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Businesses looking to start in the United Arab Emirates (UAE) have the option to get a license within the Free Zone areas, in the mainland, or both under the dual license. Operating on each jurisdiction has different perks, including their treatment of what is owed under their corporate tax regime.
At its core, Free Zone areas are genuine economic hubs designed to attract global business without distorting the local market. UAE Free Zones generally allow 100% foreign ownership and zone-specific regulation. Mainland businesses can also be 100% foreign-owned for many activities, but the licensing, regulatory requirements, and scope of permitted activities differ.
These entities are invited to participate in specific economic activities (depending on the designated area specialization), and have access to incentives such as tax benefits, clear regulatory environment and designated infrastructure. Owners also benefit from faster incorporation timelines, specialized virtual hubs and integrated business services and streamlined visa processing and immigration services.
Since the Federal Decree Law No 47 on the Taxation of Corporations and Businesses has been in effect starting 1 June 2023, businesses operating in the UAE are now required to actively assess how their business structure, income sources, and operations affect their corporate tax position.
Typically, the Federal Tax Authority is responsible for managing and enforcing tax obligations set by the Ministry of Finance, but relevant Free Zone authorities are responsible for managing the incorporation and licensing of businesses applying within their zones.
Note
A Free Zone license does not automatically mean Corporate Tax registration or 0% (QFZP). Registration and annual filing are still required.
Qualifying Free Zone Person status is the UAE’s way of preserving Free Zone tax incentives while maintaining a credible corporate tax system. It rewards businesses operating within these designated zones by allowing tax flexibility with how it treats the income generated by the business.
Free Zone businesses involved must now actively determine whether they qualify for preferential treatment under the Qualifying Free Zone Person tax status. In this guide, we outline how QFZP status directly affects your business and how you can qualify and apply for this in the upcoming financial year.
What is a Qualifying Free Zone Person (QFZP) under UAE Corporate Tax Law?
A Qualifying Free Zone Persons is a status which could be received by Free Zone entities that meet specific conditions under UAE Corporate Tax regime. Through the QFZP status, these entities are eligible to apply a 0% corporate tax rate on qualifying income.
QFZP status directly affects your effective applicable tax rate. This also affects how businesses operating in the Free Zone will price work done in the mainland, and potentially how much risk you can carry into future years. Additionally, since tax groups are not eligible for QFZP status, electing for this 0% tax rate will affect how you structure group entities.
Granting the QFZP status is not automatic. Free zone persons must meet the ongoing eligibility and revenue nature requirements for each tax period.
QFZP Status Requirements
To qualify for a 0% corporate tax rate as a Qualifying Free Zone Person (QFZP) in the UAE, businesses must be registered in a Free Zone and maintain adequate physical substance. They must earn Qualifying Income, comply with transfer pricing rules, maintain annual audited financial statements, and pass the de minimis revenue test.
The Federal Tax Authority (FTA) of the UAE strictly regulates this status. Your company must meet all of the following essential requirements in order to obtain and retain QFZP status.
QFZP Meaning: Qualifying Free Zone Person Status Requirements (UAE)
QFZP meaning explained: 6 conditions a Free Zone company must meet to claim 0% corporate tax under UAE CT Law, plus the ongoing arm’s length, audit and election obligations.
Failure to meet any of these conditions can result in the loss of the QFZP status for the start of the tax period in which the breach occurs, and for the following four tax periods. During this time, the business is treated as a regular taxable person and the 0% tax rate on qualifying income cannot be applied.
Losing QFZP Status in the UAE: The 5 Tax-Period Lockout Explained
What happens if a UAE Free Zone Person breaches QFZP conditions: instant loss of 0% rate, the 5-tax-period lockout, how to regain status, and which breaches trigger it.
After the five tax period lock out, QFZP status may be claimed again if the business meets all conditions for eligibility, has not elected into the standard corporate tax regime, is not part of any tax groups, and properly reflects its status in its corporate tax returns.
What is a Free Zone Person?
A Free Zone person is a juridical person incorporated or registered in respective Free Zone areas and are approved for their relevant activities by the assigned Free Zone Authority.
Natural persons (i.e. sole proprietors, self employed consultants, or human beings that have registered under personal licenses), and unincorporated partnerships, cannot be classified under QFZP status for corporate tax purposes.
Individuals are subject to corporate tax law if their annual business turnover exceeds AED 1 million in a calendar year.
A Free Zone Person is a QFZP only if it meets conditions (substance, audited FS, transfer pricing, de minimis, etc.).
What is considered as Qualifying Income vs. Non-Qualifying Income?
