When a free zone person derives income that is outside the scope of the free zone Corporate Tax (CT) rules, it will lose its status as a Qualified Free Zone Person (QFZP) unless it satisfies the de minimis requirements. The De Minimis helps these companies earn a small amount of income from activities that would not normally be eligible for a 0% tax rate as QFZP.
The De Minimis requirements are satisfied where the non-qualifying revenue derived by the QFZP in a tax period does not exceed the lower of AED 5 million, or 5% of the total revenue of the QFZP in that tax period.
What are De Minimis Requirements?
The De Minimis requirement allows a QFPZ to earn a small or incidental amount of non-qualifying income without being disqualified from the free zone 0% corporate tax regime.
Understanding De Minimis Requirements
To maintain the integrity of the 0% corporate tax rate on qualifying revenue, if a free zone person obtains revenue that is from outside the intended scope of the rules, it will lose its status as a QFZP until it meets the de minimis standards.
When analysing the De Minimis standards, the revenue produced from the following sources is not considered and will not influence a free zone person’s position as a QFZP.
- Revenue attributed to a foreign permanent establishment
- Revenue from a Domestic Permanent Establishment
- Revenue from Immovable Property in a free zone (excluding Commercial Property from a transaction with a free zone person)
- Income from the ownership or exploitation of intellectual property (except qualifying income from qualifying intellectual property)
The income derived from these revenue sources will be subject to a 9% Corporate Tax rate (unless it is exempt income) as applicable under the Corporate Tax.
De minimis requirements allow free zone persons to earn minimal income from excluded activities and non-qualifying sources without endangering their status as a QFZP, as long as the standards are met.
How To Apply The De Minimis Requirements To The Income Methods
1. To fulfil the De Minimis standards that the Federal Tax Authority (FTA) sets, the QFZP’s non-qualifying revenue in a tax period can be at most 5% of its total revenue or AED 5,000,000, whichever is lower.
2. To determine the non-qualifying revenue and total revenue to apply the de minimis requirements, the revenue of a QFZP must be segregated into the following components:
Total revenue is all the revenue that a free zone person derives during the tax period minus the amount of revenue, that is:
- Related to Foreign Permanent Establishment
- Related to Domestic Permanent Establishment
- Derived from Immovable Property located in a free zone, other than Commercial Property transactions with Free Zone Persons
- Derived from the ownership or exploitation of intellectual property, other than Revenue relating to Qualifying Income from Qualifying Intellectual Property
Key points:
Commercial Property: It refers to an Immovable Property or part thereof used exclusively for a business or business activity. It may not be used as a place of residence or accommodation, including hotels, motels, bed and breakfast establishments, serviced apartments, etc.
Domestic Permanent Establishment: A place of business or other form of presence of a Qualifying Free Zone Person outside the free zone in the UAE.
Foreign Permanent Establishment: A place of business or other form of presence outside the UAE of a resident person.
Immovable Property:
- Any area of land over which rights, interests, or services can be created.
- Any building, structure, or engineering work attached to the land permanently or attached to the seabed.
- Any fixture or piece of equipment that makes up a permanent part of the land or is permanently attached to the building, structure, engineering work, or seabed.
3. Non-qualifying revenue refers to the free zone person’s income from operations or transactions that are not eligible for the corporate tax rate of 0%. The following revenue is not qualifying:
Excluded Activities:
- Transactions with natural persons except ownership or management of ships, fund management services, wealth and investment management services, financing and leasing of aircraft, etc.
- Regulated banking, leasing, finance, and insurance activities.
- Ownership or exploitation of immovable property, except for transactions with free zone persons to commercial property located in a free zone where transactions of the commercial property are conducted with other free zone persons.
- Ancillary activities (which serve no independent function) are related to the above activities.
The revenue attributable to a foreign or domestic permanent establishment is determined using the arm’s length concept and covered under transfer pricing rules.
4. Ensure compliance and maintain proper substance in the free zone. It is vital to ensure the non-qualifying revenue is less than AED 5,000,000 or 5% of the overall revenue, whichever is lower. To maintain a proper substance, a Qualifying Free Zone Person must:
- Carry out a core income-generating activity in the free zone.
- Maintain sufficient assets and have qualified employees.
- Ensure sufficient operating costs are incurred relative to the scope of the free zone’s activities.
The tasks can be carried out by the QFPZ itself or can be allocated to a Related Party or other third party, but they should remain under the proper supervision of the Qualifying Free Zone Person.
How Can We Help?
Gatestone Group’s tax specialists can assist. The expert consultants will ensure compliance with the UAE regulations and requirements. We will also assist you in complying with tax laws, reducing any risks and penalties that a business might incur, and guiding you to achieve tax benefits if applicable. Contact Gatestone Group and book a free consultation with our tax experts via email at [email protected] or call +971 52 410 0849 or +971 4 450 1023.
