The UAE has consistently demonstrated its commitment to being a leader in the regulation of virtual assets. This dedication is reflected in the establishment of several regulatory bodies active in the industry, including the Dubai Financial Services Authority (DFSA), the Securities and Commodities Authority (SCA), the Financial Services Regulatory Authority (FSRA), and the Dubai Virtual Assets Regulatory Authority (VARA).
While the country continues to attract companies and individuals involved in virtual assets, stakeholders should also be mindful of the general changes to UAE legislation which may affect virtual asset-related activities. One such change is the implementation of a corporate profit tax of 9 percent on certain income derived activities.
Comprehensive guide
In May 2024, the Federal Tax Authority (FTA) issued a comprehensive and detailed guide on the tax treatment of free zone persons, providing much-needed clarity on the tax implications for certain virtual assets held by qualifying free zone persons (QFZPs). This guide addresses part of the previously unclear tax landscape for virtual assets under Federal Decree-Law No. 47 of 2022 on the taxation of businesses and corporations, which had not explicitly mentioned the tax treatment of virtual assets in the UAE mainland or free zones.
In this guide, the FTA elaborates on the conditions under which free zone persons can attain the status of QFZP, thereby benefiting from a 0 percent tax rate on income derived from qualifying activities. This development addresses the confusion that arose from Ministerial Decision 265 of 2023, which outlined qualifying activities without explicitly including virtual assets.
Read: FTA offers grace period for taxpayers falling behind on updating their tax registration
The new guide specifies that the holding of shares and other securities for investment purposes now explicitly includes cryptocurrencies. Here’s the comparison:
Ministerial Decision 265 of 2023
Holding of shares and other securities for investment purposes includes:
- Shares of any class in the share capital of another juridical person or other types of equitable interests.
- Negotiable or non-negotiable financial instruments, including derivative instruments, financial commodities, and other investment instruments that can be traded in public or private markets.
New QFZP Guide (May 2024)
Holding of shares and other securities for investment purposes includes:
- Shares of any class in the share capital of another juridical person or other types of equitable interests.
- Negotiable or non-negotiable financial instruments, including derivative instruments, financial commodities, “cryptocurrency,” and other investment instruments that can be traded in public or private markets.
This explicit inclusion by the FTA confirms the tax treatment for the holding of cryptocurrencies when conducted by entities registered in free zones. The guide does not, however, refer to the treatment of other types of virtual assets including NFTs. The FTA may provide additional clarifications in the future as they are empowered to prescribe additional requirements related to the tax treatment of cryptocurrencies and other forms of virtual assets.
As a reminder, to obtain QFZP status, a free zone person must:
- Maintain adequate substance in the free zone, which means they must have adequate assets, employees, and incur adequate operating expenditures to perform their activities in the free zone.
- Derive qualifying income
- Not have elected to be subject to the standard corporate tax rules and rates
- Comply with the arm’s length principle, meaning supplying related parties with goods and services at fair market value
- Maintain transfer pricing documentation which documents transactions between related parties and connected persons, and
- Maintain audited financial statements
Nadim Bardawil is partner and head of TMT and FinTech, and Shamma Al Falahi is partner and head of tax at BSA Law.