QFZPs are given preferential corporate tax rate at 0% on qualifying income. It is therefore important for Free Zone entities to learn the difference between qualifying income and non-qualifying income derived from their business activities within and outside of the Free Zone. In this article, we outline the split of Free Zone revenue and which activities qualify under 0% CT rate.
Qualifying Income vs Non-Qualifying Income for UAE Free Zone Companies
How UAE Corporate Tax law splits Free Zone revenue: 0% qualifying income from FZ-to-FZ deals and qualifying activities vs 9% mainland, PE, real-estate and excluded-activity revenue.
What happens to businesses with dual licenses?
A dual business license in UAE allows free zone companies to carry out their approved business activity in both the mainland and free zone areas.
Qualifying free zone persons operating with dual business licenses may still qualify for 0% CT rate on qualifying income, but certain activities in the mainland should be monitored to stay within the de minimis threshold.
Dual License in UAE: Corporate Tax Treatment for Free Zone Entities
How UAE Corporate Tax treats a Free Zone entity with a dual license: mainland-facing revenue, de minimis monitoring, qualifying vs non-qualifying income examples, and what survives at 0%.
Important: A dual license does not automatically preserve the 0% regime. Mainland-facing revenue must be monitored for the de minimis test, and income that is not Qualifying Income is generally taxed at 9%.
Note:
Some 9% categories (e.g., PE income and certain FZ real estate income) are treated separately from the de minimis test.
What are the Qualifying Activities and Excluded Activities?
Qualifying activities in the UAE are specific core business operations that allow a Qualifying Free Zone Person (QFZP) to benefit from a 0% corporate tax rate on qualifying income. However, some exceptions apply.
Knowing the core list of Qualifying Activities can help your business navigate your QFZP status and compliance.
Qualifying Activities for UAE Free Zone Corporate Tax (Full List)
Full list of qualifying activities that unlock 0% UAE Corporate Tax for QFZPs: manufacturing, qualifying commodity trading, holding shares, fund management, HQ/treasury, and logistics from Designated Zones.
Excluded activities prevent the free zone regime from becoming a shelter for activities that should normally fall outside the 0% Free Zone regime. This also separates genuine international, manufacturing, logistics, treasury and investment activities from domestic service businesses. As a result, there is regulatory oversight on the 0% corporate tax rate being available to businesses maintaining adequate substance inside UAE Free Zones.
Excluded Activities for UAE Free Zone Corporate Tax (QFZP)
UAE excluded activities for QFZPs explained: regulated banking and insurance, ownership/leasing of UAE immovable property, transactions with natural persons, and other excluded categories.
The De Minimis Rule Explained
The de minimis rule in UAE corporate tax allows a Qualifying Free Zone Person (QFZP) to keep their 0% tax rate even if they earn a small amount of non-qualifying revenue. This non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower.
De Minimis Rule UAE Free Zone: AED 5M / 5% Threshold Explained
UAE Free Zone de minimis rule: how the lower of AED 5 million or 5% of total revenue test works, with a worked AED 20M example and what happens if you breach the cap.
Essential Substance Requirements
A Qualifying Free Zone Person must maintain adequate substance in the UAE Free Zone to benefit from the 0% corporate tax rate on qualifying income. This requirement focuses on whether the business genuinely operates from the Free Zone through its people, premises, activities and operating expenditure.
Adequate substance is assessed alongside the other QFZP conditions each tax period.
Adequate Substance Requirements for UAE Free Zone QFZPs
What ‘adequate substance’ means for a UAE Free Zone QFZP: core income-generating activities (CIGAs), physical premises, qualified employees, and Free Zone operating expenses
Tax Implications and Treatment for Foreign Entities
A QFZP can earn income from foreign sources. Relevant foreign source income is not automatically qualifying income simply because it originates outside the UAE. The UAE corporate tax system allows for tax relief under Double Taxation Agreements (DTAs) with other jurisdictions.
UAE Corporate Tax Law sets out how UAE businesses should treat foreign-source income, including when Foreign Tax Credit may reduce UAE Corporate Tax payable.
Foreign Tax Credit and Foreign-Sourced Income for UAE QFZPs
How a UAE Qualifying Free Zone Person treats foreign-sourced income, when overseas tax paid can be offset against UAE Corporate Tax, and how this interacts with the qualifying/non-qualifying split
Transfer Pricing and Auditing for Compliance with the Federal Tax Authority
For a Qualifying Free Zone Person, transfer pricing is particularly important because qualifying income may be taxed at 0%, creating incentives for profit shifting if transactions are not conducted at fair market value.
