Main Rules About De Minimis Requirement
The government of UAE started corporate tax in 2023. The Federal Tax Authority (FTA) gives new guides for tax payers to understand the law. The FTA told everyone about special rules for qualifying free zone persons. The De minimis requirement is one important rule for these free zone persons.
The De minimis requirement helps a free zone person keep their status as a qualifying free zone person. This rule lets a free zone person earn a small amount of non-qualifying income. This small amount should not change the free zone tax benefits for the person.
How the De Minimis Requirement Works
A free zone person needs to meet the De minimis requirement. When a person follows this rule, they can have a small amount of income that is not qualifying income. This income does not hurt their qualifying status or their tax benefits.
If the person meets the De minimis requirement, any income that doesn’t fit the main qualifying income rules can still count as qualifying. But the De minimis requirement has strict limits set by the FTA.
The main De minimis limits are:
- The non-qualifying revenue must not be more than AED 5,000,000.
- The non-qualifying revenue must not be more than 5% of the total revenue, whichever is lower.
Here are some points to remember:
- Non-qualifying revenue means money earned from certain activities. This includes excluded activities or deals with non-free zone persons.
- Total revenue means all money earned in a tax period by the qualifying free zone person.
- Some types of income don’t count in these calculations:
- Revenue from immovable property in a free zone, such as selling or renting to non-free zone or free zone persons.
- Income from any domestic or foreign permanent establishment (PE) of a free zone person.
Example of De Minimis Rule in Action
Let’s take a company called HB LLC. HB LLC is a free zone person. HB LLC sells car parts and cars to other qualifying free zone companies. The company earns AED 80,000,000 in total revenue for one year. HB LLC does everything to stay compliant with free zone rules. HB LLC follows transfer pricing rules and other tax laws.
During the tax year, HB LLC earns AED 4,500,000 by selling to individuals. This sale is a non-qualifying activity. Now, let’s check the De minimis threshold:
- 5% of AED 80,000,000 is AED 4,000,000.
- The other limit is AED 5,000,000.
Since AED 4,500,000 is more than AED 4,000,000, HB LLC breaks the 5% rule. HB LLC does not meet the De minimis requirement. HB LLC can’t keep its qualifying free zone person status for this tax period.
Points shown in this example:
- A company must always check its non-qualifying income against both limits.
- If a company breaks the De minimis threshold, it loses its qualifying status for that year.
- A qualifying free zone person should always keep non-qualifying income low.
Why the De Minimis Rule Matters for Free Zone Companies
The De minimis requirement protects the special status of free zone companies. This rule allows some flexibility for business, but not too much.
Here are some reasons why this rule matters:
- It helps a company keep its special tax rate.
- It allows a small mistake or a small non-qualifying deal without losing benefits.
- It sets a clear line between qualifying and non-qualifying income.
- It makes tax reporting easier for small, accidental non-qualifying income.
How to Stay Compliant with De Minimis Rule
Businesses in UAE free zones need to:
- Track all revenue sources carefully.
- Separate qualifying and non-qualifying income.
- Check De minimis thresholds every tax period.
- Keep clear records for FTA audits.
Companies can:
- Get expert help from an audit and tax firm like Mubarak Al Ketbi (MAK) Auditing.
- Use accounting software to track transactions.
- Regularly review compliance with all new FTA rules.
How Mubarak Al Ketbi (MAK) Auditing Can Support You
Mubarak Al Ketbi (MAK) Auditing always gives expert support to businesses in UAE free zones. We help our clients understand De minimis requirements with easy explanations. Our team of auditors and tax consultants tracks your company’s income and expenses with great care. We help you keep your qualifying status and solve tax problems on time.
If you want a partner who’s always ready to go the extra mile, you should remember: “A stitch in time saves nine.” Let’s work together to protect your business!
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact/WhatsApp: +971 50 276 2132
