Qualifying free zone person: the conditions for 0% corporate tax in the UAE

A qualifying free zone person (QFZP) is a free zone company that pays 0% corporate tax on its qualifying income and 9% on the rest. It must meet every condition throughout the tax period: adequate substance, qualifying income, the de minimis limit, audited financial statements, transfer pricing compliance and no election for the standard rates.

Key takeaways

• A QFZP pays 0% on qualifying income and 9% on its other taxable income, with no AED 375,000 zero-rate band on that other income.
• Six conditions must all hold throughout the tax period: substance, qualifying income, the de minimis limit, audited accounts, transfer pricing and no election out.
• Non-qualifying revenue must not exceed the lower of AED 5,000,000 or 5% of total revenue.
• Failing any condition at any time removes the status from the start of that tax period and for the four after it, five tax periods in all.
• A free zone company is still a taxable person: it registers, files a return each period and keeps records.

On this page 10 sections

What a qualifying free zone person is

Under the Corporate Tax Law, a free zone person is a company established in a UAE free zone, or a branch registered there. It is a resident taxable person like any other company, so it must register and file returns. What sets a QFZP apart is the rate: Article 18 of the law gives a free zone person that meets the conditions 0% on its qualifying income, for the rest of the free zone’s tax incentive period under its own legislation.

The status is not applied for. The Federal Tax Authority (FTA) treats a free zone person as qualifying unless a condition fails or it elects out. That makes it a status to be defended in every tax period, not a licence granted once. The wider free zone rules are in corporate tax in free zones, and the standard bands are in the 0% and 9% corporate tax rates.

The 0% rate is time-limited by design. A Cabinet decision can extend a free zone’s incentive period, but no single period may exceed 50 years (Article 18(4)).

The conditions at a glance

A free zone person is a QFZP only while it meets all of the following throughout the tax period. Article 18 of the law sets the core conditions, and Article 5 of Ministerial Decision No. 229 of 2025 adds the de minimis test and audited financial statements.

Holding a free zone licence does not settle the question. The only way to know whether a company passes is to test each condition against the actual figures for the period.

Substance and qualifying income

Adequate substance

The company must carry on its core income-generating activities, the essential work that earns its revenue, in the free zone, or in a designated zone for distribution. It needs adequate assets, enough qualified full-time employees and adequate operating spending there for each activity (Cabinet Decision No. 100 of 2023, Article 8). Neither the decision nor the FTA’s free zone guide sets a minimum figure; the guide says adequacy depends on the facts of each case. Core work can be outsourced within a free zone if the company supervises it adequately.

Qualifying income

Qualifying income is defined in Article 3 of Cabinet Decision No. 100 of 2023. Four kinds qualify: income from another free zone person that is the beneficial recipient of the goods or services, unless the activity is excluded; income from qualifying activities with mainland or foreign customers, unless excluded; income from qualifying intellectual property under the formula in Ministerial Decision No. 229 of 2025; and any other income, as long as the de minimis test is met.

Ministerial Decision No. 229 of 2025 lists the qualifying activities, among them manufacturing, processing, trading qualifying commodities, holding shares for investment, ship operation, reinsurance, fund management, headquarter services, treasury and financing, aircraft financing and leasing, distribution from a designated zone and logistics. Excluded activities never earn qualifying income in their own right; they include transactions with natural persons (with a few exceptions), banking, most insurance, and owning property other than commercial property in a free zone dealt with a free zone person. The full lists are set out in the free zone guide.

The FTA’s guide says a new company with no revenue yet is not disqualified for that reason alone, provided it has no non-qualifying revenue.

The de minimis test

The de minimis test lets a QFZP have a small amount of non-qualifying revenue without losing its status. It is measured on revenue, not profit: non-qualifying revenue in a tax period must not exceed the lower of AED 5,000,000 or 5% of total revenue (Article 3 of Ministerial Decision No. 229 of 2025).

Non-qualifying revenue comes from excluded activities, from non-qualifying activities with customers that are not free zone persons, and from free zone customers that are not the beneficial recipient. The percentage sets the limit for smaller companies and the fixed cap for larger ones; they meet at total revenue of AED 100,000,000, where 5% equals AED 5,000,000. Revenue attributable to a permanent establishment, free zone property income (other than commercial property dealt with a free zone person) and most intellectual property income is left out of both sides of the test and taxed at 9%.

Worked example

Two companies with 4% non-qualifying revenue

The figures are illustrations, not data from any real company. Each company has non-qualifying revenue equal to 4% of its total revenue.

1. Company A: total revenue AED 20,000,000. 5% is AED 1,000,000, which is lower than AED 5,000,000, so the limit is AED 1,000,000. Its non-qualifying revenue is AED 20,000,000 × 4% = AED 800,000, within the limit.
2. Company B: total revenue AED 150,000,000. 5% is AED 7,500,000, which is higher than AED 5,000,000, so the limit is AED 5,000,000. Its non-qualifying revenue is AED 150,000,000 × 4% = AED 6,000,000, above the limit.

Company A keeps its status; Company B loses it, although both have 4% non-qualifying revenue.

Audited accounts, transfer pricing and the election

Audited financial statements

A QFZP must prepare and maintain audited financial statements whatever its revenue. For tax periods starting on or after 1 January 2025 the rules are in Ministerial Decision No. 84 of 2025; Ministerial Decision No. 82 of 2023 still applies to earlier periods. Other taxable persons that are not tax groups need audited accounts only above AED 50,000,000 of revenue, so this is a cost a QFZP carries from its first period. The return itself is covered in filing the corporate tax return.

Transfer pricing

Dealings with related parties, and between the free zone business and any branch outside the free zone, must be at arm’s length (Article 34), with transfer pricing documentation such as a master file and local file where the thresholds are met (Article 55).

Electing out

Under Article 19 a QFZP can elect to be taxed at the standard rates, from the start of the tax period of the election or of the next one. The FTA’s guide says the election can be made up to the due date of that period’s return. It counts as leaving the regime, so the five-period rule below applies. It brings back the AED 375,000 zero-rate band, small business relief and tax groups, each subject to its own conditions.

What is still taxed at 9%

Even a company that passes every test pays 9% on income that is not qualifying income. Cabinet Decision No. 100 of 2023 keeps three kinds of income out of the 0% rate even when they might otherwise qualify:

The 9% rate applies from the first dirham of that income: a QFZP does not get the AED 375,000 band on it (FTA free zone guide, section 3.3).

Losing QFZP status

A company that fails any condition at any time in a tax period stops being a QFZP from the first day of that period, not from the date of the failure. It then stays out for the four following tax periods, five in all, and is taxed at the standard rates on all its taxable income. An election into the standard rates has the same effect from the start of the period in which the election takes effect.

In the FTA guide’s example, a calendar-year company that fails the de minimis test in 2024 is out for 2024 to 2028 and is tested again for 2029, however well it complies in between. Because the loss runs back to the start of the period, a late discovery can mean tax paid or returns filed on the wrong basis; corporate tax penalties explains how late filing and late payment are charged.

What a QFZP gives up

A QFZP also cannot join a tax group (Article 40) or use qualifying group relief, business restructuring relief or transfers of tax losses, and a loss on its qualifying income cannot be carried forward (FTA free zone guide, sections 5.5 and 5.5.1). A free zone company outside the regime is not caught by these exclusions.

Registration follows the mainland rules. A resident juridical person incorporated, established or recognised in the UAE on or after 1 March 2024, including a free zone person, must apply for corporate tax registration within three months (FTA Decision No. 3 of 2024); the steps are in how to register for corporate tax. For the other corporate tax guides, start at the corporate tax hub.