The de minimis requirements are essential for the Free Zone Persons, who are seeking to keep the qualifying status to run their business without paying corporate tax. These requirements are necessary to ensure that the only income that gets this tax treatment is that income that is received within the scope of the intended rules. This blog will expand on these details, providing an overview of how these requirements function, what revenue is included, and role of corporate tax consultant freezone in meeting those guidelines.
1. De Minimis Requirements
Where a Free Zone Person makes income outside the defined rules of the 0% Corporate Tax rate on Qualifying Income, it will cease to be regarded as a QFZP unless it meets the de minimis rule.
1.1. Revenue Not Included for De Minimis Requirements
This revenue standard focuses on revenue that arises from transactions with a foreign permanent establishment. The income of Domestic Permanent Establishment means the total income of the foreign company linked with a Domestic Permanent Establishment. Income from immovable property situated in a free zone (other than income from the use of land and buildings used for commercial purposes in a free zone for the purpose of carrying on a business through an agent in the zone when that income is derived from a transaction with a person who is a free zone person). Income from intellectual property excluding the qualifying income.
1.2. Tax Implications of Excluded Revenue/Earnings
The income generated from these sources of revenue will be taxed at a 9% Corporate Tax rate (where the income is not classified as Exempt Income by the Corporate Tax Law). With regard to other sources of revenue, de minimis rules give the possibility for a Free Zone Person to earn an insignificant percentage of income from Excluded Activities and ineligible sources and still remain a QFZP as long as the requirements of de minimis rules are met.
2. Analyzing the De Minimis Requirements
2.1. Criteria for Satisfying De Minimis Requirements
To be entitled for De minimis benefits, the following requirements need to be satisfied: –
5% of the gross income of this QFZP in the specified Tax Period/ 5% of the gross receipts of this QFZP for the period specified above:
AED 5,000,000
2.2. Revenue Component Segregation.
A Free Zone Person’s revenue must be separated into constituent parts in order to calculate the non-qualifying revenue and total revenue required to apply the de minimis standards.
Total income: – Total revenue is the sum of all the money received by a Free Zone Person during a Tax Period subtracting the income that is Contributed by a Permanent Foreign Establishment, Permanent Domestic Establishment, Originated from Real Estate situated within a Free Zone, except Commercial Real Estate dealings with Free Zone Residence other than income related to Qualifying Income from Qualifying Intellectual Property, that results from the ownership or use.
Non-qualifying Income: -After accounting for the above exclusions, the Free Zone Person’s revenue from the given below activities: –
Excluded Activities
Transactions with non-free zone persons or non-Qualifying Activities
Transactions with a non- beneficial Free Zone Recipient of the related goods or services
3. Income Attribution Determination
The amount of profit that should be given to a permanent establishment, whether domestic or international, is determined by the Arm’s Length Principle. The income generated by an Exempt Person in its capacity as an Exempt Person, such as income from an extractive industry, is not taken into account in the computations or procedures that come before it since the Corporate Tax Law does not apply to it.
4. Qualifying Free zone status will be lost if: –
The free zone person will pay standard corporate tax @ 9% if it loses its status as “qualifying free zone person” for the reasons if the Rule De Minimis is not satisfied and it may remain from the beginning on the first day of the Tax Period and lasting four years.
Revenue Attribution Examples
Example 3: Profits from Continuing business activities Attributable to a Domestic Permanent Establishment
Company Z, a Free Zone Person, produces and transports goods from a Free Zone to a Domestic Permanent Establishment, where they are sold for AED 100,000. The fair Arm’s Length Price of the goods at the time of transfer is AED 70,000. This means that the profit allocated to Company Z’s Domestic Permanent Establishment is AED 30,000, calculated from the difference between the sale price and the Arm’s Length Price.
