Cabinet Decision No. 100 of 2023
Cabinet Decision No. 100 of 2023: Clarification on Free Zone Entities’ Qualifying Income Determination
In accordance with Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law), the UAE Cabinet has released Cabinet Decision No. 100 of 2023, which offers thorough guidance on the Determination of Qualifying Income for Qualifying Free Zone Persons (QFZPs). Cabinet Decision No. 55 of 2023 is replaced by this decision, which establishes precise guidelines for income eligibility, de minimis limits, and compliance requirements for Free Zone businesses looking to take advantage of the 0% Corporate Tax regime.
Important Points of Cabinet Decision No. 100 of 2023
1. Application Scope
• All Qualifying Free Zone Persons (QFZPs) as specified by corporate tax law are covered.
2. Qualifying Income Categories
• Revenue from transactions with individuals in the Free Zone, as long as it doesn’t stem from activities that are excluded.
• Revenue from non-free zone transactions, but only for activities that qualify.
• Profits from the possession or use of qualifying intellectual property (IP).
• Other income, subject to the de minimis conditions listed below.
3. De Minimis Conditions for Income That Doesn't Qualify
• During any tax period, non-qualifying revenue cannot be more than 5% of total revenue or AED 5 million, whichever is less.
• Among the non-qualifying revenue are:
- Income from Activities Not Included.
- Income from non-qualifying activities involving individuals from non-free zones.
- Income from individuals in the free zone who do not benefit from the goods or services.
• The total and non-qualifying revenue calculations do not include revenue from specific real estate transactions or income due to domestic or foreign permanent establishments.
4. Handling of Revenue from Real Estate and Permanent Establishments
• Under standard corporate tax regulations, income from domestic or foreign permanent establishments is completely taxed.
• Revenue from real estate situated in free zones:
- Taxable (with regard to commercial property) if leased or sold to non-free zone individuals.
- If it has to do with transactions involving non-commercial property, it is taxable.
5. Intellectual Property (IP) Income Qualifications
• Includes revenue from copyrighted software, patents, and rights that are functionally identical.
• Revenue must adhere to Ministry-issued norms, including nexus-based regulations.
6. The Economic and Substance Presence in Free Zones
• QFZPs must continue to have sufficient economic substance by:
Possessing adequate resources, skilled workers, and expenditures inside the designated or free zone.
• With proper supervision, core revenue-generating operations may be outsourced within Free Zones or Designated Zones.
• Outsourcing outside the UAE is permitted for Qualifying IP, provided that it is done under supervision and not to a Related Party.
7. Observance and Documentation
• QFZPs need to uphold:
-Documents proving the type of income and adherence to qualifying income and de minimis regulations.
-There is proof of economic activity and substance in the Free Zone.
• Income from immovable property and permanent establishments must be properly segregated.
In conclusion:
Cabinet Decision No. 100 of 2023 guarantees compliance with international tax principles, including substance and nexus criteria, and offers clear guidance on what qualifies as Qualifying Income for Free Zone businesses. In order to take advantage of the 0% corporate tax rate, Free Zone firms must thoroughly examine their internal processes, revenue sources, and transactions.