De minimis requirements: What UAE free zone companies should know
Qualifying free zone companies can pay 0 per cent tax if they meet certain requirements
To know more about UAQ Free Trade Zone, click here
Dubai: Companies in UAE free zones have traditionally enjoyed zero taxes and complete foreign ownership.
In 2023, the UAE introduced a corporate tax system with a low standard rate of 9 per cent. This new tax system follows global best practices and streamlines compliance processes for businesses.
Under these new rules, free zone companies can still qualify for a 0 percent tax rate. However, not every free zone company automatically gets this benefit.
The tax rules allow qualifying free zone companies (called QFZPs) to continue enjoying a 0 percent tax rate if they meet specific conditions listed in Article 18 of the UAE’s corporate tax law.
One key condition is the “de minimis requirement” that a QFZP must satisfy, along with other qualifying conditions, to receive the preferential 0 percent tax rate.
To retain the 0% corporate tax rate, Free Zone businesses must ensure their non-qualifying income stays within the de minimis threshold—either AED 5 million or 5% of total revenue. Exceeding this limit, even slightly, can result in full taxation at 9%. Companies should proactively monitor revenue streams and seek regular tax reviews to stay aligned with the law and preserve their corporate tax position.Johnson M. George, General Manager of Umm Al Quwain Free Trade Zone
If a free zone company fails to meet the de minimis requirement or any other specified conditions, it loses its QFZP status and is subject to the standard 9 per cent corporate tax.
What is the 'de minimis' requirement?
The de minimis requirement allows a QFZP to pay 0 percent tax if their non-qualifying income in a tax period doesn’t exceed 5 per cent of total revenue or AED 5 million, whichever is lower.
This means a free zone company can still earn some income from excluded activities and non-qualifying sources without losing its QFZP status, as long as it stays within these limits.
What counts as total and non-qualifying revenue?
According to UAE Cabinet Decision No. 100 of 2023, non-qualifying revenue includes income from:
Excluded activities
Activities that aren’t qualifying activities (when dealing with non-free zone companies)
Transactions with free zone companies who are not the beneficial recipient of the services or goods (beneficial recipient means those companies which are the actual end users of the services or goods, or who do not have an obligation to supply such service or goods to another person)
However, when calculating the de minimis requirements, certain revenues aren’t counted as non-qualifying revenue. These incomes are taxed at 9 per cent and include:
Revenue from business operations outside the free zone in the UAE (domestic permanent establishment)
Revenue from business operations outside the UAE (foreign permanent establishment)
Income from immovable property in a free zone (except transactions with other free zone companies)
Revenue from intellectual property (like royalties and license fees)
A QFZP’s income from business operations outside the free zone or outside the UAE is taxed at 9 per cent, unless specifically exempted.
This happens because business operations outside the free zone are treated as separate and independent from the free zone parent company.
Let’s understand it with an example.
If a free zone company earns Dh10 million, with Dh2 million coming from operations outside the free zone, its total revenue for de minimis calculations will be Dh8 million. The Dh2 million isn’t counted as non-qualifying income.
Similarly, if a free zone company makes Dh5 million from excluded activities (which normally counts as non-qualifying revenue) but this money comes from operations outside the free zone, its non-qualifying income for de minimis calculations would be zero.
What if the requirement isn’t met?
If a company fails to meet the de minimis requirements, it loses its QFZP status and is subject to the standard 9 per cent corporate tax rate. This applies from the beginning of the tax period and continues for the next four tax periods.
Sunil Singh is a senior journalist based in the UAE
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