A free zone person may prefer to become a qualifying free zone person to enjoy 0% corporate tax. However, the 0% rate is only applicable to qualifying income. There are certain requirements that the entities must fulfill to get this incentive. One of these conditions is to meet the de minimis requirement. It abstains a qualifying free zone person from being disqualified from the free zone corporate tax regime. This is in cases where an entity earns an incidental or small portion of non-qualifying income. In this blog, we will understand the role of the de minimis in corporate tax compliance in the UAE.
Role of De Minimis in Corporate Tax UAE
To understand the role of de minimis in corporate tax UAE, we need to understand some basic terms.
Free Zone & Free Zone Person
A free zone is a designated geographical area within the UAE specified in a decision issued by the Cabinet. A free zone person is a juridical person incorporated or otherwise registered in a free zone. It also includes a branch of a non-resident person registered in a free zone.
Qualifying Free Zone Person
When a free zone person satisfies certain conditions, they become a qualifying free zone person. As a result, there will be a 0% corporate tax rate on its qualifying income. To qualify the free zone entity must:
- derive Qualifying Income.
- maintain adequate substance in the UAE.
- satisfy the de minimis requirement.
- has not elected to be subject to corporate tax.
- comply with the transfer pricing rules and documentation requirements per the Corporate Tax Law.
- prepare and maintain audited financial statements for corporate tax law.
Condition no. 3 above points out the de minimis requirement. Let’s elaborate on this condition in further discussion.
De Minimis Requirement
As we have mentioned above, a free zone person can become a qualifying free zone person through meeting the de minimis requirement. An entity meets the de minimis requirement when the non-qualifying revenue in a tax period does not exceed the lower of:
a) AED 5,000,000 (5 million)
b) 5% of total revenue (calculated as the total amount of non-qualifying revenue / total revenue)
This requirement allows a qualifying free zone person to earn a small or minor non-qualifying income without being disqualified from the free zone tax regime.
Qualifying Income
As a general rule, the following incomes are qualifying income.
- Income earned from other free zone persons, excluding the income earned from excluded activities.
- 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.
- Any other income fulfilling the de minimis requirement.
The Effective Role of De Minimis Requirement
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. In cases where an entity does not fulfill other requirements of qualifying income but meets the de minimis requirement, the income will be a qualifying income.
Revenue Adjustment
When working on the second limb of the de minimis requirement, there is a need to adjust the revenue. The total amount of non-qualifying revenue and the total amount of revenue need adjustment concerning certain revenues. The following revenues need removal:
- Revenue attributable to a domestic or foreign permanent establishment of the qualifying free zone person.
- Revenue attributable to the following transactions:
a) Transactions, related to commercial properties in free zones, with non-free zone persons.
b) Transactions, involving immovable properties (that are not commercial properties) located in free zones, with any other persons.
Impact on Corporate Tax
A free zone entity has the opportunity to have a 0% corporate tax rate on its qualifying income. To become a qualifying free zone person, among other requirements, there is a de minimis requirement. Fulfilling this requirement brings an advantage to the firms. Firstly, the qualifying free zone person will not be disqualified from the free zone tax regime even if they earn a small or incidental amount of non-qualifying income. Secondly, 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.
As opposed to other ordinary taxable persons, a qualifying free zone person does not enjoy a 0% corporate tax rate on their first AED 375,000 non-qualifying taxable income. Therefore, taxable income that is not qualifying income will have a straight corporate tax rate of 9%.
Conclusion
A free zone entity can become a qualifying free zone person by fulfilling certain conditions. Consequently, this will enable the entity to enjoy a 0% corporate tax rate on their qualifying income. One of the conditions is to satisfy the de minimis requirement. This condition will enable the free zone company to earn a small or incidental amount of non-qualifying income without removal from the free zone taxation rules. Furthermore, if an entity does not fulfill other requirements of qualifying income but fulfills the de minimis requirement, the income will be a qualifying income. Thus, the role of de minimis in corporate tax in the UAE is crucial. Therefore, every business must adhere to these requirements and remain compliant with the tax laws.
Creative Zone Tax & Accounting (CZTA)
Every business’s first and foremost goal is to grow and succeed. We at CZTA let our clients focus on their core business and leave the rest to us. Our team takes care of tax compliance and complex taxation matters. We understand the role of de minimis in corporate tax compliance in the UAE. Therefore, come to us with confidence. Contact us now.
