Ministerial Decision No. (265) of 2023
Regarding Activities That Qualify and Activities That Are Excluded Under Federal Decree-Law No. 47 of 2022 on the Taxation of Businesses and Corporations
A New Ministerial Decision No. 265 of 2023 Specifies what activities are qualifying and excluded from corporate taxation.
“Trading of Qualifying Commodities” refers to both the actual trading of Qualifying Commodities and related derivative trading. It is mandatory to trade commodities on an approved commodity exchange market. Not just Designated Zones, but any Free Zone (FZ) authorized for Corporate Tax (CT) may be used for this business.
- Commodities that meet the qualifying criteria include raw commodities traded on recognized commodities exchanges, such as metals, minerals, energy, and agricultural products.
- Any market for commodities formed within the State that holds a license and is overseen by the appropriate Competent Authority, or any market for commodities established and acknowledged outside the State of equivalent status.
The following actions carried out by an individual
who qualifies for a free zone will be regarded as qualifying actions:
- Production of resources or things
- Material or product processing.
- Qualifying Commodity Trading.
- Keeping stocks and other securities for financial purposes
- Ship ownership, operation, and management.
- Services for Reinsurance.
- Services for managing funds.
- The movement of materials or goods into or out of a designated zone.
- Investment and wealth management services.
- Provide Related Parties with Headquarter services.
- Services related to financing and treasury for related parties
- Aircraft financing and leasing.
- Services for logistics.
The following activities are referred to as Excluded Activities by Cabinet Decision No. 100 of 2023:
- All transactions involving natural persons, with the exception of those pertaining to the Qualifying Activities mentioned in this Article’s Clause (1) paragraphs (e), (g), (h), and (k).
- Banking operations.
- Insurance-related activities, with no bearing on the qualifying activities mentioned in paragraphs (f) and (i)
- Financial and leasing operations that do not conflict with the qualifying activities listed in paragraphs (e), (j), and (k).
- Becoming the owner or using immovable property, except commercial property situated in a free zone, provided that the transaction pertaining to such commercial property is carried out with a Free Zone Person.
A Brief Overview of the Eligible Activities
- The process of producing, enhancing, or assembling commodities and materials from raw materials is known as manufacturing.
- The act of preparing, treating, transforming, or converting commodities or materials into a different form for sale or use in commerce or industry is referred to as processing.
The following items are included in the ownership of shares and other securities for investment purposes:
- Equitable interests that entitle the holder to profits and liquidation proceeds, whether as a beneficial or legal owner, or shares of any class in the share capital of another juridical person.
- Financial instruments that can be exchanged or converted into securities, whether they are negotiable or not. These include financial commodities, derivatives, and other investment instruments that can be traded on a public or private market.
The holding of shares and other securities for a minimum of twelve months is considered to be for investment purposes.
- Managing, leasing, and operating ships for the purpose of transporting people, products, or livestock internationally comprises the following: towing, general assistance to ships while at sea, dredging, and leasing and chartering of ships for this purpose. Ships utilized as floating lodging facilities, dining establishments, or casinos, or for local transit, leisure, or recreational purposes, are not permitted for this activity.
- Discretionary and non-discretionary fund management services, portfolio management, risk management, and other services associated with the daily administration and functioning of an investment fund by a fund manager chosen by the fund or its investors are all included in the category of fund management services.
- The services rendered by Headquarter to Related Parties encompass the management, supervision, and administration of Related Parties’ business activities. This includes senior and general management, administrative services, procurement services, captive insurance, business planning and development, risk management, group activity coordination, and general outlays made on Related Parties’ behalf as well as other support services.
- The provision of cash and liquidity management, financing, debt management, financial risk management, and related advisory services, including centralised payment and collection activities for or on behalf of Related Parties, are all included in the Treasury and financing services provided to Related Parties.
- The financing, leasing, and securitization of the financing and leasing of aircraft, engines, or rotable components is included in the financing and leasing of aircraft. This involves granting the right to use aircraft, engines, or rotable components in exchange for rental or other consideration under a finance lease, operating lease, or other arrangement.
- The act of distributing goods or materials within or to a designated zone encompasses the purchasing and selling of tangible or movable items such as materials, components, or other goods. It may also involve the importing, storing, managing inventories, handling, transportation, and exporting of those goods or materials to a customer who will resell them or parts of them, or who will process or alter them for the purpose of selling or reselling.
- The term “logistics services” refers to the handling, warehousing, container storage, cargo handling, order and inventory management, freight forwarding and brokerage, document preparation, packing and unpacking, and other related services. These services are provided on behalf of another person without assuming title to the other person’s goods or materials.
- Providing credit or financing for any form of consideration, as well as letting or otherwise granting the right to use an asset in exchange for rental income or other consideration under the terms of an operating lease, finance lease, or other arrangement, are all considered finance and leasing activities.
De Minimis Conditions
When a qualifying free zone person’s non-qualifying revenue for a given tax period does not surpass 5% (five percent) of that person’s total revenue for that tax period, or AED 5,000,000 (five million dirhams), whichever is less, the de minimis requirements are deemed satisfied.
- “Qualifying Expenditures” refers to costs incurred to finance research and development activities that are directly related to the invention, creation, or significant development of the qualifying intellectual property. These activities may be carried out in-house by the qualifying free zone person or may be contracted out to any person within the state or any person outside the state who is not a Related Party.
- “Overall Expenditures” refers to the total amount spent on funding research and development projects that are directly related to the invention, creation, or significant development of qualifying intellectual property. This includes costs associated with purchasing qualifying intellectual property, whether they are carried out in-house by the qualifying free zone person or are contracted out to another person.
- Article (34) of the Corporate Tax Law defines “Overall Income” as royalties and any other income derived from Qualifying Intellectual Property as determined by the provisions of the law. This includes embedded intellectual property income derived from the sale of products and the use of processes directly related to the Qualifying Intellectual Property as determined in accordance with the arm’s length principle.
- “Uplift Expenditures” refers to a 30% (thirty percent) increase in the qualifying expenditure, subject to the terms of this article’s clause (3).
To ascertain the amount of income from Qualifying Intellectual Property that qualifies as Qualifying Income, the Qualifying Free Zone Person is required to keep all records, books, and papers that attest to this and provide them to the Authority.