Requirements for Qualifying Free Zone Person (QFZP) status under UAE’s Corporate Tax Regime

Free zones in UAE provide advantageous benefits through tax advantages and economic benefits. These designated areas provide economic centers specifically built for the purpose of expanding the activities of businesses inside the free zones.

By having an economic center, the business can benefit from streamlined incorporation times, virtual business centers, a fully integrated suite of services, and streamlined immigration and visa processing.

The Corporate Tax Law became effective for financial years starting on or after June 1, 2023. Under Federal Decree Law. No 47 of 2022, the UAE Corporate Tax Law provides a temporary tax relief for small businesses with revenue not exceeding AED 3 million.

In line with this, the UAE has designated that not all free zone persons are automatically exempt. Designating a Qualifying Free Zone Person status legally protects the traditional tax advantages offered, but only if strict conditions are met.

In this article, we talk about the requirements to become a Qualifying Free Zone Person, and separate treatments required for compliance across the UAE.

What is a Qualifying Free Zone Person?

Businesses can choose to incorporate either in mainland UAE or in Free Zone regulated areas that allows 100% foreign ownership.

Free Zone persons can also elect to register under a dual license in order to trade with the mainland without local agents. To comply with standard corporate tax rules, the QFZP status was created to protect the traditional advantage allowed for Free Zone companies if strict conditions are met.

A Qualifying Free Zone Person (QFZP) is a Free Zone Person that meets the conditions in Article 18 of the UAE Corporate Tax Law. A QFZP remains within the Corporate Tax regime, but is taxed at 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income (subject to conditions).

FZ companies must now establish and prove their operation’s existence (not just registration status) in order to elect for QFZP. For Corporate Tax purposes, QFZPs must prepare and maintain audited financial statements annually. Separate audit requirements may also apply under the relevant Free Zone authority’s rules.

Summary of the Difference between QFZPs and Other Mainland Businesses & Free Zone Persons

Key Aspect	Qualifying Free Zone Persons	Mainland Business & Other Free Zone persons
Corporate Tax Rate	0% on earned qualifying income 9% on nonqualifying income	0% below AED 375k 9% above and in excess of AED 375k
De minimis rule	Yes	No
Adequate substance test	Mandatory	Not QFZP-based
Audit requirement	Mandatory annually	Depends on structure
Risk of 5-year penalty window	Yes (if de minimis breached)	No
Corporate Tax Groups	QFZP are specifically excluded from forming or joining corporate tax groups because they already benefit from special tax treatment	Yes if conditions are met
Can they elect for small business relief?	SBR election is not available to QFZPs	Yes if they meet conditions set by Small Business Relief

Benefits of obtaining QFZP status (Resident vs Foreign Companies)

A QFZP benefits from a 0% corporate tax rate on its qualifying income generated from activities conducted within the designated Free Zone.

Companies are able to maximize their tax savings under the framework and structure set by CT Regime.

Additionally, QFZP regime is attractive to foreign-owned companies that establish entities in Free Zones to serve regional or international markets. Companies that maintain status can continue benefiting from other advantages such as:

• 100% foreign ownership
• Faster incorporation timelines
• Simplified regulatory and immigration procedures
• Strategic access to infrastructure and global trade hubs

By clearly defining which income derived qualifies for 0% tax rate, the QFZP framework provides greater transparency for businesses managing cross-border operations.

If a QFZP opts into the standard corporate tax regime, it will lose the benefits of the 0% tax rate on qualifying income and be subject to the standard corporate tax framework.

QFZP in Dubai and across UAE Free Zones

The framework applies across all recognized Free Zone areas, each with their respective Free Zone Authority. The list includes those located in Dubai and other Emirates.

Common examples include:

Each Free Zone center has its core expertise and advantages related to those industries, including specialized exchanges and services. They would also have their own Approved Auditors List that would sign on audit reports if required by relevant authorities.

Requirements for Qualifying Free Zone Person

The following conditions must all be met to qualify. Failure to meet one requirement and the company becomes subject to the standard tax regime.

1. Be a juridical person registered in a UAE Free Zone Companies with purely Mainland licenses are subject to standard corporate taxation rules
2. Adequate substance requirements for Free Zone companies
   • Maintain adequate assets including qualified full time employees, personnel and other resources
   • Conduct core income-generating activities (CIGAs) within the Free Zone
   • Has a physical presence in the area
     • Commercial immovable properties, offices, facilities that are appropriate to the nature of the business (ie warehousing for logistics companies)
     • Shared or flexible offices may be acceptable if they are reasonable commercial properties
   • Incurs other operating expenses within the designated zone (including operating costs that reflect business activities)
3. Not voluntarily electing into standard corporation tax
4. Earn Qualifying income as defined under the CT framework vs. non-qualifying income
   It creates a two-tier Free Zone tax structure:
   • Eligible businesses can maintain a 0% rate on qualifying income while complying with global tax standards.
   • Non-qualifying income for Free Zone entities is taxed at a 9% corporate tax rate.
5. Follow the De Minimis ThresholdFree zone persons must actively monitor revenue composition between qualifying and nonqualifying income.
   Non-qualifying income must not exceed the lower of:
   • AED 5 million, OR
   • 5% of total revenue

Qualifying Activities and Non-Qualifying Activities

Qualifying Income vs Non Qualifying Income

As a rule qualifying income (0%) generally includes:

1. Income from transactions with other free zone persons (subject to exclusions)
2. Income that is not derived from explicitly stated excluded activities.
3. Income from Qualifying Activities (including with Non-Free Zone Persons, where permitted)
4. Income from Qualifying Intellectual Property, but with specific conditions (nexus approach, qualifying R&D expenditure, etc.)

