Applicability of the Beneficial Recipient Requirement for Qualifying Income under Article 3(1)(b) of Cabinet Decision No. 100/ 2023:

Facts

Company A FZ-LLC (“Company A”) is a Qualifying Free Zone Person (“QFZP”) established in a UAE Free Zone. It is engaged in activities falling within the scope of Qualifying Activities under Article 2(1)(c) of Ministerial Decision No. 265/ 2023.

Company A carries out said Qualifying Activities for a diverse client base, including:

• Free Zone Persons established in UAE Free Zones; and
• Non-Free Zone Persons located outside the UAE or in the UAE mainland.

Company A seeks to apply the 0% Corporate Tax rate available to QFZPs in respect of income earned from the Qualifying Activities. However, it faces interpretive uncertainty on whether it must prove that its Free Zone Person counterparties are the “Beneficial Recipients” of the Qualifying Activities in order for the income from said activities to qualify for the 0% rate under Article 3(1)(b) of Cabinet Decision No. 100/ 2023.

Whether the Company A is required to prove that the Free Zone Person is the Beneficial Recipient of the Qualifying Activity, or whether the income may qualify irrespective of such proof under Article 3(1)(b) of Cabinet Decision No. 100/2023?

Summary

There are two possible interpretative approaches which can be adopted to answer the question. These divergent approaches are outlined below:

Although competing interpretations exist, the activity-based approach is more compelling, better supported and more consistent with the statutory and administrative framework.

As per this approach, income derived from Qualifying Activities that are not Excluded Activities would qualify under Article 3(1)(b) of Cabinet Decision No. 100/2023, regardless of whether the counterparty is a Free Zone Person or a Non-Free Zone Person. In such cases, there is no requirement to prove that the Free Zone Person is the Beneficial Recipient, as the Beneficial Recipient test is confined to Article 3(1)(a) by virtue of Article 3(2).

The interpretation under this approach aligns with the structure of the Cabinet Decision, the FTA’s administrative guidance, and the underlying policy objective of incentivizing genuine economic activity within Free Zones.

However, given the interpretive uncertainty, it would be wise to seek a Private Clarification from the FTA on this issue, to ensure certainty and mitigate future risks.

Analysis

In order to address the Question raised, the analysis below considers the statutory framework, FTA’s administrative guidance, and competing interpretations of Article 3 of Cabinet Decision No. 100/2023.

Legal Framework for Qualifying Income:

Article 3(1) of Cabinet Decision No. 100/2023 defines the categories of income that constitute "Qualifying Income". The following two provisions are most relevant to the issue at hand:

• Article 3(1)(a): Income from transactions with Free Zone Persons, excluding Excluded Activities.
• Article 3(1)(b): Income from transactions with Non-Free Zone Persons, but only in respect of Qualifying Activities that are not Excluded Activities.

Article 3(2) introduces the Beneficial Recipient requirement but expressly limits its application to income falling under Article 3(1)(a). It provides that the Free Zone Person must be the Beneficial Recipient of the relevant goods or services for the income to qualify under that limb.

Activity-Based Approach:

Under this interpretation, Article 3(1)(b) applies wherever the income is derived from a Qualifying Activity that is not an Excluded Activity, regardless of whether the counterparty is a Free Zone Person or a Non-Free Zone Person. The Beneficial Recipient test under Article 3(2) is not applicable in such cases.

This interpretation is supported by the following:

a. Text of Cabinet Decision No. 100/2023:

• Article 3(1)(b) refers specifically to transactions in respect of Qualifying Activities that are not Excluded Activities. It does not incorporate or cross-reference the Beneficial Recipient condition.
• Article 3(2) limits the Beneficial Recipient requirement exclusively to Article 3(1)(a). The absence of any reference to Article 3(1)(b) indicates a deliberate legislative intent to exclude this requirement from the scope of Article 3(1)(b).
• The structure of Article 3 reflects a clear division between different qualification criteria. If income satisfies Article 3(1)(b), it need not be re-tested under Article 3(1)(a).
• This distinction is reinforced by Article 4(2)(a)(3). It treats revenue from transactions with Free Zone Persons who are not Beneficial Recipients as Non-Qualifying for the de minimis test. It is general in scope and does not reference Qualifying Activities, suggesting it applies only where income is assessed under Article 3(1)(a) and fails the Beneficial Recipient test.
• Reading Article 4(2)(a)(3) as introducing a Beneficial Recipient requirement into Article 3(1)(b) would contradict the structure of the Cabinet Decision and impose obligations not supported by the text.
• Moreover, Article 4 applies only where income does not already qualify under Article 3(1). It acts as a residual classification mechanism, not an override. Once income qualifies under Article 3(1)(b), Article 4—including the Beneficial Recipient test—has no application.
• Accordingly, where income qualifies under Article 3(1)(b) based on the nature of the activity, the Beneficial Recipient requirement does not apply, even if the counterparty is a Free Zone Person.

b. FTA Free Zone Guide No. CTGFZP1:

