Imagine building a thriving business in a tax-free jurisdiction. Sounds ideal, right? For Free Zone Persons in the UAE, this dream can be a reality. The UAE’s recent implementation of a Corporate Tax regime acknowledges the critical role played by FZs in the nation’s economic growth. Recognizing this, the government offers a highly attractive benefit – a 0% Corporate Tax rate for qualifying Free Zone companies and branches (QFZPs) engaged in designated Qualifying Activities and transactions. To qualify for this tax advantage, certain criteria must be met, including the fulfilment of the De Minimis Requirements.
The De Minimis Requirements
Think of the de minimis rules as walking a tightrope. One wrong step, and you risk losing your tax-free advantage. It’s crucial to balance your income streams to avoid exceeding the de minimis threshold.
Let’s break down these rules and guide you through this challenging landscape.
If a Free Zone Person generates income outside the defined rules of the 0% Corporate Tax rate on Qualifying Income, it will cease to be considered a QFZP unless it meets the de minimis rule.
Revenue not included for De Minimis Requirements
This standard focuses on revenue that arises from transactions with a foreign permanent establishment. The income of a Domestic Permanent Establishment refers to the total income of the foreign company linked with a Domestic Permanent Establishment. It includes:
- Income from immovable property situated in a free zone (excluding income from the use of land and buildings used for commercial purposes in a free zone for business operations through an agent in the zone when that income is derived from a transaction with a free zone person).
- Income from intellectual property, excluding qualifying income.
De Minimis Requirements: Tax Implications of Excluded Revenue/Earnings
Income from these sources will be subject to a 9% Corporate Tax rate, unless it is classified as Exempt Income under the Corporate Tax Law. The de minimis rules permit a Free Zone Person to earn a minor percentage of income from Excluded Activities and ineligible sources while still retaining QFZP status, provided the de minimis rule criteria are satisfied.
Understanding the De Minimis Requirements
- De Minimis Threshold
To qualify for the 0% corporate tax rate, a Free Zone Person (FZP) must meet the de minimis threshold. This is calculated as the lower of:
- 5% of the FZP’s gross income for the tax period
- AED 5,000,000
- Revenue Classification
To determine de minimis compliance, an FZP must carefully classify its revenue.
- Total Revenue: This encompasses all income received during the tax period, excluding contributions from permanent foreign establishments, permanent domestic establishments, and real estate income (except commercial property rentals within the free zone to other FZP’s).
- Non-Qualifying Income: This includes revenue from:
- Transactions with non-free zone entities or for non-qualifying activities
- Transactions with non-beneficial free zone recipients
By accurately categorizing revenue, FZP’s can calculate their non-qualifying income and determine if they meet the de minimis criteria.
Profit Attribution and Exempt Income
Determining the profit attributable to a permanent establishment, whether domestic or foreign, is based on the Arm’s Length Principle. Notably, income generated by exempt persons, such as those in the extractive industry, is excluded from these calculations as they fall outside the scope of the Corporate Tax Law.
Consequences of Non-Compliance
If an FZP fails to meet the de minimis requirements, it will lose its qualifying status and become subject to the standard corporate tax rate of 9%. This change takes effect from the beginning of the tax period and lasts for four years.
To maintain their tax-advantaged position, FZP’s must diligently manage their income streams to ensure non-qualifying income remains below the de minimi
s threshold. By adhering to these guidelines, businesses can avoid the significant tax implications of non-compliance.
UAE Corporate Tax Made Easy with MS
Don’t let the new UAE Corporate Tax system hinder your business growth. MS offers expert tax solutions to streamline the process. Our team of professionals will handle everything from registration to filing, ensuring accuracy and compliance. By entrusting your corporate tax matters to us, you’ll gain valuable time and resources to focus on what truly matters – expanding your business.
Disclaimer:
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