In This Article
- The End of the “Zero Tax” Myth
- What Is a QFZP?
- Conditions to Qualify
- Qualifying Activities (Updated MD 229)
- Excluded Activities
- The De Minimis Rule
- What If You Lose QFZP Status?
- Substance Requirements
- Audited Financial Statements
- Transfer Pricing Compliance
- QFZP Compliance Checklist
- How Qaspro Global Can Help
- FAQs About QFZP & UAE Corporate Tax
Introduction: The End of the “Zero Tax” Myth
For decades, the UAE’s free zones were synonymous with zero taxation. Businesses flocked to Dubai, Abu Dhabi, Sharjah, and other emirates specifically to enjoy this tax-free environment.
But with Federal Decree-Law No. 47 of 2022 and the rollout of Corporate Tax from 1 June 2023, the landscape has changed fundamentally. Free zone companies are no longer automatically exempt. Only those that qualify as a Qualifying Free Zone Person (QFZP) can enjoy the 0% corporate tax rate — and only on their qualifying income.
Everything else? Taxed at 9%.
What Is a Qualifying Free Zone Person (QFZP)?
A QFZP is a company, branch, or establishment that is incorporated or registered in a UAE free zone and meets all conditions under the Corporate Tax Law. If every condition is met, the entity benefits from the following rates:
| Income Type | Tax Rate |
|---|---|
| Qualifying Income (from qualifying activities) | 0% |
| Non-Qualifying Income (within de minimis limit) | 0% |
| Non-Qualifying Income (exceeding de minimis) | 9% |
| All income if QFZP conditions NOT met | 9% on entire income |
Common Misconception: Unlike mainland businesses, QFZPs do not benefit from the AED 375,000 small business relief threshold. The 0% rate applies only to qualifying income. This mistake can cost you heavily.
Conditions to Qualify as a QFZP
Your business must satisfy all conditions simultaneously. Failing even one disqualifies your entity — not just for the current year, but for the next four tax periods as well.
Condition 1: Be a Free Zone Person
You must be incorporated, established, or registered in a UAE free zone. This includes branches of non-resident entities registered in a free zone.
Condition 2: Derive Qualifying Income
Your income must come from qualifying activities as defined by Ministerial Decision No. 229 of 2025 (replacing MD 265 of 2023).
Condition 3: Maintain Adequate Substance
Your core income-generating activities (CIGAs) must be conducted within the free zone with adequate employees, assets, and operating expenditure.
Condition 4: Meet the De Minimis Threshold
Non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue.
Condition 5: Prepare Audited Financial Statements
Mandatory for all QFZPs from tax periods starting 1 January 2025 (Ministerial Decision No. 84 of 2025).
Condition 6: Comply with Transfer Pricing Rules
All related-party transactions must be at arm’s length with proper documentation.
Condition 7: Not Elect Standard Tax Rates
The entity must not have voluntarily opted out of the QFZP regime. Once you opt out, re-entry is restricted for at least five tax periods.
Qualifying Activities (Updated — MD 229 of 2025)
Ministerial Decision No. 229 of 2025 (effective retroactively from 1 June 2023) replaced the earlier MD 265 of 2023 and significantly expanded the list of qualifying activities:
| # | Qualifying Activity |
|---|---|
| 1 | Manufacturing or processing of goods or materials |
| 2 | Trading of Qualifying Commodities (expanded scope) |
| 3 | Holding of shares & securities for investment purposes |
| 4 | Ownership, management & operation of ships |
| 5 | Reinsurance services |
| 6 | Fund management services (regulated) |
| 7 | Wealth & investment management services (regulated) |
| 8 | Headquarter services to Related Parties |
| 9 | Treasury & financing services to Related Parties or for own account |
| 10 | Financing & leasing of aircraft |
| 11 | Distribution of goods or materials in/from a Designated Zone |
| 12 | Logistics services |
| 13 | Qualifying Intellectual Property income (nexus approach) |
| 14 | Ancillary activities to any of the above |
Key Update: Commodity Trading Expanded
MD 229 now includes structured financing transactions — prepayment, factoring, forfaiting, countertrade, warehouse receipt financing, export receivable financing, project finance, Islamic trade finance, and streaming arrangements.