Free zone entities must maintain rigorous UAE transfer pricing documentation aligned with the OECD framework, with specific requirements depending on transaction values and business size.
The Federal Tax Authority therefore expects businesses to demonstrate that transactions (and subsequent tax adjustments) adhere to regulatory requirements set within the UAE.
Transfer Pricing for UAE Free Zone Entities: Arm’s Length and Documentation
Arm’s length principle and Transfer Pricing documentation requirements for UAE Free Zone QFZPs: intragroup pricing, related-party transactions and what FTA expects from your TP file
Why audited financial records matter for FTA Compliance
Audited financial statements are a mandatory requirement for QFZPs under UAE Corporate Tax regulations. The audit increases the reliability of accounting records used for tax reporting, financing and regulatory compliance.
The UAE does not require an audit for every UAE business, and in turn, a QFZP is not required to prepare separate financial statements for their Qualifying vs other income.
Instead, the QFZP must maintain sufficient supporting documentation showing how Qualifying Income was determined and other calculations supporting the De Minimis Threshold.
Here are some key points that external auditors and the FTA may require from a financial statement audit.
Audited Financial Statements for QFZPs: UAE Corporate Tax Requirement
Why audited financial statements are mandatory for every UAE QFZP regardless of revenue: what the FTA expects, how audits support qualifying-income claims, Approved Auditors lists, and the 7-year retention rule
Corporate Tax Registration and Filing for Corporate Tax (UAE Free Zones)
To qualify for QFZP status, you must first register for corporate tax. Once registered, a taxable person is mandated to file tax returns within 9 months from the end of the tax period. Any tax liability must also be paid by the said deadline.
This filing obligation applies equally to free zone persons and qualifying free zone persons, even when there is no tax payable.
Corporate Tax Registration for QFZP
QFZPs do not have a separate or special registration process. They can register for corporate tax the same way as all taxable persons via the EmaraTax portal. Verifying their status comes later, in how income is treated in the tax returns.
You can find more information on how to register for corporate taxes in the UAE in this full guide.
- Step 1: Confirm you are a free zone person. Before registering, businesses must be:
- Incorporated or registered in a UAE Free Zone and hold a valid license that is regulated by the relevant authority
- A juridical person (i.e. a company, not an individual)
- Step 2: Register for corporate tax with the FTA
- Registration is done through the EmaraTax portal (FTA’s online system)
- This is mandatory even if you expect a 0% tax outcome
- You will receive a Corporate Tax Registration Number (CT TRN) once approved.
- Step 3: Maintain QFZP conditions during the tax period. These conditions are assessed for each period.
- Maintain adequate economic substance
- Earn qualifying income
- Track nonqualifying income and make sure it is within the de minimis threshold
- Prepare audited financial records
- Comply with transfer pricing documentation
- Step 4: Elect QFZP status in the corporate tax return
- QFZP treatment is claimed when filing.
- The company declares itself as QFZP, tags the qualifying vs nonqualifying income, and applies equivalent tax rates to each
Calculating corporate tax for filing
Corporate tax is imposed on a business’s taxable income, which is derived from its net profit or net income, after applying relevant tax adjustments, exemptions, and tax reliefs under the law.
Under QFZP, a taxable person calculates their tax liability as:
Taxable income = accounting profit + tax adjustments
Tax payable = Taxable income x applicable CT rate (0% on qualifying; 9% on non qualifying)
For first-time founders, it helps to have a professional guide you through the process. This is where skrooge.ai can help you.
Questions? Contact us via our website and our expert professionals will walk you through our process with complete transparency and quick insight within 15 minutes.
Frequently Asked Questions (FAQs)
What are the corporate tax rates for a free zone company?
Under Federal Decree Law No 47 of 2022, the United Arab Emirates introduced the law on Taxation of Corporations and Businesses. This is administered under the Federal Tax Authority.
Free zone companies are generally regulated by relevant authorities. Despite their economic benefits, they are not exempt from corporate taxes.
FZ registered businesses that qualify under “Qualifying Free Zone Person (QFZP)” status are taxed at 0% for qualifying income and 9% for nonqualifying income.
What is the difference between qualifying and nonqualifying income?
The difference comes down to where the income is earned and from what activity. Qualifying income meets the conditions, generally including qualifying activities carried out in the free zone. Transactions with other free zone persons are also included (subject to exclusions). They must be earned while maintaining adequate economic substance, complying with transfer pricing and staying within the de minimis threshold for non qualifying revenue.
On the other hand, non-qualifying income is income that falls outside the QFZP qualifying rules, such as Excluded Activities and mainland customer revenue that is not derived from Qualifying Activities. To get a list of examples, you can check out our article above
What is the de minimis rule for free zone businesses?
