On 3rd November 2023, The UAE Ministry of Finance issued two significant decisions, 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The previously issued Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023 have been repealed by Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023, respectively.
In the decision, 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.’
The decisions have modified and incorporated definitions for various "Qualifying Activities," which align closely with the content outlined in the erstwhile Decisions and public consultation document.
The provisions of Cabinet Decision No. 55 and Ministerial Decision No. 139 have been integrated in the new decisions and the major amendments are summarized in this document.
Income from ownership or exploitation of Intellectual Property (‘IP’) 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 under these new Free Zone tax regulations.
Definition of QIP
The definition of QIP includes patents, copyrighted software and any right functionally equivalent to a Patent but does not include any marketing-related IP such as trademarks.
The definition of qualifying income has been modified to include income derived from ownership or exploitation of QIP. However, revenue from ownership or exploitation of any IP other than QIP and income in excess of qualifying income will be subject to tax.
A formula is provided to calculate the amount of Qualifying Income derived from IP, which aims to calculate the portion of the income that qualifies for a 0% tax rate by establishing a direct link between the research and development (‘R&D’) expenditures and the overall income generated from the IP.
The formula is provided below:
Qualifying income = Qualifying expenditures + Up-lift expenditures X Overall income
CA Purvi Mehta, Manager – Direct Tax
+971 52 2800480