However, if a QFZP earns 51% or more of its revenue from distribution, warehousing, logistics, or inventory management, its commodity trading won’t qualify.
Key Update: Treasury for Own Account
Previously only treasury services to Related Parties qualified. Now, treasury and financing for the QFZP’s own account is also included — great news for businesses earning interest on deposits and investments.
Excluded Activities
Income from the following activities does not qualify for the 0% rate:
- Transactions with natural persons (individuals) — except for specified qualifying activities
- Banking & insurance activities regulated by the Central Bank
- Ownership or exploitation of immovable property — except commercial property between Free Zone Persons
- Intellectual property income not meeting Qualifying IP criteria
- Any activity not listed as a Qualifying Activity
The De Minimis Rule Explained
The de minimis threshold is your safety net — a small amount of non-qualifying income won’t disqualify you. Your non-qualifying revenue must not exceed:
AED 5,000,000 OR 5% of total revenue (whichever is lower)
Practical Example
A logistics company in a UAE free zone earns AED 4,200,000 total. Of this, AED 200,000 comes from services to individuals (non-qualifying).
Non-qualifying percentage: 4.76% → Below 5% threshold → QFZP status retained
But if non-qualifying income were AED 250,000 (5.95%) → QFZP status LOST for 5 years
What Happens If You Lose QFZP Status?
If you fail any condition at any point during a tax period, you lose QFZP status from the beginning of that period — plus the next 4 consecutive tax periods.
Example: Lose status in 2024 → 2025, 2026, 2027, 2028 also lost → Earliest re-test: 1 January 2029.
During this entire period, ALL income is taxed at 9%.
Substance Requirements
Simply being registered in a free zone is not enough. The UAE demands genuine economic substance:
Core Income-Generating Activities (CIGAs)
Must be conducted within the free zone — not outsourced entirely to mainland or offshore entities.
Adequate Qualified Employees
Physically present in the free zone. An employee cannot be counted toward multiple CIGAs simultaneously.
Adequate Assets
Office space, equipment, and technology located in the free zone.
Adequate Operating Expenditure
Sufficient spending incurred in relation to the free zone business operations.
Note: CIGAs can be outsourced to related or third parties within a free zone, but the QFZP must maintain proper oversight and supervision of the outsourced activity.
Audited Financial Statements — Now Mandatory
From tax periods commencing 1 January 2025, all QFZPs must prepare audited financial statements. This ensures clear distinction between qualifying and non-qualifying income.
Key Audit Thresholds
- Tax groups: Audited special-purpose statements required regardless of revenue
- Standalone entities: Audited accounts if revenue exceeds AED 50 million or claiming QFZP benefits
- All QFZPs: Must comply from financial years starting 1 January 2025
Transfer Pricing Compliance
All related-party transactions must reflect arm’s length pricing. Documentation requirements include:
| Requirement | Threshold |
|---|---|
| Related-party disclosure schedules | Transactions exceed AED 40 million |
| Itemised disclosures per category | Categories above AED 4 million |
| Master File & Local File | UAE turnover above AED 200 million OR MNE group > AED 3.15 billion |
Your QFZP Compliance Checklist
- Register for Corporate Tax with the FTA
- File corporate tax returns within 9 months of year-end
- Prepare audited financial statements (mandatory from 2025)
- Maintain clear separation of qualifying vs non-qualifying income
- Monitor the de minimis threshold throughout the year
- Ensure genuine economic substance in the free zone
- Maintain transfer pricing documentation for related-party transactions
- Keep contracts, invoices & records for minimum 7 years
- Review activities against updated Qualifying Activities list (MD 229)
- Engage a qualified tax consultant for annual compliance review
How Qaspro Global Can Help Your Free Zone Business
Navigating the QFZP regime is complex — and a single misstep can cost your business five years of 0% tax benefits. That’s where Qaspro Global comes in.