• The Algorithm/ Roadmap provided in Section 4.4.1. confirms that income from Qualifying Activities is included in total revenue and excluded from non-qualifying revenue, regardless of whether the recipient is a Free Zone or Non-Free Zone Person.
• Section 3.1. contemplates two independent limbs under which Qualifying Income may arise. The second limb clearly contemplates activity-based qualification without regard to the recipient’s status.
• Sections 3.2.3, 4.3, and 5.2 of the Guide list income from “transactions relating to Qualifying Activities that are not Excluded Activities” as a standalone category of Qualifying Income—without any limitation based on recipient identity.
• In Example 13 of the Guide, a QFZP’s revenue attributable to “Qualifying Activities that are not Excluded Activities performed in a Free Zone” has been considered as its Qualifying Income, without making reference to the status of the recipient of the activity.
• Example 48, 49, 54 and 83 of the Guide demonstrate QFZPs earning Qualifying Income from Qualifying Activities (manufacturing, trading, distribution), in transactions involving both Free Zone and Non-Free Zone counterparties. None of these examples apply or mention the Beneficial Recipient test.

c. FTA’s Basic Tax Information Bulletin for Free Zone Persons, lists income from “transactions relating to Qualifying Activities that are not Excluded Activities” as a distinct source of Qualifying Income. It does not impose a Beneficial Recipient requirement on such transactions or limit them to recipients outside the Free Zone.

d. Purposive Interpretation:

A restrictive reading of Article 3(1)(b), limiting its scope to Non-Free Zone Persons and subjecting all Free Zone Person transactions to the Beneficial Recipient test, produces legally inconsistent and commercially irrational outcomes.

• The UAE Corporate Tax Law and FTA guidance make clear that the Free Zone regime exists to promote substantive economic activity within Free Zones, particularly through Qualifying Activities.
• If restrictive reading is adopted, a QFZP performing the same Qualifying Activity would qualify for the 0% rate when serving a mainland or foreign customer, but potentially be disqualified or subject to extra documentation burdens when serving a Free Zone customer, unless the Beneficial Recipient test is met. This distinction is arbitrary. It penalizes intra–Free Zone commerce and creates compliance burdens that are not aligned with tax risk or substance.
• It could also lead to absurd outcomes: a QFZP engaged exclusively in Qualifying Activities within a Free Zone (e.g., trading, manufacturing, or processing) may lose access to the 0% rate simply because its clients are other Free Zone Persons.
• Further, extending the Beneficial Recipient requirement to Article 3(1)(b) would collapse the distinction between the limbs and create confusion around eligibility criteria that were clearly intended to operate separately.

By contrast, a purposive and coherent interpretation of Article 3(1)(b) treats the nature of the activity, not the status of the recipient, as the determining factor. Where income is derived from a Qualifying Activity that is not an Excluded Activity, and other statutory conditions are met, it qualifies for the 0% rate without needing to establish that the Free Zone Person is the Beneficial Recipient.

This interpretation ensures legal consistency, clarity in administration, and alignment with the Free Zone regime’s policy objectives.

Recipient-Based Approach:

An alternative view adopts a recipient-based interpretation, under which:

• Article 3(1)(b) applies only to transactions with Non-Free Zone Persons;
• Transactions with Free Zone Persons, even if involving a Qualifying Activity, must be assessed under Article 3(1)(a);
• As a result, the Beneficial Recipient test under Article 3(2) would apply to all transactions involving Free Zone Persons, including those that involve Qualifying Activities.

This interpretation is based on:

1. A literal reading of Article 3(1)(b), which refers specifically to “transactions with a Non-Free Zone Person,” suggesting an exclusionary scope;
2. Article 4(2)(a)(3), which treats revenue from transactions with Free Zone Persons who are not the Beneficial Recipient as Non-Qualifying Revenue for de minimis purposes, without distinguishing whether the underlying activity is Qualifying or not;
3. Select language in Sections 4.4.1 and 10.1 of the FTA Free Zone Guide No. CTGFZP1, which may be interpreted to suggest that Article 3(1)(b) applies exclusively to transactions with Non-Free Zone Persons.

However, this restrictive interpretation is less persuasive, as it:

• Overlooks the structural distinction between Articles 3(1)(a) and 3(1)(b), which were clearly drafted as independent qualifying limbs;
• Contradicts Article 3(2), which expressly limits the Beneficial Recipient test to transactions assessed under Article 3(1)(a);
• Collapses the distinction between recipient-based and activity-based qualification criteria, undermining the intended dual pathway structure;
• Conflicts with multiple examples and interpretative guidance in the FTA Guide and FTA Basic Tax Information Bulletin, which treat income from Qualifying Activities as qualifying regardless of counterparty status;
• Leads to economically inconsistent and commercially irrational outcomes, undermining the Free Zone regime’s policy objective of incentivizing substance-based operations within Free Zones.

Accordingly, the activity-based interpretation—under which income from Qualifying Activities that are not Excluded Activities qualifies under Article 3(1)(b) of Cabinet Decision No. 100/2023, irrespective of the recipient’s status and without applying the Beneficial Recipient test—is better supported by the text, structure, and purpose of the Cabinet Decision and the FTA’s Administrative Guidance.

Accordingly, Company A is not required to prove that the Free Zone Person is the Beneficial Recipient, where the income falls within Article 3(1)(b).

However, given the interpretive uncertainty, it would be wise to seek a Private Clarification from the FTA to confirm the applicability of Article 3(1)(b) without the Beneficial Recipient condition. This would provide certainty and mitigate future compliance risk.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.