QFZP UAE: Qualifying Free Zone Person Quick Overview
Free Zone Companies under the UAE Corporate Tax Guide Under the Federal Decree-Law No. 47…
Understanding Qualifying Free Zone Persons (QFZP) under UAE Corporate Tax Law
A Qualifying Free Zone Person (QFZP) is a free zone entity that satisfies all conditions under Article 18 of Federal Decree-Law No. 47 of 2022 and the applicable implementing decisions. This allows the business entity to benefit from a 0% tax rate on qualifying income.
Note
A UAE free zone company doesnāt automatically mean 0% corporate tax.
To qualify for QFZP treatment, businesses need to meet several conditions around substance, qualifying income, activities, audits, and the de minimis threshold. And getting one of these wrong can mean losing the preferential treatment for several years.
For founders operating in a UAE free zone, understanding these requirements early can save a lot of headaches later.
QFZP Requirements for Free Zone Companies
QFZP status is not automatic for every Free Zone Person. The statutory conditions must be satisfied throughout the relevant tax period.
In exchange for enjoying the tax advantages, Free Zone businesses must continuously satisfy all statutory conditions during the relevant tax period .
- Be a juridical or tax resident (person) registered in a UAE Free Zone.
- Maintain adequate substance for registered business activities in the Free Zone
- Earn qualifying revenue and non-qualifying revenue not more than the allowed amount under the De Minimis Rule
- Not elect into standard corporate taxation rate
To maintain QFZP status, a Free Zone entity cannot do the following:
- Join a Corporate Tax Group
- Claim Small Business Relief (tax relief) while choosing QFZP status.
- A non-Free Zone registered entity cannot apply for QFZP status
QFZPs must also meet the following conditions to keep their status.
- Follow the arm’s length principle and meet all transfer pricing and documentation requirements.
- Prepare audited financial statements for each relevant tax period.
- Reflect your QFZP status correctly in your corporate tax return
- Even if the 0% rate applies, you must register for corporate tax and file annually.
How do you establish adequate substance (including business expenses)?
A QFZP must demonstrate adequate substance by conducting core income-generating activities within the Free Zone. This means maintaining adequate assets, employing qualified full-time employees, and incurring adequate operating expenditures.
Adequate substance is specific to the business activities rather than a fixed numerical threshold. Substance requirements help demonstrate that the business operates commercially, and does not exist solely to gain tax benefits.
Business expenditure must show real business activity. Expenses can take the form of rent, payroll, and contracts with other service providers.
Core income generating activities may be outsourced to another person within the Free Zone or Designated Zone, provided that the QFZP exercises adequate supervision. Special outsourcing rules apply to qualifying intellectual property activities.
De Minimis Requirement for Non-Qualifying Revenue
A QFZP must derive qualifying income during the tax period.
Qualifying income for a Qualifying Free Zone Person (QFZP) includes income derived from transactions with other Free Zone Persons, exports to non-Free Zone Persons, and income from qualifying activities as defined by UAE tax law.
Income from ancillary activities that are incidental to the main qualifying activities can also be classified as qualifying income, provided they meet the necessary criteria.
Qualifying income excludes exempt income and other income arising from excluded activities.
A QFZP may still earn some non-qualifying revenue if it satisfies the de minimis requirements. Keep in mind that the de minimis test is based on total revenue, and not taxable income.
Failure to satisfy the de minimis requirement has tax implications on the QFZP. If it exceeds the lower of AED 5 million or 5% of total revenue, the business will lose QFZP treatment.
List of Qualifying Activities and Excluded Activities
The classification depends on the legislationānot simply the industry in which the business operates.
Some businesses may perform both qualifying and non-qualifying activities.
Activity Classification |
Examples |
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Qualifying Activities |
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Non-Qualifying Activities / Excluded Activities |
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Commercial Property Rules for Qualifying Free Zone Persons
The UAE Corporate Tax framework provides special rules for income derived from commercial property by a Qualifying Free Zone Person (QFZP). While income from immovable property is generally treated as an excluded activity, commercial property located in a UAE Free Zone may still generate qualifying income in certain circumstances.
Rental income from commercial property may qualify if:
- The commercial property is located within a UAE Free Zone.
- The property is leased, rented, licensed or otherwise made available to another Free Zone Person
Commercial property generally refers to offices, warehouses, retail units, industrial facilities, or other immovable property used exclusively for business purposes.
Commercial property does not include residential accommodation, hotels, serviced apartments, motels, bed and breakfasts, or similar accommodation facilities.
For example:
- Commercial property as qualifying income
A logistics company in JAFZA leases warehouse space to another Free Zone company operating in the same Free Zone. Because the property is commercial property located in a UAE Free Zone and the tenant is another Free Zone Person, the rental income may be treated as qualifying income, provided all other QFZP conditions are met. - Commercial property as non-qualifying income
A Free Zone company leases office space in a UAE Free Zone to a mainland company. Although the property is commercial property, the tenant is not a Free Zone Person. As a result, the rental income is generally treated as income from an excluded activity rather than qualifying income. - Residential property
A Free Zone company owns residential apartments and earns rental income from tenants. Because residential accommodation is not considered commercial property under the Corporate Tax rules, the income does not qualify for the QFZP 0% corporate tax regime.
What happens if I fail to meet the de minimis requirements?
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 subsequent four tax periods. During this time, the business is treated as a regular taxable person and the 0% tax rate on qualifying income will no longer apply.
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.
Other Corporate Tax Law Conditions for QFZPs as governed by UAE Federal Tax Authority
Condition # 1 – Do not elect into standard corporate tax rules
A Free Zone Person cannot claim QFZP treatment if they chose to be subject to standard corporate tax rules. The business’ entire taxable income is taxed under 9% corporate tax rate, which is commercially beneficial for some businesses.
For example, a Free Zone software company initially qualifies as a QFZP by providing services to other Free Zone businesses.
As the company grows, most of its customers become mainland UAE companies. Because a larger portion of its income no longer qualifies for the 0% regime, the company may elect to be taxed under the standard corporate tax rules instead of maintaining QFZP status.
Condition # 2 – Cannot be part of a corporate tax group in current or previous tax periods
A Qualifying Free Zone Person cannot be a member of a corporate tax group while claiming QFZP status. Likewise, a non-Free Zone Person cannot become a QFZP simply by joining a free zone tax group.
Condition # 3 – Restrictions on Small Business Relief and Business Restructuring Relief
A QFZP cannot claim Small Business Relief while remaining within the QFZP regime. Businesses must choose between the applicable tax regimes where relevant. This restriction is intended to prevent overlapping tax benefits.
Under the UAE Corporate Tax Law, Qualifying Free Zone Persons (QFZPs) are explicitly excluded from utilizing Business Restructuring Relief (Article 27) and Qualifying Group Relief for their free zone operations. The entity cannot claim tax-neutral “no gain, no loss” transfers under business restructuring relief while it is a QFZP.
If a QFZP sets up a mainland branch (forming a domestic permanent establishment), that specific branch is taxed at the standard 9% rate.
Ongoing Compliance Obligations under UAE Corporate Tax
QFZPs must comply with the arm’s length principle. Transactions with related parties and connected persons remain subject to the UAE transfer pricing rules. Businesses must maintain appropriate transfer pricing documentation where required.
Qualifying Free Zone Persons (QFZPs) are required to file their annual tax returns within nine months after the end of their financial year, detailing both qualifying and non-qualifying income.
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