Facts
Company B FZ-LLC (“Company B”) is a Free Zone Person under the UAE Corporate Tax Law. It is engaged in the trading of a commodity (metal/ energy/ minerals/ agriculture) that may fall within the scope of “Qualifying Commodities” under Article 1 of Ministerial Decision No. 265/2023.
The commodity in question is not currently traded physically on any Recognised Commodities Exchange. However, derivatives referencing the commodity—specifying clear grades, quality parameters, and other contractual specifications—are actively traded on several Recognised Commodities Exchanges. These derivative contracts are cash-settled, with no physical delivery of the underlying commodity taking place.
Company B seeks to determine whether, for the purposes of Article 1 of Ministerial Decision No. 265/2023, the trading of cash-settled derivatives on a Recognised Commodities Exchange is sufficient for the underlying commodity to be regarded as “traded” on such an exchange in raw form.
Question
Whether, for the purposes of the definition of “Qualifying Commodity” in Article 1 of Ministerial Decision No. 265/2023, a commodity can be regarded as “traded on a Recognised Commodities Exchange” where only cash-settled derivatives pertaining to that commodity are traded on such an exchange?
Summary
The question can be answered both in affirmative and negative by applying two different interpretative approaches. These divergent approaches are outlined below:
|
Position |
Rationale |
Qualifies as “traded” where only cash-settled derivatives exist? |
|
Position 1 - Affirmative |
The term “traded” in Article 1 of the Ministerial Decision No. 265/ 2023 should adopt the meaning ascribed to “trading” in the definition of “Trading of Qualifying Commodities” in Article 2(3)(c) of the said Decision. This definition expressly includes both physical and derivative trading, without imposing any limitation that derivatives must be settled by physical delivery. |
Yes |
|
Position 2 - Negative |
“Traded” in Article 1 of the Ministerial Decision No. 265/ 2023 should be read with the words “in raw form” following it, which implies that the commodity is to be physically traded in its raw form or physically-settled in its raw form through derivatives. |
No |
Although the above-described competing interpretations exist, it is found that the affirmative position is more compelling, better supported and more consistent with the statutory framework.
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
Legal Framework for Qualifying Commodities:
Article 1 of the Ministerial Decision No. 265/ 2023 defines Qualifying Commodities as “Metals, minerals, energy and agriculture commodities that are traded on a Recognised Commodities Exchange Market in raw form.”
Article 2(3)(c) of the Ministerial Decision No. 265/ 2023 defines Trading of Qualifying Commodities as “the physical trading activities of Qualifying Commodities and associated derivative trading used to hedge against risks involved in such activities.”
As per Section 10.5. of the FTA’s Free Zone Persons Guide No. CTGFZP1, “Trading of Qualifying Commodities” means “the physical trading activities of Qualifying Commodities and associated derivative trading used to hedge against risks involved in such activities (for example, using financial instruments, like futures or options, to protect against potential financial risks or losses that could occur in the commodity trading process).”
Further, “raw form” is explained as referring to “commodities that are in their natural and unprocessed state, and no value has been added to the commodity once it was grown, extracted, or mined. They are basically products that are close to the form they were in when they were harvested or extracted and are traded on Recognised Commodities Exchange Market before being processed or transformed.”
Position 1 - Affirmative interpretation:
Legislative reference to Derivative Trading:
The term “traded” is not expressly defined in Article 1 of Ministerial Decision No. 265/ 2023. In the absence of a standalone definition, the most coherent and legally consistent approach is to interpret it in the context of and harmoniously with Article 2(3)(c) of the same Decision, which addresses the identical subject matter and expressly defines “Trading of Qualifying Commodities” to encompass both physical and derivative trading, without imposing any limitation that derivatives must be settled by physical delivery.
The deliberate inclusion of derivative trading in the definition of “Trading of Qualifying Commodities” and the absence of any settlement-type restriction on such trading — which could easily have been specified — reflect a clear drafting choice. This indicates a clear legislative intent that, whenever the term “trading” or “traded” is used in the context of the qualifying activity of trading in Qualifying Commodities — including where it appears in Article 1 for the purpose of defining Qualifying Commodities — it encompasses both physical trading and derivative trading, without distinction as to settlement type, so long as such contracts are traded on a Recognised Commodities Exchange.
Standardisation of Commodity Specifications in Derivatives:
Derivative contracts, whether physically delivered or cash-settled, are standardised instruments that prescribe precise, objective parameters for the underlying commodity, including grade and quality specifications. Further, in cash-settled contracts, the settlement amount is determined by reference to the price performance of the underlying commodity.
The economic substance of such trades is therefore inextricably linked to the commodity itself. Accordingly, when these derivatives are traded on a Recognised Commodities Exchange, the underlying commodity is, in substance and effect, “traded” on that exchange.
Position 2 – Negative interpretation:
Requirement for Trading in Raw Form:
The definition of Qualifying Commodities under Article 1 of Ministerial Decision No. 265/ 2023 requires the commodities to be traded on a Recognised Commodities Exchange Market “in raw form.” Further, Section 10.5.1 of the Guide No. CTGFZP1 states that commodities traded in raw form are those traded on such an exchange before being processed or transformed.
Read together, these provisions indicate that, to be treated as a Qualifying Commodity, the commodity itself (in its raw form) must be the subject of trading on the exchange or be physically delivered for settlement of a Derivative contract, rather than merely referenced in cash-settled derivatives where no transfer of the physical commodity takes place.
Subject of transaction:
The primary subject of a cash-settled derivative contract is not the actual commodity itself, but a financial obligation — namely, the settlement of the price differential based on the commodity’s market value. In this view, such a contract constitutes a trade in a financial instrument linked to the commodity, rather than a trade in the commodity itself in its raw form. Accordingly, the exchange on which such derivatives are traded would not, for the purposes of Article 1 of Ministerial Decision No. 265/ 2023, be regarded as a market where the commodity, in its raw form, is actually traded.
Assessment and Recommendation:
The arguments in favour of Position 1 are well-supported and credible, based on legislative context and the definition of “Trading of Qualifying Commodities” in Article 2(3)(c) of Ministerial Decision No. 265/ 2023. However, the arguments supporting Position 2 are also defensible, particularly given the express “raw form” requirement in Article 1 of Ministerial Decision No. 265/ 2023.
Considering the interpretative uncertainty, it is advisable to seek a Private Clarification from the FTA to determine the correct position on whether cash-settled derivative trading suffices for the underlying commodity to qualify as “traded” on a Recognised Commodities Exchange under Article 1.
Pending such clarification, the prudent approach would be to adopt Position 2 for compliance purposes — i.e., treat as Qualifying Commodities only those either directly traded in raw form on a Recognised Commodities Exchange or traded through physically-settled derivatives.
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.
