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UAE Introduces New Regulations on Free Zones Taxation

The UAE has made substantial modifications to its free zone, taxation, and intellectual property legislation.

The UAE has significantly changed its regulations governing free zones, taxation, and intellectual property. 

Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023 have been repealed and replaced with the newly introduced Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023. 

These new regulations have far-reaching implications for businesses operating in free zones.

Focus on Qualifying Income (QI):

Cabinet Decision No. 100 of 2023 primarily focuses on Qualifying Income (QI) earned by Qualifying Free Zone Persons (QFZPs). 

It introduces a detailed framework for classifying income derived from the ownership or exploitation of Qualifying Intellectual Property (QIP) and trading Qualifying Trading Commodities (QTC) as QI, subject to specific criteria.

The new regulations are beneficial for QFZPs generating income from QIP and QTC. Income from QIP, which includes patents, copyrighted software, and similar rights that undergo legal protection and registration processes, has the potential to be taxed at a 0% rate, a significant change from the previous tax treatment.

The formula for Calculating QI:

A specific formula is introduced to calculate the QI income of QIP: QI income of QIP = total income from QIP * [(qualifying expenditure of the QIP + uplift expenditure of the QIP) / overall expenditure of the QIP]. 

Qualifying expenditures directly support research and development activities associated with creating, inventing, or significantly advancing the QIP.

Non-Qualifying Intellectual Property:

Income from non-qualifying intellectual property (NQI) of QIP will be subject to a 9% tax rate and will not contribute to deminimus criteria calculations. 

This treatment aligns with income earned by QFZPs from residential property and permanent establishments.

Trading of Qualifying Commodities:

The new regulations introduce “trading of qualifying commodities” as a qualifying activity. QFZPs engaged in trading activities involving commodities, such as metals, minerals, energy, and agriculture, may enjoy a corporate tax rate of 0% on income from these activities, provided all conditions are met.

Holding of Shares and Other Securities:

The activity previously known as “Holding of shares and other securities” has been modified to “Holding of shares and other securities for investment purposes.” Investment purposes entail holding these assets continuously for at least 12 months.

QFZPs generating income from QIP can now outsource core income-generating activities related to QIP to entities within the UAE or unrelated entities outside the UAE, with proper supervision.

Considerations for Businesses:

Businesses operating in free zones are advised to conduct a comprehensive analysis to determine the most suitable approach that aligns with these new regulations and maximizes the impact on corporate tax. 

The changes offer opportunities for businesses to optimize their tax positions while complying with the evolving regulatory landscape.

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