There are more than 50 free zones in the EAU, each of which offers considerable tax benefits, including 0% of the Personal Income Tax and the Capital Profit Tax. Since June 2023, most companies have a leg subject to a standard or 9% corporate tax rate in taxable gains, but there are some exemptions. Could you benefit from this generous scheme?
The minimis requirement in the EAU Corporate Tax
The Law of Federal Decree No. (47) or 2022 on the taxes of corporations and companies made some significant changes in the Fiscal Panorama of the EAU. The main change, effective since June 2023, introduced a corporate tax rate or 9% for companies operating in the EAU. This was introduced to help EAU accelerate development and allow the region to become a leading jurisdiction for companies and investments that adhere to international standards. But, this legislation made some notable exemptions, namely, under the rule of minimis.
The minimis rule allows some companies to obtain a limited amount of income that does not qualify for the special tax rate, without losing tax advantages. This is called the “unqualified income.” It is mainly applied to companies in free areas, where these companies obtain tax advantages. It allows companies that operate in free zones to maintain their status as qualified people from the free zone (QFZPS) and benefit from a 0% corporate tax rate on specific caliples.
Essentially, the rule establishes a limit to determining how much unqualified income a company can win before losing its special fiscal state. A QFZP can obtain unqualified income provided it does not happen, or 5% of the company’s total income or AED 5 million, Whicever is lower. If the non -qualifying income leaves this threshold, the company immediately loses its QFZP status and will no longer be eligible for the tax rate of 0%.
Who is the minimis requirement applied?
The minimis rule applies to companies in the EAUs that are known as qualified people from the free zone (QFZPS). These are companies established in one of the designated free zones of the EAU, areas that sacrifice special tax benefits. To maintain this tax free, the business must meet specific conditions:
- Participate in qualified commercial activities, such as manufacturing, trade with other free zone companies or offering services to companies located outside the EAU of the EAU
- Ensure an adequate configuration in the EAU with an office or installation. It is not enough just being there on paper.
- Follow the price rules for related companies. For example, if the business buys or sells things with other companies with which it is connected (such as parent companies or sisters), you must follow rules of fair prices called “transfer prices” and keep clear records of those offers.
- Keep the audited financial statements and ensure that all financial records are reviewed and signed by an approved auditor.
Some companies may choose not to participate in the state of QFZP 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 many unqualified income, it will lose its QFZP status. That means that you can no longer enjoy the tax rate of 0% and, on the other hand, will pay 9% corporate taxes on income above AED 375,000.
How to calculate the minimis threshold
If your business is a person with a qualified free zone (QFZP) and wishes to keep the corporate tax of 0%, you must make sure not to earn too much money from the incorrect types of activities.
To make sure to stay within the limit, you must first understand what it counts as “non -qualifying income.” This includes:
- Money made of activities that the government says they are excluded
- The money of offers with companies outside the free zone (such as the companies of the continental EAU).
- Money from other free zone companies that are not the true end user of services or products.
Then, you must solve your total income, excluding the income of your business that is located outside the EAU and the money made of properties in the free zone.
Your business will still be within the limit if your unqualified income is: 5% or less of your total income or 5 million or less (Whicever One is narrower)
Implications not to meet the minimis requirement
So what happens if you don’t meet the minimis requirement?
If your unqualified income exceeds the limits, your company will lose the tax free of taxes and begin to pay a 9% tax on profits exceeding 375,000 AED, just like any other business.
Once a company loses the QTZP state, it is disqualified for five years in total: the current fiscal year plus the next four fiscal years. Once you have a disqualified leg, all your income, only the normal income would qualify for the tax rate of 0%, will be taxed at 9%.
To avoid thesis repercussions, it is essential that companies:
- Keep exhaustive records where your money comes from
- Make sure they remain under the allowed minimis limit
- Have clear financial records
- Regularly verify (or audit) your accounts to avoid unwanted surprises
By carefully administering the income of their business and maintaining good records, companies can remain on the right side of the rules and keep their tax free as long as possible.
About set had
In Set Hub, we specialize in making a business configuration in simple, soft and without stress for new entrepreneurs and investors. Whether you are starting a small business or plan to launch a specialized service, it is our mission to help you get into operation quickly and correctly. We offer a full range of services to support each part of its trip, including the training of the company, the processing of visas and residence, the configuration of the corporate bank account and the tax and accounting services.
With our local ideas and experience, navigating the EUA corporate tax system and the rules such as the Minimis requirement becomes much easier. We help to ensure that your business is structured in the right way from the beginning, so it is not only eligible for tax benefits, but also remains compatible year after year. Beyond tax matters, we also help with HR and recruitment, brand and marketing, and an aid to find the appropriate office space to meet their needs.
In Set Hub, we not only help you establish a business, we support it in the construction of a business that passes in the competitive and rich environment in Dubai opportunities. If you are thinking of starting a business in Dubai, especially within a free zone, we will guide it through each step. Contact us today to find more about how we can help.
