Understanding the De Minimis Rule: Key to 0% Corporate Tax in UAE Free Zones
If you’re a business registered in a UAE Free Zone, understanding the de minimis requirements is essential to maintain your Qualifying Free Zone Person (QFZP) status and enjoy the 0% corporate tax rate on eligible income. This blog serves as your ultimate guide to understanding how this rule works, what income qualifies, what doesn’t, and how to stay compliant.
What is the De Minimis Rule?
The de minimis rule refers to a threshold that determines how much non-qualifying income a Free Zone company can earn while still benefiting from the 0% Corporate Tax rate as a QFZP.
In simple terms, the UAE allows Free Zone companies to earn a very small amount of ineligible income without losing their tax-free benefits. But if that small amount is exceeded, the entire tax benefit is lost.
Why is the De Minimis Rule Important?
The UAE’s corporate tax regime aims to support legitimate Free Zone activities. However, it also prevents abuse of the system. If a company generates too much income from ineligible sources, it no longer qualifies for preferential treatment.
This rule ensures:
- Fair taxation.
- Proper use of the Free Zone structure.
- Encouragement of business within approved parameters.
What is the De Minimis Threshold?
To maintain your QFZP status, your non-qualifying revenue in any tax period must not exceed the lower of:
- 5% of total revenue, or
- AED 5 million.
Even a slight breach of either limit results in full taxation at the standard 9% Corporate Tax rate — with significant consequences.
Types of Revenue: What Counts and What Doesn’t
To assess compliance, Free Zone Persons need to understand how revenue is classified:
1. Non-Qualifying Revenue (Included in de minimis calculation)
This is the income that can disqualify you if it exceeds the threshold. It includes:
- Revenue from Excluded Activities (e.g., banking, insurance, real estate outside Free Zones).
- Transactions with non-Free Zone Persons that do not qualify as “Qualifying Activities”.
- Deals with other Free Zone entities where the counterparty is not the actual end-user.
2. Disregarded Revenue (Not included in de minimis calculation)
Some income is completely excluded from both total and non-qualifying revenue when applying the de minimis test, but it is taxed at 9% unless exempt. This includes:
- Income from a Permanent Establishment in mainland UAE.
- Income from foreign operations (Foreign Permanent Establishments).
- Certain real estate income, especially from property located in Free Zones but not used commercially by another Free Zone business.
- Income from intellectual property, such as licensing fees or royalty income, unless it meets specific exemption rules.
How to Apply the De Minimis Test
To assess whether you meet the de minimis rule:
- Calculate Total Revenue
Exclude disregarded income. Only include income relevant to the Free Zone activities. - Identify Non-Qualifying Revenue
Include only income from excluded or non-qualifying sources within the Free Zone. - Compare the Result
Ensure that non-qualifying revenue is:- 5% or less of total revenue, and
- Not more than AED 5 million.
Failing either one of these conditions results in disqualification from the 0% tax regime.
Simple Example to Understand the De Minimis Rule
Imagine you run a Free Zone company that sells software services. Most of your clients are other businesses within the Free Zone, so your income qualifies for the 0% tax rate.
But during the year, you also take on a few projects for clients outside the Free Zone and offer a paid consultation service that’s not part of your core qualifying activities.
Here’s what your revenue looks like this year:
- Total qualifying income: AED 9,000,000
- Income from non-qualifying services: AED 400,000
To see if you still meet the de minimis rule, you check:
- 5% of total revenue = AED 450,000
- Your non-qualifying income = AED 400,000
Because AED 400,000 is less than 5% of your total revenue and less than AED 5 million, you’re still safe!
You retain your QFZP status and continue to enjoy 0% corporate tax on your qualifying income.
What Happens if You Breach the De Minimis Limit?
Exceeding the limit results in the loss of QFZP status for:
- The current tax period, and
- The next four (4) consecutive tax periods.
During this time, your entire taxable income becomes subject to the standard 9% corporate tax. Reinstating QFZP status isn’t automatic—you must meet all the conditions again after the penalty period ends.
Other Conditions to Keep QFZP Status
The de minimis rule is only one piece of the puzzle. To remain a QFZP, a company must also:
- Have adequate substance in the UAE (people, assets, and operations in the Free Zone).
- Derive Qualifying Income (from specific, approved business activities).
- Comply with transfer pricing and the Arm’s Length Principle.
- Not elect to be taxed as a regular company.
- Maintain audited financial statements.
Simply being in a Free Zone isn’t enough—you must meet all requirements every tax year.
Common Traps to Avoid
Here are mistakes that can easily cause a QFZP to fall out of compliance:
- Ignoring non-qualifying income from one-time deals or passive income.
- Misclassifying real estate income from Free Zone property.
- Treating disregarded income as qualifying when it’s not.
- Failing to maintain proper documentation or financial records.
How Tax Consultants Can Help
Given the complexity, it’s highly recommended that Free Zone businesses work with UAE Corporate Tax consultants or audit firms. They can help:
- Assess your eligibility for QFZP status.
- Identify risky income streams.
- Track de minimis thresholds in real-time.
- Structure operations to stay within legal limits.
- Prepare and audit your financial statements correctly.
Staying compliant with the de minimis rule is not just about math — it’s about strategic tax planning.
Final Thoughts
The de minimis rule is a critical safeguard in the UAE’s Corporate Tax system, allowing Free Zone companies to maintain their QFZP status only if their non-qualifying revenue remains truly minimal. Even small mistakes can result in major tax consequences.
Understanding the nuances of what counts, what doesn’t, and how to report it accurately is essential for long-term tax efficiency and compliance.
FAQ
Starting June 1, 2023, the UAE applies a 9% Corporate Tax on profits over AED 375,000.
However, Free Zone companies can still get 0% tax if they qualify as a QFZP.
A Free Zone company that meets all these conditions:
Operates inside a Free Zone.
Has real presence (staff, assets, operations).
Earns Qualifying Income (from allowed business activities).
Follows the de minimis rule.
Has audited financial statements.
Complies with transfer pricing laws.
Does not choose to be taxed at 9%.
This rule allows a QFZP to earn a small amount of non-qualifying income without losing the 0% tax rate.
The limit is the lower of:
5% of total revenue, or
AED 5 million
Go above that? You’ll lose QFZP status and pay 9% tax.
Non-qualifying income includes:
Business with individuals or mainland companies (unless approved).
Banking, insurance, finance, and certain real estate income.
Income from IP like royalties or trademarks (unless approved).
Deals where the other Free Zone company isn’t the real end-user.
You’ll lose QFZP status and pay 9% tax on all income:
From the start of that tax year.
For the next 4 years too — total of 5 years disqualified.
Yes. Even if:
You’re in a Free Zone.
You make no profit.
You qualify for 0% tax.
📌 All companies must register and file a tax return.
Yes! Even QFZPs must:
File a Corporate Tax return.
Prepare audited financials.
Track and document income sources.
Maintain records and transfer pricing reports (if applicable).
