The wait is finally over! Clarifications on the taxability of Free Zone businesses are here. On the 3rd November 2023, the UAE Ministry of Finance issued Cabinet Decision No. (100) of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person and Ministerial Decision No. (265) of 2023 Regarding Qualifying Activities and Excluded Activities for the purposes of Federal Decree-Law No. 47 of 2022. The decisions have repealed the previously issued Cabinet Decision 55 and Ministerial Decision 139.
What are the significant updates?
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The scope of ‘Qualifying Income’ has been expanded to include income derived from ownership and exploitation of Qualifying Intellectual Property and Trading of Qualifying Commodities.
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Formula for computing the portion of income derived from ownership and exploitation of Qualifying Intellectual Property to form part of Qualifying income.
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Definitions for the "Qualifying Activities" have been introduced or modified as required to align the spirit of the law with the former Decisions and public consultation document.
Qualifying Intellectual Property:
Income from ownership or exploitation of Intellectual Property is no longer considered an Excluded Activity. Businesses that earn income from owning or exploiting intellectual property assets should carefully assess whether they can benefit from the 0% tax rate. Income derived from the ownership or exploitation of intellectual property that is not Qualifying Intellectual Property and income in excess of Qualifying Income calculated based on the formula given below shall be considered Taxable Income and taxed at @9%.
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Qualifying Intellectual Property: Patents, Copyrighted Software and any right functionally equivalent to a Patent that is both legally protected and subject to a similar approval and registration process to a Patent, such as utility models, intellectual property assets that grant protection to plants and genetic material, orphan drug designations, and extensions of Patent protection, but not including any marketing related intellectual property assets, such as trademarks.
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Patents: Any patent granted under the law regulating patents in the State or granted under the relevant law of a foreign jurisdiction.
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Copyrighted Software: Any copyright subsisting in software granted under the law regulating copyrights in the State or granted under the relevant law of a foreign jurisdiction.
The Qualifying Income shall be determined as follows:

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Qualifying Expenditures means expenditures incurred to fund research and development activities, conducted either by the Qualifying Free Zone Person or outsourced to any Person in the State or any Person outside the State that is not a Related Party, directly connected with the creation, invention or significant development of the Qualifying Intellectual Property.
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Overall Expenditures means total expenditures incurred to fund research and development activities, conducted either by the Qualifying Free Zone Person or outsourced to any Person, directly connected with the creation, invention or significant development of the Qualifying Intellectual Property, including acquisition costs of the Qualifying Intellectual Property.
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Overall Income means royalties or any other income derived from Qualifying Intellectual Property as determined according to the provisions of the Corporate Tax Law, including 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 under Article (34) of the Corporate Tax Law.
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Uplift Expenditures means the Qualifying Expenditure increased by 30% (thirty percent). The Up-lift Expenditures shall be applicable only to the extent that Qualifying Expenditures, after being up-lifted is less than or equal to Overall Expenditures
Trading of Qualifying Commodities:
This decision now includes 'Trading of Qualifying Commodities' part Qualifying Activity. Qualifying Commodities comprise metals, minerals, energy, and agricultural commodities traded in their raw form on a Recognized Commodities Exchange Market that is licensed and regulated by a competent authority, whether within or outside the State. Trading of Qualifying Commodities involves both physical trading and associated derivative trading, which are employed to hedge against the risks associated with these activities.
Major definitions as per Ministerial Decision No. (265) of 2023:
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Manufacturing of goods or materials includes the production, improvement or assembly of products and materials from raw materials or components.
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Processing of goods or materials includes the preparation, treatment, transformation or conversion of goods or materials into another form of good or material for commercial or industrial use or sale.
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Trading of Qualifying Commodities means the physical trading activities of Qualifying Commodities and associated derivative trading used to hedge against risks involved in such activities.
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Holding of shares and other securities for investment purposes includes the holding of the following:
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Shares of any class in the share capital of another juridical person or other types of equitable interests that entitle the holder to receive profits and liquidation proceeds, whether as a legal or beneficial owner.
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Negotiable or non-negotiable financial instruments, including, derivative instruments, financial commodities, and other investment instruments that are or can be traded in a public or private market or that are convertible or exchangeable into a security or which confer a right to purchase a security, with the exception of the holding of financial or investment instruments that are issued pursuant to a securitization of receivables from a non-financial asset.
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Shares and other securities are deemed to be held for investment purposes when held for an uninterrupted period of at least (12) twelve months.
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Ownership, management and operation of Ships includes the ownership, management and operation of Ships used in the international transportation of passengers, goods or livestock, towing activities and the provision of general assistance to Ships at sea, dredging activities at sea, and leasing and chartering of Ships on a bareboat basis used in the international transportation of passengers, goods or livestock. This activity shall not include Ships used for local transportation or leisure or recreational purposes, or as floating hotels, restaurants or casinos.
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Headquarter services to Related Parties 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.
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Distribution of goods or materials in or from a Designated Zone, includes the buying and selling of goods, materials, component parts or any other items that are tangible or movable and may include the importation, storage, inventory management, handling, transportation and exportation of those goods or materials to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale, provided such activities are conducted in or from a Designated Zone and the goods or materials entering the State are imported through the Designated Zone.
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Logistics services includes the storage and transportation of goods or materials on behalf of another Person without taking title to the good or material of that other Person, including cargo handling, warehousing, container storage, transport agency services, customs brokerage services, order and inventory management, freight forwarding and brokerage services, document preparation, packing and unpacking and other related services.
Stay up-to-date with the changes in the laws and regulations to ensure sound compliance and foresight. Contact us for an impact assessment of UAE Corporate Tax on your business.