There are more than 50 free zones across the UAE, each of which offers considerable tax benefits, including 0% personal income tax and capital gains tax. Since June 2023, most businesses have been subject to a standard corporate tax rate of 9% on taxable profits, but there are some exemptions. Could you benefit from this generous scheme?
De minimis requirement in UAE corporate tax
The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses made some significant changes to the UAE’s tax landscape. The main change, effective since June 2023, introduced a corporate tax rate of 9% for businesses operating in the UAE. This was introduced to help the UAE accelerate development and enable the region to become a leading jurisdiction for businesses and investment that adheres to international standards. But, this legislation made some notable exemptions, namely under the de minimis rule.
The de minimis rule allows some businesses to earn a limited amount of income that does not qualify for the special tax rate, without losing tax advantages. This is called the ‘non-qualifying income’. It applies mainly to businesses in free zones, where these businesses get tax advantages. It allows businesses operating in free zones to maintain their status as Qualifying Free Zone Persons (QFZPs) and benefit from a 0% corporate tax rate on income earned from specific qualifying activities.
Essentially, the rule sets a limit to determine how much non-qualifying income a business can earn before it loses its special tax status. A QFZP can earn non-qualifying income as long as it does not exceed either 5% of the business’s total revenue or AED 5 million – whichever is lower. If the non-qualifying income exceeds this threshold, the business immediately loses its QFZP status and will no longer be eligible for the 0% tax rate.
Who does the de minimis requirement apply to?
The de minimis rule applies to businesses in the UAE that are known as Qualifying Free Zone Persons (QFZPs). These are companies set up in one of the UAE’s designated free zones, areas that offer special tax benefits. To keep this tax-free status, the business has to meet specific conditions:
- Engage in qualifying business activities, like manufacturing, trading with other free zone businesses, or offering services to businesses located outside the UAE
- Secure a proper set-up in the UAE with an office or facility. It is not enough just to be there on paper.
- Follow pricing rules for related companies. For example, if the business buys or sells things with other companies it’s connected to (like parent or sister companies), it must follow fair pricing rules called “transfer pricing” and keep clear records of those deals.
- Keep audited financial statements and make sure all financial records are reviewed and signed off by an approved auditor.
Some businesses can choose to opt out of the QFZP status and be taxed like any other company. If they do that, this rule no longer applies to them.
However, if a company meets these conditions but earns too much non-qualifying income, it will lose its QFZP status. That means it can no longer enjoy the 0% tax rate and will instead pay 9% corporate tax on income above AED 375,000.
How to calculate the de minimis threshold
If your business is a Qualifying Free Zone Person (QFZP) and you want to keep the 0% corporate tax, you need to ensure you don’t earn too much money from the wrong types of activities.
To make sure you stay within the limit, you first need to understand what counts as ‘non-qualifying revenue’. This includes:
- Money made from activities the government says are excluded
- Money from deals with companies outside of the free zone (such as mainland UAE businesses).
- Money from other free zone businesses that are not the real end user of the services or products.
Then you need to work out your total revenue, excluding income from parts of your business that are located outside the UAE and money made from property in the free zone.
Your business will still be within the limit if your non-qualifying income is: 5% or less of your total revenue OR AED 5 million or less (whichever one is smaller)
Implications of not meeting the de minimis requirement
So, what happens if you don’t meet the de minimis requirement?
If your non-qualifying income goes over the limits, your business will lose tax-free status and start paying 9% tax on profits above AED 375,000, just like any other business.
Once a business loses QTZP status, it is disqualified for five years in total: the current tax year plus the next four tax years. Once it has been disqualified, all of its income – even the income that would normally qualify for the 0% tax rate – will be taxed at 9%.
To avoid these repercussions, it is essential for businesses to:
- Keep thorough records of where their money is coming from
- Make sure they stay under the allowed de minimis limit
- Have clear financial records
- Regularly check (or audit) their accounts to avoid unwanted surprises
By carefully managing your business’s income and keeping good records, businesses can stay on the right side of the rules and keep their tax-free status for as long as possible.
About Set Hub
At Set Hub, we specialise in making business setup in Dubai simple, smooth, and stress-free for new entrepreneurs and investors. Whether you’re starting a small company or planning to launch a specialised service, it is our mission to help you get up and running quickly and correctly. We offer a full range of services to support every part of your journey, including company formation, visa and residency processing, corporate bank account setup, and tax and accounting services.
With our local insights and expertise, navigating the UAE’s corporate tax system and rules like the de minimis requirement becomes much easier. We help ensure your business is structured the right way from the beginning, so you’re not only eligible for tax benefits but also stay compliant year after year. Beyond tax matters, we also assist with HR and recruitment, branding and marketing, and even help you find the right office space to suit your needs.
At Set Hub, we don’t just help you set up a business, we support you in building a business that thrives in Dubai’s competitive and opportunity-rich environment. If you’re thinking of starting a business in Dubai, especially within a free zone, we’ll guide you through every step. Contact us today to find out more about how we can help.