Nonqualifying income (9%) generally includes:

1. Income from Non-Free Zone (mainland) persons that is not derived from Qualifying Activities (or that falls under Excluded Activities)
2. Certain UAE sourced income that does not meet qualifying conditions
3. Income from Domestic or Foreign Permanent Establishments
4. Certain real estate income
5. Non-qualifying IP income
6. Income from excluded activities, even if licensed
7. Other income within de minimis limits (5% of total revenue or AED 5 million, whichever lower)

Qualifying Activities vs Excluded Activities for Free Zone Companies

1. Qualifying activities activate the corporate tax benefits for QFZP companies.
   These include (among others):
   • Manufacturing and processing
   • Trading of qualifying commodities
   • Holding shares for investment management
   • Fund and wealth management
   • HQ, treasury, and financing services to Related Parties
   • Logistics and distribution in/from Designated Zones
2. Common non qualifying activities, even if licensed, include:
   • Certain professional and service activities and certain transactions with natural persons
   • 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
   • Regulated banking and insurance activities
   • Any activity specifically listed as an Excluded Activity under the applicable Cabinet or Ministerial Decisions

Other Compliance Requirements (including Audit Rules and Transfer Pricing)

A QFZP must prepare and maintain audited financial records annually to verify eligibility for the 0% tax rate.

Conditions for Compliance

1. De minimis threshold
   As mentioned, as soon as the non qualifying revenue goes over by AED 1, the QFZP status is revoked. The de minimis threshold is met where non-qualifying Revenue does not exceed 5% of total Revenue or AED 5,000,000, whichever is lower.
2. Audited financial statements for the relevant tax period
   For Corporate Tax purposes, audited financial statements are required for: (i) Qualifying Free Zone Persons (QFZPs), and (ii) Taxable Persons (not in a Tax Group) with Revenue exceeding AED 50 million in the relevant Tax Period. Separate audit requirements may also apply under the relevant Free Zone authority’s rules. The audits support the accuracy of the accounting profit.
   
   Audited accounts also form the basis for the tax filings, FTA reviews or audits. Lack of proper documentation or any evidence of non-arm’s length pricing can result in changes to the tax liabilities, loss of any preferential treatment, penalties, or reassessments. Records should be retained for a period of at least 7 years.
   
   Each Free Zone has their own Approved Auditors List who can sign on the company’s audited reports.
3. Transfer pricing rules, arm’s length principle and appropriate transfer pricing documentationQFZP must ensure that transactions with related entities are conducted in accordance with the arm’s length principle. This means that:
   • Prices and terms of transactions between related parties should reflect the same conditions that would apply between independent businesses in a comparable transaction
   • The purpose of this rule is preventing profit shifting between entities to benefit from different tax treatments
   • Proper transfer pricing documentation may include:
     • details of related party transactions
     • pricing methodology used
     • benchmarking studies or market comparisons
     • supporting financial records and agreements
4. Elect QFZP treatment in its tax declarationsAlways remember – even where the 0% rate applies, registration is mandatory and annual filing is required.

In case of breach

If a Free Zone entity fails to meet any qualifying conditions, it will be treated as a taxable person subject to a 9% corporate tax rate on its full income for the current year and the subsequent four years.

During this time, business will be treated as a regular taxable person and the 0% rate on qualifying income cannot be applied.

After five tax periods have passed, QFZP status may be claimed again if the business meets all requirements for eligibility, and is not part of any tax groups.

Recent ministerial decisions and updates for UAE Corporate Tax Law (2023–2025)

The introduction of corporate taxation in the UAE changed the tax environment from 0% to 9% for many businesses. Without a doubt, it significantly changed the country’s tax landscape.

To support the implementation of the new system, the UAE government issued several cabinet and Ministerial Decisions between 2023 that clarified and eased the standard corporate tax rules on Free Zone companies.

Cabinet Decisions Supporting the UAE CT Framework

A number of Cabinet Decisions were introduced including detailed guidance on the implementation of the Law and key information on:

• the definition of qualifying income for FZ entities
• eligible and excluded activities for QFZP status
• compliance requirements for maintaining tax benefits.

Incentives remain available while still aligning the UAE tax system with international standards.

Cabinet Decision No. 100 of 2023, Ministerial Decision No. 229 of 2025, and Ministerial Decision No. 84 of 2025

These implementing decisions provide further technical guidance on how the rules apply in practice, including:

• the classification of qualifying and excluded activities
• conditions for maintaining Qualifying Free Zone Person (QFZP) status
• additional compliance and reporting requirements for FZ businesses.

Together, Ministerial and Cabinet Decisions help businesses maintain cost efficiency while complying with the new tax framework.

Step-by-step guide to becoming a QFZP

All Free Zone entities, including Qualifying Free Zone Persons, must register for corporate tax with the Federal Tax Authority in the UAE.

QFZPs do not have a separate or special registration process. They can register for CT 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 corporation tax in the UAE in this full guide.

1. 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)
2. 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.
3. Step 3: Maintain QFZP conditions during the tax period.
   These conditions are assessed for each period.
4. Step 4: Elect QFZP status in their tax returns
   • QFZP treatment is claimed when filing.
   • The company declares itself as QFZP, tags the qualifying vs nonqualifying income, and applies equivalent tax rates
5. Step 5: Calculate the tax you owe and include in your CT filing
   • Tax is imposed on a business’ taxable income, derived after applying tax adjustments, exemptions and reliefs on their recorded net profit or net income.
   • Under QFZP, the formula is as follows:
     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 an expert professional guide you through the process. You can reach out to us anytime at skrooge.ai.

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