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.
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.
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.
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.
2.2. 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.
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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.
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.
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 |
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:
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:
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.
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
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.