The de minimis rule: the threshold never to cross

The principle of the de minimis rule

The de minimis rule, set out in Article 4(2) of Cabinet Decision No. 100 of 2023, allows a margin of non-qualifying revenue within a QFZP entity. This tolerance is intended to avoid penalizing predominantly qualifying activities on account of ancillary non-qualifying amounts.

Calculating the threshold

The de minimis threshold is defined as the lower of the following two amounts:

1. 5% of the entity's total revenue.
2. AED 5 million.

Example: for an entity with revenue of AED 50 million, the threshold is 5% × 50 = AED 2.5 million (lower than AED 5 million). For an entity with revenue of AED 200 million, the threshold is AED 5 million (which is the lower of the two: 5% × 200 = AED 10 million versus AED 5 million).

What goes into the numerator?

The numerator includes revenue from Excluded Activities and revenue from transactions with Non-Free Zone Persons for non-qualifying activities, after the statutory exclusions. A mainland or overseas customer’s location alone does not determine the classification.

What is included in the denominator?

The denominator is total revenue for the period, subject to the symmetric statutory exclusions. Revenue attributable to a Domestic or Foreign Permanent Establishment and specified real-estate revenue under CD 100/2023 are excluded from both terms. Intellectual-property income must follow its specific rules. An income-tax exemption for dividends or gains does not justify removing all such receipts from the denominator.

For each flow, document the counterparty, its beneficial-recipient role, the activity, any exclusions and the separate income treatment. FZ-to-FZ transactions do not all require an activity from the list; a Free Zone customer does not by itself guarantee 0%.

Quarterly monitoring recommended

The rule is assessed over the entire tax year, but quarterly monitoring is necessary to detect a risk of breach in time and to take corrective measures (shifting the non-qualifying activity into a third-party entity, restructuring contracts, temporarily discontinuing an activity).

Consequences of a breach

• Loss of QFZP status for the period of the breach and the four subsequent tax periods (Federal Decree-Law No. 47 of 2022, art. 18(3); Cabinet Decision No. 100 of 2023).
• Taxation under the standard regime: 9% on taxable income above AED 375,000 (Cabinet Decision No. 116 of 2022).
• Inability to regain QFZP status before the penalty period expires.
• Possible retroactive reassessments on prior financial years if the breach reveals irregularities.

Threshold management strategies

• Ring-fencing: isolating non-qualifying activities in a separate entity (mainland or another non-QFZP free zone).
• Contract restructuring: reorganizing flows so that transactions fall within a qualifying category (for example, transactions with other Free Zone Persons that are the beneficial recipients).
• Temporary discontinuation: suspending an ancillary activity if the threshold is being approached.
• Granular cost accounting: allocating each flow at the point of origin to enable real-time monitoring.