The UAE authorities have delivered important updates withinside the taxation framework for corporations and businesses, especially via the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. This regulation, effective from June 1, 2023, pursuits to adjust corporate tax responsibilities throughout numerous sectors, introducing the idea of “Qualifying Activities” and “Excluded Activities.” The latest public clarification of Cabinet Decision No. 265 of 2023 similarly clarifies those activities, presenting valuable guidance for businesses operating withinside the UAE, particularly the ones in Free Zones.
In this blog, we will discover the definition and classification of qualifying and excluded activities, the situations under which those classifications apply, and the way businesses can navigate those regulations to ensure compliance with the brand new taxation regime.
Qualifying Activities: What Counts and Why It Matters
The UAE Corporate Tax Law categorizes positive commercial enterprise activities as “Qualifying Activities,” that are subject to favorable tax treatment. Businesses concerned in those activities are eligible for tax benefits, in particular withinside the Free Zones, provided to meet the standards set out withinside the regulation and its next decisions.
- Manufacturing and Processing of Goods
Manufacturing, production, and assembly of products and materials from raw material and components are taken into consideration as qualifying activities. This consists of any activities that make a contribution to the production, improvement, or assembly of goods.
- Trading of Qualifying Commodities
The buying and selling of commodities, which include metals, minerals, energy, and agricultural merchandise on recognized commodities exchange markets, also qualifies for tax benefits. This provision applies to each physical trading and derivatives trading activities used for hedging functions.
- Holding Shares and Securities for Investment
The holding of shares and different securities for investment is another qualifying activity. This consists of the possession of shares or equitable pastimes that entitle the holder to profits or liquidation proceeds. Importantly, such investments must be held for an uninterrupted duration of at least 12 months.
- Ownership and Operation of Ships
The owner, management, and operation of ships used in worldwide transportation or for activities, which include dredging, towing, or leasing ships on a bareboat foundation, are qualifying activities. This not only encompasses ships used for leisure, leisure purposes, or neighborhood transportation.
- Reinsurance, Fund, and Wealth Management Services
Reinsurance services, alongside fund and wealth control services, are labeled as qualifying activities. These services must be performed under the regulatory framework set with the aid of using the UAE’s economic authorities, which include the Dubai Financial Services Authority or the Securities and Commodities Authority.
- Financing, Leasing, and Distribution of Aircraft and Goods
Activities associated with financing, leasing, and distribution of air-crafts, in addition to logistics services, are also identified as qualifying activities. These activities encompass the leasing of planes and their additives, distribution of products inside or from Free Zones, and offering logistics services like warehousing, freight forwarding, and customs brokerage.
Excluded Activities: What Doesn’t Qualify
Along with recognizing positive activities as qualifying, the regulation additionally excludes different activities that don’t meet the standards. These activities, even as nevertheless critical for businesses, do not benefit from the tax advantages provided under the UAE Corporate Tax Law.
- Transactions with Natural Persons
Any transactions with natural persons, besides for the ones associated with qualifying activities which include ship own-ship or wealth control services, are excluded. This rule is designed to raise awareness on commercial business-to-business activities rather than individual transactions.
- Banking and Insurance Activities
Banking and insurance operations are excluded from qualifying activities except they fall underneath unique classes which include reinsurance or wealth control services. These sectors are a problem to their very own regulatory frameworks and do now no longer enjoy the popular corporate tax incentives to be had to qualify activities.
- Real Estate Transactions
Ownership or exploitation of immovable assets is excluded from qualifying activities, with an exception made for business assets placed in Free Zones, provided the transaction is performed with a Free Zone Person. This exclusion displays the UAE’s awareness of incentivizing commercial enterprise activities that make a contribution to monetary boom in preference to actual property speculation.
- Finance and Leasing Activities
While financing and leasing activities associated with planes or ships might also additionally qualify for tax benefits, popular finance and leasing operations, which include the ones concerning property now no longer especially tied to free zones, are excluded from the favorable tax treatment.
- Ancillary Activities
Any activities ancillary to the excluded activities, which include popular economic services or administrative responsibilities that help non-qualifying operations, are also excluded. This guarantees that the best center commercial enterprise activities are eligible for the benefits.
Special Considerations for Free Zone Businesses
One of the maximum critical elements of the brand new regulation is its awareness of businesses inside Free Zones. The UAE gives large incentives for businesses running in Free Zones, provided they perform qualifying activities. However, businesses ought to adhere to unique situations to keep their eligibility, which include assembling the de minimis revenue requirement.
De Minimis Requirements
To ensure that Free Zone organizations are simply targeted on qualifying activities, the regulation introduces a de minimis threshold. The general revenue from non-qualifying activities ought to now no longer exceed 5% of the enterprise’s general revenue for AED 5,000,000, whichever is lower, for the enterprise to hold its qualifying status.
Implications for Businesses within the UAE
For organizations working within the UAE, specifically the ones inside Free Zones, expertise in the difference between qualifying and excluded activities is important for retaining tax compliance and optimizing tax advantages. Companies that have interaction in qualifying activities can benefit from decreased tax fees and potentially benefit from exemptions from certain company taxes.
However, organizations worried about excluded activities ought to be conscious that they do now no longer qualify for those advantages, and thus, they want to plot their operations to control their tax duties effectively. The UAE authorities have designed the UAE Corporate Tax Law to incentivize particular sectors that contribute to the wider monetary goals of the country, making it important for organizations to align their operations with the described criteria.
Conclusion
The UAE’s Federal Decree-Law No. 47 of 2022, in conjunction with the clarifications in Cabinet Decision No. 265 of 2023, has provided a clearer framework for organizations to navigate the corporate tax landscape. Understanding which activities qualify for tax advantages and which of them are excluded is important for corporations searching to optimize their tax positions and ensure compliance with the regulation. With cautious planning and engaging the corporate tax consultant in Dubai, the proper strategic approach, organizations can benefit the UAE’s tax-friendly surroundings and continue contributing to the country’s monetary growth. ebs Chartered Accountants can assist organizations in navigating the complexities of the UAE’s corporate tax laws, ensuring compliance and optimizing tax advantages for qualifying activities.
FAQs
What are Qualifying Activities under the UAE Corporate Tax Law?
Qualifying activities include manufacturing, processing, trading of commodities, fund management, and more, subject to specific conditions.
What activities are excluded from qualifying under the UAE Corporate Tax Law?
Excluded activities include banking, insurance, finance and leasing, and ownership of immovable property, among others.
What are the de minimis requirements for Qualifying Free Zone Persons?
Non-qualifying revenue must not exceed 5% of total revenue or AED 5,000,000, whichever is lower, to maintain qualifying status.
How can ebs Chartered Accountants assist with Corporate Tax compliance?
ebs Chartered Accountants provide expert guidance on corporate tax compliance, ensuring businesses meet qualifying and excluded activity requirements.