On 3rd November 2023, three months after the UAE Ministry of Finance (MoF) issued the Free Zone (FZ) Public Consultation Document (PCD), the MoF released Cabinet Decision No. 100 of 2023 on Determining Qualifying Income, and Ministerial Decision No. 265 of 2023 on Qualifying Activities and Excluded Activities. Both Decisions are retroactively effective from 1st June 2023, and replace previous Decisions i.e. Cabinet Decision No. 55 of 2023 and Ministerial Decision No.139 of 2023 in the context of Free Zone Persons.


We have summarized the major changes and amendments incorporated in the new Decisions as below:

  1. The scope of Qualifying Income is extended to include the amount of Qualifying Income derived from the ownership or exploitation of Qualifying Intellectual Property, excluding expressly any marketing related intellectual property assets, such as trademarks.
  2. The scope of Qualifying Activities is extended to include Trading of Qualifying Commodities, including physical trading of metals, minerals, energy, and agricultural commodities that are traded on a recognized stock exchange, as well as the associated derivative trading instruments used to hedge against the risk of such trading activities.
  3. A specific definition for a Holding Activity has been included that specifies when it can be considered a Qualifying Activity. These assets should be held only for investment purposes i.e. for an uninterrupted period of at least 12 months. Different examples of qualifying shares and securities have been provided.
  4. Regarding a Distribution Activity, it has been clarified that the distribution of goods and materials must be carried out in or from a Designated Zone. The Decision provides examples of functions and activities that may constitute such a distribution Activity (e.g. importation, storage, inventory, management etc.). The Decision provides that when goods or materials enter the UAE, they should be imported through a Designated Zone. It is still unclear whether drop shipment models would be eligible to qualify as a ‘Qualifying Activity’.
  5. Manufacturing of goods or materials was and remains a Qualifying Activity. Previously it was unclear whether manufacturing with distribution falls within the scope of a Qualifying Activity, or whether distribution should be separated and treated as regular income subject to de minimis rules. It has now been clarified that manufacturing of goods or materials includes the production, improvement, or assembly of products and materials from raw materials or components. Hence it is expected that income generated from the distribution of goods/materials should be identified, excluded, and treated separately (based on rules for the distribution of goods).
  6. Incidental Income is no longer considered as part of Qualifying Income. The criteria of serving ‘no independent function’ has been removed from the meaning of ‘ancillary’ and includes those activities with minor contribution to the main Activity and closely related to it.
  7. The updated legislation clarifies the FZ substance requirements. Among others, for adequate numbers of qualified employees, only full-time employees shall be considered. The activities can be outsourced to any person based in a FZ or Designated Zone. In relation to Qualifying Intellectual Property, the activities can be outsourced to any other person in the UAE and also to a non-related party outside the UAE. The new Cabinet Decision maintains the requirement regarding adequate supervision of the outsourced Activity, but does not provide clarity on what adequate supervision means.
  8. The new legislation provides the meaning of ‘Qualifying Activities’ and ‘Excluded Activities’ which are largely in line with the Public Consultation Document released in July 2023.

Next steps

Free Zone entities should consider the updated legislation and reassess their tax position accordingly. KPMG has a dedicated Corporate Tax team whose members will be delighted to help you assess the impact of the updated legislation on your operations and activities


Joe Pacelli

Head of Tax

Nadia Batiukova

Director, Corporate Tax

Hassan Fadda

Director, Corporate Tax