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 the 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 the consequences of failure to meet these 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 Residents 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
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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: -
A Free Zone Person Company Z produces goods in a Free Zone and transports them to a Domestic Permanent Establishment. They then proceed to sell those goods for AED 100,000. The fair Arm’s Length Price of the goods at the time of transfer is AED 70,000. Hence, the profit that can be allocated to Company B’s Domestic Permanent Establishment is AED 30,000, which is arrived at from the difference between the sale and the Arm’s Length Price.
Example 4: Income from a Permanent Establishment in the Home Country
Free Zone Person Organization D carries part of its operations through a Permanent Establishment in the Domestic Territory while undertaking the Qualifying Activities through the Free Zone Parent. Company D also engages in provision and management of payroll through its Domestic Permanent Establishment. For the Free Zone parent, the value of these services received through the arm’s length method is AED 100,000. To achieve the de minimis criteria, revenue will be erased and deemed to be owing to the Domestic Permanent Establishment. This sum will be included in the computation of the Domestic Permanent Establishment's taxable revenue from the previously specified operations.
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.
Facts: The only difference is that if Company E has made any further transactions with non-free zone individuals, the Domestic Permanent Establishment of Company E is to pay AED 300,000, according to the data of Example 5.
Calculation:
- Non-qualifying Revenue: Excluded Activities with Free Zone persons AED 200,000
- Total Revenue for de minimis requirement: AED 7,000,000 (excluding AED 300,000 attributable to Domestic Permanent Establishment).
- Percentage of Non-qualifying Revenue: = 200,0007,000,000×100≈ 2. 86%
Result: Based on the above analysis, Company E fulfills the de minimis standards for a QFZP as since 2. As for the volume, it is miniscule compared to the 5% de minimis level and does not exceed AED 5,000,000. If it meets further requirements, it may be eligible for the 0% Corporate Tax rate for QFZPs on its qualified income.
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 UAE for comprehensive guidance and compliance solutions
Frequently Asked Questions (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.
Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.
