The De Minimis Requirements refer to the thresholds set by the UAE’s Federal Tax Authority (FTA) for determining whether a free zone entity can be considered a Qualifying Free Zone Person for corporate tax purposes. These requirements allow a free zone entity to earn a limited amount of non-qualifying income without losing its special tax status under the free zone corporate tax regime.
Importance of De Minimis Requirements:
The De Minimis Requirements are crucial because they:
- Provide flexibility for free zone entities to engage in certain non-qualifying activities without jeopardizing their tax benefits.
- Establish clear criteria for income qualification, ensuring transparency and compliance with the corporate tax law.
To meet the De Minimis Requirements, a free zone entity’s non-qualifying revenue must not exceed the lower of:
- AED 5,000,000, or
- 5% of the total revenue.
Non-Qualifying Revenue:
This includes income from:
- Excluded activities where transactions are with non-free zone persons.
- Certain immovable property dealings within free zones.
Total Revenue:
The total income earned by a free zone entity in a tax period, excluding:
- Revenue from immovable property transactions with non-free zone persons.
- Income related to domestic or foreign permanent establishments (PEs).
Example Scenario:
Consider AB LLC, a free zone entity with a total revenue of AED 80,000,000/-
Out of this 80 million, it earns AED 4,500,000 from transactions with individuals, which is non-qualifying revenue. Since this amount exceeds the De Minimis threshold of AED 4,000,000 (5% of AED 80,000,000) and AED 5,000,000, AB LLC would not qualify as a free zone person for that tax period.
In summary, the De Minimis Requirements allow a free zone entity to maintain its qualifying status while accommodating a small portion of non-qualifying income, provided it stays within the specified thresholds. Compliance with these requirements is essential for free zone entities to benefit from the UAE’s corporate tax regime.
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