A free zone entity can achieve a 0% corporate tax rate if it becomes a qualifying free zone person. To become a qualifying free zone person, there are certain conditions to meet. One of those conditions is to satisfy the de minimis requirement. Yes, at first it is a bit confusing; however, further reading will elaborate in easy words. In this blog, we will discuss the role of the de minimis requirement in the context of the UAE corporate tax. But first, we should build the ground to understand the concept.
What is a Free Zone Person?
A free zone Person is a juridical person that is incorporated, established, or otherwise registered in a free zone. For instance, a non-resident juridical person’s branch in the free zone will be a free zone person. However, the non-resident parent will be a foreign permanent establishment. Also, a person who is not a juridical person, for instance, a natural person, cannot be a free-zone person.
When Does a Free Zone Become a Qualifying Free Zone Person?
A free-zone entity can become a qualifying free-zone person if it satisfies the following conditions. The free-zone person must:
- maintain adequate substance in a Free Zone,
- derive qualifying income,
- not have made an election to be subject to the standard corporate tax rate,
- comply with the arm’s length principle for transactions with related parties,
- Maintain transfer pricing documentation,
- maintain audited financial statements, and
- Satisfy the de minimis requirement.
If an entity meets all the conditions, the corporate tax law allows a Qualifying Free Zone Person to benefit from a 0% corporate tax rate on their qualifying income. However, income that is not qualifying income is subject to corporate tax at the standard rate of 9%. Furthermore, one should note that A Qualifying Free Zone Person is not eligible to benefit from the 0% Corporate Tax rate applicable on Taxable Income up to the AED 375,000 threshold and is subject to the rate of 9% on its entire Taxable Income that is not Qualifying Income.
Let’s now elaborate further on the last condition above.
Role of De Minimis Requirement in UAE Corporate Tax
If we look at all the conditions, we see that the last one in our list relates to the de minimis requisite. An entity meets this requirement when the non-qualifying revenue in a tax period does not exceed the lower of:
a) AED 5,000,000 (AED 5 million)
b) 5% of total revenue (calculated as the total amount of non-qualifying revenue / total revenue)
In simple words, non-qualifying income should not be more than 5% of the total revenue with a maximum cap of AED 5 million in a tax period.
What is a Qualifying Income?
The following incomes constitute a qualifying income.
1. Income earned from other free zone persons. It excludes income earned from excluded activities.
2. Income earned from non-free zone persons, including domestic and foreign persons. However, it does not include income from excluded activities as per the tax law.
3. Any other income fulfilling the de minimis requirement.
Excluded Revenue
The following revenue shall not be included in the calculation of non-qualifying revenue and total revenue.
a. Revenue attributable to immovable property located in a Free Zone derived from the following transactions:
- Transactions with non-free zone persons in respect of commercial property.
- Transactions with any Person in respect of non-commercial immovable property.
b. Revenue attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person.
What if the Entity does not Meet the De Minimis Requirement?
Suppose an entity does meet the de minimis requirement or any other conditions mentioned above for a qualifying free-zone person. In this case, it will cease to be a qualifying free zone person from the beginning of the Tax Period in which it fails to meet the condition and for the four subsequent Tax Periods. Therefore, meeting the conditions is critical for a business to enjoy a 0% corporate tax rate.
For further details on the topic, please read Ministerial Decision No. 139 of 2023 and Cabinet Decision No. 55 of 2023.
Key Takeaway
The de minimis requirement allows a qualifying free zone person to earn a small or incidental amount of non-qualifying income without being disqualified from the free zone corporate tax regime. Furthermore, if the income does not fulfill other requirements of qualifying income, it might still be treated as qualifying income only by fulfilling the de minimis requirement.
Conclusion
The role of satisfying the de minimis requirement is crucial for firms opting for qualifying free-zone persons. The requirement mandates that a free-zone person’s non-qualifying income should not exceed 5% of the total revenue or a maximum of AED 5 million in a tax period. Breaching the condition will not enable them to become a qualifying free zone person and enjoy a 0% CT rate. The benefit of the de minimis requirement is that if a firm earns a small portion of non-qualifying income, it will still be a qualifying free zone person. However, having a non-qualifying income above the threshold provided will ultimately demote the entity from the 0% status.
Creative Zone Tax & Accounting (CZTA)
Keeping your business compliant is the most important thing, especially in the UAE. Therefore, our skillful team can assist you with all the complexities of the tax laws, including the de minimis requirement. Book an appointment today and clear all your doubts. We are ready to assist you.
