Why UAE free zone businesses must stay within the 5% revenue threshold or Dh5 million with Corporate Tax

'Non-qualifying' deals cannot generate more than 5% of annual revenue or Dh5m

Free zone businesses in the UAE should keep steadfast focus on two numbers when it comes to corporate tax now that they know what the 'qualifying income' is.

Any future tax period, these businesses must ensure that their 'non-qualifying' revenues do not exceed 5 percent of their total revenue or Dh5 million. It is known as the 'de-minimis' threshold.

Businesses based in free zones will no longer be eligible for the 0% corporate tax rate if these numbers are breached over a period of five years.

They will be taxed as taxable enterprises, with a corporate tax rate of 9 percent. If their income exceeds Dh375,000.

All non-qualifying revenue generated by free zone businesses must be below the two limits at all times, which is everything not rated as 0%.

The free zone entity cannot benefit from corporate tax exemption if the minimum requirements are not met or the entity does not meet any qualifying conditions."

As a result, free zone entities cannot conduct mainland UAE business above this threshold. They could potentially tax all revenue at 9 percent if they do so.

Businesses in free zones make their own decisions

In accordance with its standard practice, the Ministry of Finance has given quite a bit of flexibility to free zone businesses regarding how they want to be placed in the corporate tax system.

Businesses with substantial operations on the mainland cannot seek to be included in the standard corporate tax regime and thus benefit from the 9 percent rate. For operations within or between free zones, they can elect 0 percent status.

Free zone authorities must confirm if a hub is eligible for 0% status.