CORPORATE, TAX
April 7, 2026
4:19 pm

What It Takes to Become a Qualifying Free Zone Person Under UAE Corporate Tax Law

The UAE’s corporate tax framework, introduced in June 2023 under Federal Decree-Law No. 47 of 2022, changed the landscape for every company operating in the country. The standard rate sits at 9% on taxable profits above AED 375,000. But for businesses registered in one of the UAE’s 40-plus free zones, there is still a route to 0% taxation, provided they satisfy a specific set of conditions.

That route is QFZP status.

A free zone person (FZP) is any juridical entity incorporated or registered in a UAE free zone, including branches of both domestic and foreign companies. However, simply holding a licence in JAFZA, DMCC, DIFC, or any other zone does not automatically grant a preferential tax position. The entity must meet cumulative conditions, each tested annually, to be recognised as a QFZP and keep its qualifying income taxed at zero.

Perhaps the most common misconception we see among international clients is the assumption that “free zone equals tax-free.” It doesn’t. Not anymore. And the Federal Tax Authority is now reviewing the first wave of full-year returns, asking pointed questions about substance, revenue classification, and documentation.

The Core Conditions for QFZP Eligibility

So what exactly does a free zone entity need to demonstrate? The conditions are cumulative, meaning every single one must be satisfied. Fail on one, and the entire position falls apart.

The entity must be a juridical person registered in a recognised UAE free zone.
It must maintain adequate substance within the free zone
It must derive qualifying income as defined by applicable ministerial decisions
It must not have elected to be taxed under the standard corporate tax regime
It must prepare audited financial statements
It must comply with transfer pricing rules under Articles 34 and 55 of the CT Law
Any non-qualifying income must remain within the de minimis threshold

A single weak link in that chain, say, a poorly documented related-party transaction or revenue that slips past the de minimis ceiling, can trigger a loss of QFZP status. And the penalty is severe: the entities are subject to a 9% tax on all income for the current year and the following four years.

Understanding What Counts as Qualifying Income

Not every dirham earned by a free zone company operating under a QFZP framework is subject to the 0% treatment. The income must fall into accepted categories, and its treatment depends on both the nature of the activity and the identity of the counterparty.

Under Cabinet Decision No. 100 of 2023 and the more recent Ministerial Decision No. 229 of 2025 (which replaced MD 265 of 2023, effective retroactively from 1 June 2023), qualifying income includes:

Income from transactions with other free zone persons, except where it relates to excluded activities
Income from transactions with non-free zone persons, but only in respect of qualifying activities that are not excluded
Income from ownership or exploitation of qualifying intellectual property
Any other income, provided the de minimis requirements are met

The counterparty question is critical. For certain activities, income qualifies regardless of the buyer. For others, the 0% treatment applies only when the transaction is with another free zone entity or a party outside the UAE. Depending on the activity, selling services directly to a mainland business could push revenue into the non-qualifying column.

The Full List of Qualifying Activities Under MD 229

Ministerial Decision No. 229 of 2025 significantly expanded and clarified the scope of qualifying activities. The current list, which applies retroactively from 1 June 2023, is broader than what businesses were working with under the earlier MD 265.

The recognised qualifying activities are:

Manufacturing or processing of goods or materials
Trading of qualifying commodities (physical trading, associated financial derivatives hedging, and structured commodity financing)
Holding shares and other securities for investment purposes
Ownership, management, and operation of ships
Reinsurance services
Fund management, wealth management, and investment management services for related or unrelated parties
Financing and leasing of aircraft, including associated activities
Headquarters services to related parties
Treasury and financing services to related parties or for the entity’s own account
Distribution of goods or materials in or from a designated zone
Logistics services
Any activities ancillary to the above

It is worth noting that for some of these, particularly distribution, logistics, and certain services, the qualifying treatment depends on additional conditions. The goods must enter the UAE through the designated zone and be supplied to customers who resell, process, or alter them for sale.

Condition	Requirement	Consequence of Failure
Free zone registration	Juridical person in a recognised UAE free zone	Not eligible for QFZP
Adequate substance	Core income-generating activities performed in the free zone; adequate staff, assets, and operating expenses	Loss of status for the current year + 4 years
Qualifying income	Income from approved activities per MD 229 of 2025	Non-qualifying income taxed at 9%
De minimis rule	Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million (whichever is lower)	Full income taxed at 9% for the current year + 4 years
Audited financial statements	Required for all QFZPs per MD 84 of 2025	Disqualification from 0% rate
Transfer pricing compliance	Arm’s length pricing on all related-party dealings	Loss of QFZP status
No election to the standard regime	The entity must not opt into the 9% CT regime	Irrevocable for 5 consecutive periods

Excluded Activities That Jeopardise the 0% Rate

Even within a free zone, certain activities are explicitly excluded from the QFZP regime. Revenue from these activities, even in small amounts, counts as non-qualifying income and is included in the de minimis calculation.