The de minimis rule is a way to preserve incentives for genuine free zone activity and prevent mainland revenue from being routed through FZ areas for tax benefits.
The de minimis threshold is the maximum amount of non-qualifying revenue a Qualifying Free Zone Person (QFZP) can earn without losing its 0% Corporate Tax status. The threshold is set at the lower of AED 5 million, or 5% of total revenue.
If the non qualifying exceeds this limit in a financial year, QFZP status is lost. The loss applies from the start of the tax period and for the following four taxation periods.
What are the main requirements to get 0% corporate tax in a UAE free zone?
The following requirements are stipulated under CT law:
✔️ Be a juridical person incorporated in a UAE Free Zone
✔️ Maintain adequate substance on business activities within the Free Zone
✔️ Earn qualifying income as defined under the UAE Corporate Tax framework
✔️ Not elected into standard corporate tax rates
✔️ Not earn more than the permitted amount of nonqualifying income under the De Minimis Rule
Because of the nature and framework behind QFZP, a FZ entity cannot:
✖️ Be part of a Corporate Tax Group
✖️ Claim Small Business Relief (i.e. tax relief) while electing for QFZP status
✖️ Free Zone entities may only join a Tax Group if they do not claim the 0% rate.
✖️ Likewise, a non free zone person may not apply for QFZP status.
Which business activities are considered ‘qualifying activities’?
Qualifying activities activate the corporate tax benefits for QFZP companies.
These include:
1. Manufacturing and processing
2. Trading of qualifying commodities
3. Holding shares for investment management
4. Fund and wealth management
5. HQ, treasury, and financing services
6. Logistics and distribution in/from Designated Zones
Common excluded activities, even if licensed, include:
1. Certain professional and service activities and certain transactions with natural persons
2. Certain real estate activities, including ownership, leasing or exploitation of immovable property located in the UAE, unless
— Property is considered as commercial property located in a free zone
3. Regulated banking and insurance activities
4. Any activity specifically listed as included under Cabinet decision or Ministerial decisions
These excluded activities exist to prevent free zones from being used as tax shelter for mainland businesses and ensure that the incentives only apply to substance-based activities.
What does ‘adequate substance’ mean for a free zone businesses?
Adequate substance requirements means the entity demonstrates economic substance by performing its core income generating activities (CIGA) in the free zone and maintaining appropriate operational resources. This includes appropriate physical presence, employees and expenses that reflect the nature and scale of its business.
What is transfer pricing and why is it important for free zone businesses?
Transfer pricing refers to how prices are set for transactions between related parties.
For free zone businesses, it is important because these transactions must follow the arm’s length principle to ensure profits are reported fairly and tax benefits are not overstated.
Proper transfer pricing documentation helps maintain compliance and reduces the risk of adjustments or penalties by the Federal Tax Authority.
Is corporate tax registration mandatory for all businesses located in free zones?
Yes, corporate tax registration is mandatory for all businesses, done through the Federal Tax Authority’s EmaraTax portal. It is also mandatory to file tax returns even if no tax is payable. Registration ensures that there is proper reporting, compliance and confirmation of eligibility for any applicable tax benefits.
What happens if I lose my QFZP status?
If you lose your status, your business is treated as a regular taxable person under the CT regime. The loss applies from the start of the period in which the breach occurs and for the following four taxable periods.
During this time, the 0% tax rate cannot be applied, and QFZP status may only be regained after this period, provided all qualifying conditions are met again.
How do I calculate taxable income with mixed qualifying and nonqualifying income?
First of all, you need to classify revenue streams: what’s potentially qualifying, what’s clearly non-qualifying, what’s PE-related, etc. You can’t run de minimis without knowing what counts as non-qualifying revenue. Then you run the the de minimis test. If it is passed, you could proceed with calculation of taxable income and tax to be paid.
You start with accounting profit, separate the income by type (ideally, you tag this as soon as you record it). Add back non deductible expenses, and make necessary accounting adjustments before separating tax rates.
After breaking your income into each bucket, apply the appropriate tax rate (0% on qualifying, 9% on nonqualifying). Calculate taxable income by category and check if the de minimis threshold is met.
Here is an example:
Total accounting profit: AED 3,000,000
-> Qualifying income: AED 2,500,000
-> Nonqualifying income: AED 500,000
(Assume these figures represent taxable income amounts after adjustments, not revenue)
Tax calculation:
-> AED 2,500,000 × 0% = AED 0
-> AED 500,000 × 9% = AED 45,000
✔️ Total Corporate Tax payable: AED 45,000
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