deemed to be held for investment purposes.

5. Ownership, Management, and Operation of Ships:

• Qualifying activities include:
• International transportation of goods, passengers, or livestock.
• Towing activities.
• General assistance at sea.
• Dredging activities.
• Chartering and leasing of ships.
• Exclusions: Local transport, leisure or recreational use, floating hotels, restaurants, and casinos are not considered Qualifying Activities.

6. Reinsurance Services.

7. Fund Management Services:

• Includes portfolio and risk management, as well as other services related to the daily management and operations of investment funds, subject to regulation by the Competent Authority.

8. Wealth and Investment Management Services:

• Comprises discretionary and non-discretionary investment management, general advisory services, and other wealth management-related advisory services.

9. Headquarter Services to Related Parties:

• Activities related to administering and managing business operations solely for related parties, including:
• Senior and general management.
• Captive insurance services.
• Administrative and procurement services.
• Business planning and development.
• Risk management and coordination of group activities.

10. Treasury and Financing Services to Related Parties:

• Activities such as financing, debt management, financial risk management, cash and liquidity management, and centralized payment services.

11. Financing and Leasing of Aircraft:

• Covers financing, leasing (granting the right to use assets for rent), and securitization of aircraft, aircraft engines, or routable components.

12. Distribution of Goods or Materials in or from a Designated Zone:

• Involves buying and selling goods or materials and related activities, including:
• Importation.
• Inventory management.
• Storage.
• Transportation and handling.

13. Logistics Services:

• Providing storage or transportation services without taking title to the goods, including:
• Cargo handling.
• Warehousing.
• Customs brokerage services.
• Order and inventory management.
• Freight forwarding services.
• Packing and unpacking.

14. Ancillary Activities:

• Activities that support the aforementioned Qualifying Activities.

What are Excluded Activities under UAE Corporate Tax Law?

Article 2 of the Ministerial Decision outlines the activities classified as Excluded Activities for Qualifying Free Zone Persons as follows:

1. Transactions with Natural Persons:

   Activities involving a Qualifying Free Zone Person and a natural person are deemed excluded, except in specific cases such as:
• Ownership, management, and operation of ships
• Financing and leasing of aircraft
• Fund management services
• Wealth and investment management services

2. Banking Activities:

   Activities subject to regulatory oversight are classified as Excluded Activities.

3. Insurance Activities: 

   Insurance activities that are also regulated are considered excluded, with the exception of:
• Reinsurance services
• Headquarters services provided to related parties

4. Finance and Leasing Activities:

                     This category includes:

• Providing credit or financing of any kind
• Leasing or granting the right to use an asset for rent or other considerations
• Operating leases, etc.

  5. Ownership or Exploitation of Immovable Property

              Excluded when the transaction pertains to commercial property (within the Free Zone) with a Free Zone Person.                                                      6.Ancillary Activities                                                                                                                                                                                                                                Any activity that supports the aforementioned excluded activities falls into this category.

DE MINIMIS REQUIREMENT

The De Minimis condition is satisfied when the Non-Qualifying Revenue  generated by the Qualifying Free Zone Person (QFZP) during a tax period does not exceed the lower of the following two thresholds:

• 5% of Total Revenue (TR) earned by the QFZP in the tax period; or
• AED 5 million.

QUALIFYING INCOME FROM QUALIFYING INTELLECTUAL PROPERTY (QIP)

Qualifying Intellectual Property encompasses patents, copyrighted software, and other rights comparable to patent rights. According to Article 7 of Cabinet Decision No. 100 of 2023, income generated from the ownership and exploitation of Qualifying Intellectual Property is classified as Qualifying Income.

DOCUMENTS AND RECORDS TO BE MAINTAINED BY QFZP FOR QIP

A Qualifying Free Zone Person must maintain all necessary documents and records to demonstrate the following regarding QIP:

• Ownership and rights to exploit the QIP.
• Qualifying Expenditures and Overall Expenditures incurred.
• Overall Income derived.
• The connection between Qualifying Expenditures and the Overall Income generated.