The interpretation of the term "commercial property", as outlined in Ministerial Decision No. 139 of 2023 (referred to as "the decision"), holds significant importance. A comprehensive understanding of this definition is essential for addressing different inquiries. According to the decision, commercial property is defined as an immovable property or a portion thereof exclusively utilized for business or business-related activities, with no residential or accommodation use, including establishments such as hotels, motels, bed and breakfast facilities, and serviced apartments.

This definition provides clear guidance, stipulating that qualifying income (QI) can only originate from commercial properties employed for business purposes within the free zone and not for habitation or residential purposes. For example, even if a hotel is located within a free zone, income from renting out hotel rooms will not qualify as QI. Furthermore, the sale of forthcoming developments within free-zone commercial properties will also fall under this category, provided the master plan designates them for commercial use.

While leasing is generally classified as one of the "excluded activities," an exception is introduced in Article 3(1)e of Ministerial Decision No. 139 of 2023. This exception applies to the ownership or utilization of free zone commercial property by Qualifying Free Zone Persons (QFZP) when transactions involving such commercial property happen with other free zone entities and the property is not planned for habitation or residential purposes. In this scenario, it is no longer considered an "excluded activity" but qualifies as a legitimate activity with the ability to generate qualifying income.

The term "exploitation of the property" lacks a specific definition in the legislation, but it can reasonably be assumed to encompass the economic utilization of property. This broad interpretation includes activities like property development, property rental, resource extraction from property, or commercial usage of the property. Consequently, property development, leasing, and property management services fall under the category of property exploitation. On the other hand, contracting, subcontracting, and brokerage services do not fall within the scope of property exploitation. It's worth noting that the absence of a precise legal definition of property exploitation may lead to differing interpretations compared to those of the authorities.

So, income derived from commercial properties by qualifying free zone real estate developers qualifies as such when the property is not designated for habitation or residential purposes and the transaction involves another free zone entity. This same principle applies to the management and leasing of free-zone commercial properties when the transaction involves another free-zone entity. For example, consider A Ltd., a DMCC company engaged in real estate development. If they develop a commercial plot of land in accordance with the master plan and sell it to B Ltd., another DMCC company, the income earned by A Ltd. from this transaction becomes qualifying income, provided that all other relevant conditions are met.

Another instance involves C Ltd., a Qualifying Free Zone Person (QFZP), and a hotel operator. Any income earned by C Ltd. related to the commercial section (not the residential portion) of the hotel qualifies as qualifying income when the transaction involves another free zone entity and all associated conditions are satisfied. In another scenario, D Ltd. owns a commercial tower comprising office spaces located in the DMCC. If D Ltd. meets all relevant conditions and qualifies as a QFZP, the rental income earned by D Ltd. from leasing out these offices to other free zone entities is considered qualifying income, provided that all related conditions are met.

In the case of a mixed-use property, income derived from the commercial portion is considered qualifying income (QI) for qualifying free zone persons (QFZP) when the transaction involves other free zone entities. Conversely, income generated from the residential portion is subject to a 9% corporate tax when the transaction includes either another free zone entity or a non-free zone entity. For instance, consider TK, a QFZP based in Jafza who owns a hotel within Jafza. The hotel includes ground-floor shops and residential units. TK Ltd. leases the shops to other Jafza companies, and the hotel rooms are rented out. Income from the shops qualifies as QI, while income from renting the rooms is subject to a nine percent corporate tax.

In the case of contractors, sub-contractors, and brokers based in the free zone, they are treated as regular free zone resident entities without the privilege of enjoying QI status. It is advisable for free zone real estate developers, contractors, sub-contractors, brokers, and similar entities to evaluate their status and understand the property's nature to determine the appropriate tax treatment for related transactions.