Example 4: Income from a Permanent Establishment in the Home Country
Company D operates in a Free Zone and has a Permanent Establishment in the Domestic Territory. It carries out Qualifying Activities through the Free Zone Parent and also provides payroll management services through its Domestic Permanent Establishment. The value of these services received by the Free Zone parent is AED 100,000. To meet the de minimis criteria, revenue will be erased and considered as owed to the Domestic Permanent Establishment, and will be included in the computation of its taxable revenue.
Table of Examples
| Example | Company | Description | Arm’s Length Price | Sale Price | Revenue Attributable to Domestic Permanent Establishment |
| 3 | B | Goods transferred from Free Zone to Domestic Permanent Establishment and sold | AED 70,000 | AED 100,000 | AED 30,000 |
| 4 | D | Routine administrative activities conducted through Permanent Establishment (local) | 100,000 AED | – | 100,000 AED |
Example 5: For QFZP De Minimis Requirements
A Free Zone Person Company E derives income
| Sources of income | Amount (AED) |
| Domestic Permanent Establishment | 10,000,000 |
| Rent income from Immovable Property Free Zone to Non-Free Zone Persons | 2,500,000 |
| Transactions with Free Zone Persons (Beneficial Recipients), of which 200,000 AED from Excluded Activities | 5,000,000 |
| Transactions with Non-Free Zone Persons from Qualifying Activities | 2,000,000 |
| Transactions with Non-Free Zone Persons from non-Qualifying Activities | 300,000 |
Calculation
Disregarded income:
- Permanent Establishment (Domestic): AED 10,000,000
- Free zone Immovable Property: AED 2,500,000
Non-qualifying Revenue:
- From Excluded Activities (Free Zone Persons): AED 200,000
- From Non-Qualifying Activities (Non-Free Zone Persons): AED 300,000
Total Non-qualifying Revenue: AED 500,000:
- Total Revenue for de minimis requirement: AED 7,300,000 (AED 5,000,000 + AED 2,000,000 + AED 300,000)
Percentage of Non-qualifying Revenue:
500,0007,300,000×100≈6.85%
Conclusion: 6.85% exceeds the 5% de minimis threshold, Company E despite not having the required criteria for that of a QFZP is liable to pay standard corporate @ 9%.
Example 6: To meet De Minimis Conditions, use QFZP.
Company E can meet De Minimis Conditions by using QFZP. If the company has made transactions with non-free zone individuals, its Domestic Permanent Establishment must pay AED 300,000. The non-qualifying revenue for the de minimis requirement is AED 200,000, which is 2.86% of the total revenue excluding the amount attributable to the Domestic Permanent Establishment. Company E fulfills the de minimis standards for a QFZP and may be eligible for a 0% Corporate Tax rate on its qualified income if it meets further requirements.
Conclusion
Free Zone Persons need to be able to sustain their status within the Free Zone and take advantage of the 0% corporate income tax rate on the given income. With proper management of classes of income to ensure that ineligible income does not exceed permissible limits, Free Zone Persons can avoid running afoul of the corporate tax regime in the UAE. Should these requirements not be met, the company loses this special tax treatment and begins paying the normal corporate tax rates. Trust Corporate Tax Consultant Dubai for comprehensive guidance and compliance solutions
FAQs
What are the de minimis requirements for Free Zone Persons?
The de minimis, therefore, refers to the Non-Qualifying Revenue thresholds that QFZPs must fulfill.
5% of their Total income or
AED 5 million that is, whichever is lower.
How is the de minimis threshold calculated?
Determining de minimis threshold is based on the business’s Non-Qualifying Revenue. It should not exceed the revenue threshold for instance 5% of their Total income or AED 5 million that is, whichever is lower.
What happens if a Free Zone Person exceeds the de minimis threshold?
Any grossing up of the Non-Qualifying Revenue over the de minimis threshold will result in the Free Zone Person ceasing to be a QFZP.
They may also lose their tax benefits and compliance regarding qualification for QFZP status.
Are there any exemptions to the de minimis requirements?
To my knowledge up to May 2024, there are no exemptions to the de minimis rule which was defined earlier. By satisfying the conditions the status of being QFZPs can be availed.