The excluded activities under MD 229 include:

Transactions directly with natural persons (with limited exceptions for shipping, aircraft, and fund or wealth management)
Regulated banking, finance, leasing, and insurance activities (reinsurance is the notable exception)
Exploitation of intellectual property that does not meet the qualifying IP criteria
Ownership or exploitation of immovable property, except for commercial property dealings between free zone entities
Any activities ancillary to the above

The natural-persons exclusion catches more businesses than you might expect. A company providing advisory or management services to individual clients from its free zone office could find that revenue is classified as excluded, regardless of how the licence reads.

The De Minimis Rule and Why It Trips People Up

This is where things get genuinely tricky for finance teams.

The de minimis rule permits a QFZP to earn some non-qualifying income without losing its preferential position. The threshold is the lower of 5% of total revenue or AED 5 million. Stay within it, and the non-qualifying income gets taxed at 9% while the rest remains at 0%. Breach it, and the entire income base shifts to 9% for the current period and the next four years.

What makes this rule dangerous is how easily it can be triggered by poor revenue tagging. A handful of mainland invoices, a mixed-service contract, or scope creep on a project originally scoped for a free zone client, any of these can push the ratio past the ceiling.

Certain categories of revenue are excluded from both the numerator and denominator of the de minimis calculation. These include revenue attributable to a domestic permanent establishment, a foreign permanent establishment, non-commercial immovable property in a free zone, and income from qualifying IP. Getting these exclusions right requires careful accounting and, frankly, a good understanding of the underlying rules.

A practical example: a JAFZA company earns AED 14 million in total revenue. AED 13.2 million qualifies. AED 800,000 does not. That is 5.7%, just above the threshold. The QFZP position is lost, and the resulting liability could approach AED 1.2 million. Had two or three contracts been restructured, the outcome might have been zero.

Adequate Substance: More Than a Buzzword

The substance test is perhaps the most qualitative, and therefore the most scrutinised, element of QFZP compliance. It requires that the entity’s core income-generating activities (CIGAs) be undertaken in the free zone, supported by adequate assets, a sufficient number of qualified full-time employees, and adequate operating expenditure.

What does “adequate” mean in practice? There is no single number. It is proportional to the scale and nature of the business. A high-revenue trading company with near-zero operational costs in the UAE is a red flag. It does not necessarily mean something is wrong, but it will invite questions during an audit.

CIGAs can be outsourced to a related or third party within a free zone, provided the QFZP maintains proper supervision. For qualifying IP income, outsourcing can extend to any person in the UAE or any non-related party outside the country. But the supervisory control must be real and documented, not a paper arrangement.

Key evidence that auditors typically look for:

Office lease or flexi-desk agreement (where permitted)
Staff on payroll or formalised outsourced operations agreements
Board minutes and management decisions are recorded in the UAE
A cost base that matches the activity profile
Operational documents explaining how services are delivered

Audited Financial Statements and Filing Obligations

Under Ministerial Decision No. 84 of 2025, all QFZPs must prepare audited financial statements. This applies regardless of revenue size. For standalone entities outside the QFZP regime, the audit requirement only kicks in above AED 50 million in revenue, but for those claiming the 0% rate, there is no exemption.

The audit serves a dual purpose. It forces discipline around revenue classification, related-party balances, and expense allocation. And it gives the FTA a third-party verified record to compare against the tax return.

Common issues that weaken a QFZP file during audit:

Revenue not split between qualifying and non-qualifying lines
Related-party balances sitting in suspense accounts without supporting documentation
Large year-end journal entries with insufficient justification
Expense allocations that do not clearly trace to specific income streams

Corporate tax registration is mandatory for all free zone entities via the FTA’s EmaraTax portal, and annual returns must be filed within nine months of the fiscal year-end. Even if no tax is payable, a nil return is still required.

Transfer Pricing and Related-Party Discipline

Free zone businesses frequently transact with group entities, whether through intercompany loans, management fees, shared services, or the transfer of goods. All of these must be priced at arm’s length under Articles 34 and 35 of the CT Law and Ministerial Decision No. 97 of 2023.

