The United Arab Emirates ("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% on certain income derived activities.
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 ("QFZP"s). 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% 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.
The new guide specifies that the holding of shares and other securities for investment purposes now explicitly includes cryptocurrencies. For 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 NFT's. 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, meaning, they must have adequate assets, employees, and incur an adequate of operating expenditures to perform its 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.
For any advice regarding the setup of companies engaging in virtual assets and related transactions, and the tax considerations of such transactions, we at BSA are well-positioned to assist our clients. Our highly capable TMT and Tax teams, headed by experienced professionals, is dedicated to providing comprehensive guidance and support in navigating the evolving virtual asset landscape in the UAE.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
