Tax News

Dubai: The UAE Ministry of Finance has introduced significant changes with the issuance of Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023. These decisions specifically impact qualifying income and activities within free zones. Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, emphasized the vital role of free zones in the UAE’s economic growth and their significance in attracting foreign direct investment. The decisions underscore the UAE’s commitment to aligning with international taxation standards and enhancing the competitiveness of its Corporate Tax regime. Cabinet Decision No. 100 broadens the definition of Qualifying Income to encompass income derived from the ownership or exploitation of Qualifying Intellectual Property. This aligns with the OECD’s modified nexus approach, detailed in Ministerial Decision No. 265 of 2023. Ministerial Decision No. 265 designates the trading of Qualifying Commodities as a Qualifying Activity, qualifying for a 0% corporate tax rate for income generated from the physical trading of various commodities on recognized stock exchanges. It also includes derivative trading income utilized for risk hedging in such trading activities. Moreover, the Ministerial Decision provides clarity on the scope of Qualifying and Excluded Activities, offering transparency to businesses operating within free zones. The decisions aim to maintain a competitive Corporate Tax regime, reinforcing the UAE’s position as a global hub for business and investment, and align with its sustainable development agenda.

In March, we emphasized the need to distinguish between UAE’s tax residency regulations and being deemed a ‘resident person’ for corporate tax purposes. Contrary to the misconception that an individual is exempt from UAE corporate tax without a primary or permanent residence in the UAE or staying less than 90 days, the Federal Tax Authority clarified that physical residence, whether by citizenship or residency visa, is not the criterion for determining corporate tax residency or taxability. Individuals engaging in a ‘business’ or ‘business activity’ in the UAE are considered ‘resident persons’ and subject to taxation, provided their turnover exceeds Dh1 million annually. The accuracy of immigration status, visas, work permits, and business licenses does not affect tax implications. The scope extends beyond ‘business’ to include ‘business activity,’ potentially triggering corporate tax liability. ‘Business’ encompasses any regular, independent activity, such as industrial, commercial, or vocational activities, while ‘business activity’ considers short-term activities conducted in the UAE. Determining factors include the location of individuals contributing to services or assets supporting service rendering in the UAE. For instance, a person regularly providing architectural services in the UAE is considered a ‘resident person’ subject to the Dh1 million threshold. Overseas individuals, including performers, sportspersons, and celebrities, need to assess whether their activities constitute a ‘business activity’ in the UAE, potentially obligating them to corporate tax compliance. Tax treaties with other countries may influence tax obligations. Where overseas individuals are not engaged in a ‘business activity,’ their UAE-sourced income might be subject to withholding tax. The current withholding tax rate is 0%. The guide clarifies that certain activities, like raffle winnings or game show prizes, are not typically considered ‘business’ or ‘business activity.’ However, sports personalities earning income in other countries often encounter similar tax considerations on winnings. Resident individuals engaged in independent business activities, such as doctors, artists, or social media influencers, should assess tax implications. Golden Visa holders earning income other than wages or investment income need special attention. Individuals and professionals should be aware of their tax obligations, seeking timely consultations for a smooth transition into the tax era with confidence.

Commodity businesses at free zones will be much pleased with latest corporate tax updates A big relief has been provided to commodity traders operating from free zones that have not been deemed ‘designated zones’. Income derived from trading of ‘qualifying commodities’ with non-free zone persons (domestic or overseas) would also be eligible for 0 per cent tax rate. Qualifying commodities means metals, minerals, energy and agriculture commodities traded on a recognized commodities exchange market – in the UAE or overseas – in raw form. It applies to physical trading activities of such commodities and associated derivative trading used to hedge against risks involved in such activities. Qualifying intellectual property Income from the ownership or exploitation of all intellectual property assets was earlier specifically excluded from 0 per cent rate. Under the revised decisions, a certain portion of the income derived from the ownership of ‘Qualifying Intellectual Property’ is eligible for 0 per cent rate. Qualifying IP includes patents and copyrighted software. Any other rights that are functionally equivalent to a patent are also included. (For example, utility models, IPR for plants and genetic material, orphan drug designations, and extensions of patent protections.) However, any marketing related IPR – such as trademarks – would not be eligible. The proportion of the expenses incurred to fund R&D activities directly connected with the creation, invention or significant development of such qualifying IP – along with a deemed ‘uplift expenditure’ – will determine how much income from qualifying IP could enjoy 0 per cent rate. Clarity on adequate substance Maintaining ‘adequate substance’ is an important compliance requirement to claim 0 per cent tax rate. Adequate substance requires conducting core income-generating activities (CIGA) and maintaining adequate assets, a certain number of employees and incurring operating expenditure. Core income-generating activities mainly consist of those functions that drive the business value and are not mostly support activities. It requires an adequate number of qualified full-time employees. The adequate substance should be maintained in such free zone – or a designated zone – where the qualifying activity is required to be conducted. Even the third-parties to whom core income-generating activities could be outsourced should meet this location condition. Points to ponder Income from headquarter services to related parties – eligible for 0 per cent – has now been explained in detail. ‘Headquarter services’ includes the administering, overseeing and managing of business activities of related parties, including the provision of senior and general management, captive insurance services, administrative services, procurement services, business planning and development, risk management, coordination of group activities, and in general incurring expenditures on behalf of related parties and providing other support services to related parties. The ‘headquarter services’ should be treated carefully. Apart from the anti-abuse rules, a question remains if a mainland company – otherwise ineligible for 0 per cent rate and/or operating mainland retail stores – could restructure its management activities (including owners’ salaries) into a separate free zone company. Similarly, free zone companies – otherwise ineligible for 0 per cent – should split their management activities into a separate free zone company. Even though transfer pricing will apply, the corporate group may be able to enjoy 0 per cent on a fair portion of its overall profits. The activity of distribution of goods or materials in or from a designated zone has been explained in detail, thereby addressing pertinent concerns of taxpayers. I have come across many interesting scenarios that still need careful evaluation – be it the distribution of equipment not intended for resale, ensuring that overseas customers are resellers, trading of goods that are not qualifying commodities, or third-port shipment sales. With more clarity available on free zone tax incentives, business owners need to ensure that they ask the right questions to optimize the tax impact and compliance requirements. Offset Paper ======================================= Indonesia (per Ream) ————————————— 23×36              75             12000 27×34              75             14000 25×35.5            75            13,400 30×40              75            18,150