The documentation requirements scale with size. Related-party schedules become mandatory when transactions exceed AED 40 million, and itemised disclosures are needed for categories above AED 4 million. For larger businesses with UAE turnover above AED 200 million, or those part of a multinational group with consolidated revenue exceeding AED 3.15 billion, both master file and local file documentation are required.

Getting transfer pricing wrong does not just create a tax adjustment. It can disqualify the entity from QFZP status entirely, because non-compliance with Article 34 is one of the eligibility conditions. This is not a technicality; it is a structural risk that needs attention from day one.

Recent Regulatory Updates: MD 229 and What Changed

The issuance of Ministerial Decision No. 229 of 2025, alongside MD 230, represented the most significant update to the QFZP framework since the CT Law came into force. Both decisions apply retroactively from 1 June 2023, which means businesses may need to revisit positions already taken in earlier filings.

Key changes introduced by MD 229 include:

Expanded commodity definitions: qualifying commodities now cover industrial chemicals, associated by-products, and environmental commodities such as carbon credits and renewable energy certificates
Broader trading scope: structured financing transactions (prepayment, factoring, forfaiting, countertrade, warehouse receipt financing, and Islamic trade finance) are now included
Treasury for own account: the scope of treasury and financing services has been extended beyond related parties to include a QFZP’s own-account activities
51% revenue test: if a QFZP earns 51% or more of its revenue from distribution, warehousing, logistics, or inventory management, its commodity trading activities will not be treated as qualifying

The retroactive application is significant. Businesses that filed returns under the narrower MD 265 framework may now be able to claim benefits they previously excluded through voluntary disclosure amendments.

C. Savva & Associates is not a law firm. For matters requiring legal expertise, the firm collaborates with its partner law firm Nicholas Ktenas & Co., LLC, which provides legal counsel on corporate and commercial law, banking and finance, data protection, intellectual property, employment law, and trusts.

Frequently Asked Questions

What is a qualifying free zone person (QFZP)?

A QFZP is a juridical entity, such as a company or branch, that is incorporated or registered in a UAE free zone and satisfies all conditions under Article 18 of the Corporate Tax Law. These conditions include maintaining operational presence in the zone, earning income from approved activities, filing audited accounts, and keeping non-qualifying revenue below set thresholds. When all criteria are met, the entity benefits from a 0% corporate tax rate on its eligible earnings. The status is not permanent and must be tested in each period.

What are the qualifying free zones in the UAE?

The UAE has more than 40 free zones spread across all seven emirates. Popular zones include JAFZA, DMCC, DIFC, and ADGM in Abu Dhabi, as well as SAIF Zone in Sharjah, RAKEZ in Ras Al Khaimah, and UAQ FTZ in Umm Al Quwain. A distinct concept is the “designated zone,” which receives special VAT treatment on goods under Cabinet Decision No. 59 of 2017. It is important not to confuse the two; all designated zones are free zones, but not all free zones are designated for VAT purposes. The FTA maintains and periodically updates this list.

What is the new VAT rule in the UAE for 2026?

Federal Decree-Law No. 16 of 2025, effective 1 January 2026, introduced several amendments to the UAE’s VAT framework. The most notable change removes the obligation for businesses to issue self-invoices under the reverse charge mechanism. Instead, entities must retain supplier invoices and import documentation as proof. A five-year time limit for reclaiming excess refundable VAT was also introduced. Additionally, the FTA gained explicit authority to deny input tax deductions when a transaction is linked to a tax-evasion arrangement, requiring businesses to verify the legitimacy of their suppliers before claiming deductions.

What are qualifying commodities under the QFZP regime?

Under MD 229 of 2025, qualifying commodities include metals, minerals, energy products, agricultural goods, industrial chemicals, associated by-products, and environmental commodities such as carbon credits and renewable energy certificates. A commodity only qualifies if a quoted price exists for it or for a related commodity on a recognised exchange market or through a recognised price reporting agency listed in MD 230. Goods packaged for retail sale are explicitly excluded. The definition no longer requires commodities to be in raw form, which broadened access for many trading businesses in the Middle East.

Talk to Our Team About Your Free Zone Position

If your business operates from a UAE free zone and you are unsure whether your QFZP position holds up under the latest ministerial decisions, now is the time to check. C. Savva & Associates works with free zone entities across Dubai and the wider region to review qualifying income classifications, substance documentation, and de minimis compliance. Reach out to our advisory team for a focused review of your current setup.