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Post By: admin February 29 2024

What is De Minimis Requirements and its Importance in Determining Qualified Income Person Under CT?

After the introduction of corporate tax in UAE in 2023, the FTA has been issuing further guides and clarifications in-order to help tax payers get clear insights into the application of the new law. One such clarification regarding the determination of qualifying income for the qualifying free zone person has been issued by the FTA. De minimis requirement is part of the same clarification that every qualifying free zone person must be aware of.

The De Minimis Requirement

For a freezone person who requires to become a qualifying freezone person, he must meet the De minimis requirements as stated by the FTA, whereby the person, after meeting the said requirements, will be allowed to earn a small amount of non-qualifying income that does not affect the qualifying free zone person status or the freezone CT regime of the person.

If the person meets the De minimis requirement, then the income earned by the person that does not meet the first two conditions of the qualified income criteria will still be considered as qualifying income under the De minimis requirement.

The De minimis requirements are said to be met if the following criteria are said to be fulfilled:

The non-qualifying revenue of the person must not exceed the lower of the following amounts:

  1. AED 5000,000 and
  2. 5% of the total revenue

For further clarification of the said criteria, the following points must be kept in mind:

  1. Non-qualifying revenue under the De minimis requirement means the revenue earned in a particular tax period from the following:
    • Excluded activities
    • Activities that are non-qualifying where the opposite party to the transaction is a non-freezone person.
  1. Total revenue is the revenue earned by a qualifying freezone person in a certain tax period.
  2. Certain revenue or income will not be considered while calculating the non-qualifying revenue and the total revenue as described, which include:
    • Revenue related to an immovable property that is located in any free zone might be earned in the following manner:
      • Transacting with a non-freezone person with regards to any property that is commercial
      • Transacting with any person with regard to any immovable property that might not be commercial
    • Revenue related to any domestic PE or any foreign PE of any qualifying free zone person.
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Example of a De Minimis Requirement Situation

Consider the firm name HB LLC, which is a free zone person and sells automobiles and their parts to other qualifying free zone entities. The total revenue of the HB LLC amounted to AED 80,000,000 in a certain tax period. The HB LLC makes all the efforts to stay compliant and maintain its substance in the free zone, but it has not yet elected or decided to be subject to the CT regime under the normal rates. It also follows the transfer pricing regulations and other requisites laid by the CT law.

While conducting the business during the tax period, it earned a small amount of revenue by transacting with individuals, which amounted to AED 4500,000. The balance amount of total revenue was under the qualifying income where this revenue earned from transacting with the individuals was under the excluded activities, and also the amount exceeded the de minimis threshold of AED 4000,000, i.e., 5% of AED 80,000,000 and AED 5000,000, so the conclusion is that HB LLC will not be considered eligible for the qualifying free zone person.

As the above example clearly describes, every related revenue will not be eligible to be considered a qualifying income subject to certain criteria. The qualifying free zone person who earns any non-qualifying income must ensure that they meet the minimum requirements so that they do not lose their status as qualifying free zone persons. The De minimis requirement criteria, in short, enables the qualifying freezone person to earn a small amount of non-qualifying income without affecting their status.

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