Our dedicated team of UAE tax specialists works with free zone businesses across the Emirates to ensure they not only qualify but maintain QFZP status year after year.
Our Free Zone Tax Services
- QFZP Eligibility Assessment — evaluate all conditions & identify gaps
- Income Classification — precise qualifying vs non-qualifying analysis
- Substance Advisory — ensure CIGAs and substance requirements are met
- De Minimis Monitoring — ongoing tracking to prevent threshold breaches
- Audit Coordination — working with auditors for compliant financial reporting
- Transfer Pricing Documentation — preparing all required TP documentation
- Corporate Tax Return Filing — accurate, timely filing with the FTA
- FTA Audit Support — full representation if the FTA comes calling
Don’t risk losing your 0% tax status. Contact Qaspro Global today to assess your QFZP eligibility and protect your tax benefits.
Frequently Asked Questions About QFZP & UAE Corporate Tax
What is a Qualifying Free Zone Person (QFZP) in the UAE?
A Qualifying Free Zone Person (QFZP) is a company, branch, or establishment registered in a UAE free zone that meets all conditions under Federal Decree-Law No. 47 of 2022 and related Ministerial Decisions. QFZPs benefit from a 0% corporate tax rate on qualifying income instead of the standard 9% rate.
What is the corporate tax rate for free zone companies in UAE?
Free zone companies that qualify as QFZP pay 0% corporate tax on qualifying income and 9% on non-qualifying income. If QFZP conditions are not met, the entire income is taxed at 9%.
What are qualifying activities under MD 229 of 2025?
Ministerial Decision No. 229 of 2025 lists 14 qualifying activities including: manufacturing, commodity trading (expanded to include structured finance), holding shares/securities, ship operations, reinsurance, fund management, wealth management, headquarter services, treasury and financing (including for own account), aircraft leasing, distribution from Designated Zones, logistics, qualifying IP income, and ancillary activities.
What is the de minimis rule for QFZP in UAE?
The de minimis threshold allows QFZPs to earn a small amount of non-qualifying income without losing status. Non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue. Exceeding this threshold results in loss of QFZP status for the current year plus the next 4 tax periods.
What happens if a free zone company loses QFZP status?
If a free zone company fails any QFZP condition, it loses status from the beginning of that tax period plus the next 4 consecutive tax periods (5-year penalty). During this time, all income is taxed at 9%.
Are audited financial statements mandatory for QFZPs?
Yes. From tax periods starting 1 January 2025 (Ministerial Decision No. 84 of 2025), all QFZPs must prepare audited financial statements.
Do free zone companies need to register for UAE corporate tax?
Yes. All free zone companies — whether QFZP or non-QFZP — must register for corporate tax with the Federal Tax Authority (FTA), file annual corporate tax returns within 9 months of the financial year-end, and settle any tax due by the deadline.
What are the substance requirements for QFZP in UAE?
QFZPs must demonstrate adequate economic substance in the free zone, including: core income-generating activities (CIGAs) conducted within the free zone, adequate qualified employees physically present, sufficient assets (office, equipment), and adequate operating expenditure.
Does the 0% QFZP tax rate apply to income from mainland transactions?
It depends. Income from certain qualifying activities conducted with mainland businesses can qualify for the 0% rate. However, income from excluded activities does not qualify. Non-qualifying mainland income counts toward the de minimis threshold.
Which free zones in UAE qualify for the QFZP regime?
The QFZP regime applies to all UAE free zones including DMCC, JAFZA, IFZA, DAFZA, DIFC, ADGM, SAIF Zone, RAK Free Zone, Meydan Free Zone, Hamriyah Free Zone, and all other registered free zones across the seven emirates. The key is meeting all QFZP conditions — not which free zone you’re in.
Disclaimer: This blog is for general informational purposes only and does not constitute professional tax advice. Tax laws and regulations are subject to change. Please consult a qualified tax advisor for guidance specific to your business situation.