Qualifying Free Zone Person (QFZP) Under UAE Corporate Tax
Free zones in UAE provide advantageous benefits through tax advantages and economic benefits. These designated…
Free Zone Companies under the UAE Corporate Tax Guide
Under the Federal Decree-Law No. 47 of 2022, also known as the UAE Corporate Tax Law, the government introduced a 9% corporate tax rate and outlined standard corporate tax rules for businesses incorporated and operating in the UAE.
The law also created the framework for UAE free zone companies to elect for Qualifying Free Zone Person (or QFZP) status if they meet the prescribed conditions. QFZP aims to preserve the continued free zone incentives and competitiveness as genuine economic hubs, while adhering to international tax standards.
QFZP was further clarified through subsequent:
- Cabinet Decision No. 100 of 2023 on Qualifying Income
- Ministerial Decision No. 265 of 2023 on Qualifying Activities and Excluded Activities and
- Ministerial Decision No. 97 of 2023 on Transfer Pricing Documentation requirements.
Qualifying Free Zone Person vs Designated Free Zones
Qualifying Free Zone Person is a status that free zone entities can elect into as long as conditions are met. Take note that this only applies to eligible companies incorporated or registered in a UAE Free Zone.
Mainland businesses automatically do not qualify, unless they have a Free Zone entity registered. Likewise, not all Free Zone companies automatically qualify. A business must satisfy the QFZP conditions for the relevant tax period and report its position accordingly in its Corporate Tax return.
Note
We sometimes see first time founders confused on QFZP vs Designated Free Zones.
Designated Free Zones are a different treatment as this refers to specific free zones that meet strict customs controls. Typically, designated zones offer perks that affect VAT as certain transactions are considered “outside the scope of VAT”
A business can operate inside a designated free zone without automatically qualifying as a QFZP for corporate tax purposes.
Conversely, QFZPs can operate within a Designated Free Zone if conditions are met. Check out our article for more details on how you can use this for your business.
Why maintain QFZP status?
Pros for QFZP |
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Limitations for QFZP |
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What conditions must be met according to the Federal Tax Authority?
A QFZP must:
- Be a resident juridical person registered in the free zone. The entity must be incorporated or registered as a corporate entity. Sole proprietors and freelancers generally do not qualify.
- Maintain adequate substance requirements including substantial operating expenses in free zone
- Earn qualifying income and satisfy the de minimis requirement
- Comply with transfer pricing rules and apply the arm’s length principle
- Maintain transfer pricing documentation
- Prepare audited financial statements
- Not elect to be taxed under the standard Corporate Tax regime
What is the de minimis rule?
QFZP status can be lost if the de minimis requirement is not met.
This means that non-qualifying revenue must not exceed:
- AED 5 million, or
- 5% of total revenue , whichever is lower
For example:
If the total income is at AED 1 million:
- AED 1 million * 5% = AED 50,000
- Since AED 50,000 is lower than AED 5m, this becomes the limit.
This means that non-qualifying income must not exceed AED 50,000 to elect for QFZP status.
Businesses therefore need to monitor revenue composition throughout the year to avoid breaching the limit.
Be careful of underestimating the limits. Even if your profits look small, you can still breach the de minimis condition.
What does “maintain adequate substance” mean?
To meet the adequate substance test, a Qualifying Free Zone Person (QFZP) must conduct its core income-generating activities (CIGAs) within the Free Zone, maintain adequate assets (i.e. commercial properties), employ a sufficient number of qualified full-time employees, and incur an adequate amount of business expenditures.
Note
A QFZP may outsource its core income-generating activities to a related or third party within a Free Zone, but it must maintain supervision over the outsourced activities to ensure compliance with the adequate substance requirements.
Are audited financial statements required for free zone businesses?
Entities must have their financial books audited annually in accordance with International Financial Reporting Standards (IFRS) to qualify for the 0% rate.
How does transfer pricing documentation work?
Related-party transactions must follow the arm’s length principle. This means that transactions between connected entities should be priced as if they were conducted between independent businesses under similar market conditions.
Companies cannot charge arbitrary prices to related parties to shift income or maximize the tax benefits for qualifying income.
Documentation must be maintained to support pricing decisions.
It should include:
- nature of the transaction
- parties involved
- how the pricing was determined
- any supporting agreements or benchmarking where available
For example, a mainland company cannot artificially transfer profits to a related Free Zone company through inflated service fees, management charges, or licensing arrangements to access the QFZP’s 0% tax rate.
Tip
If your Free Zone company regularly invoices, lends money to, receives services from, or shares resources with related companies, don’t wait until year-end to think about transfer pricing.
Establishing defensible pricing and maintaining documentation throughout the year is significantly easier than trying to justify transactions retrospectively.
Understanding Qualifying Activities vs Excluded Activities
Qualifying activities in UAE Free Zones include the processing of goods, manufacturing, logistics and distribution services, and investment management or reinsurance activities.
To qualify for the 0% corporate tax rate, activities must be conducted in or from a designated zone, particularly for the distribution of goods or materials.
Qualifying Income vs Non-Qualifying Income
Free zone entities that qualify as Qualifying Free Zone Persons (QFZPs) may receive 0% on qualifying income only, subject to substance and revenue rules. Non-qualifying income is taxed similar to others at 9%.
Type of Income |
Qualifying Income (0%) includes: |
Non-Qualifying income (9%) includes: |
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Types of Transactions |
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Note that as per UAE regulations, free zone entities are not allowed to participate in mainland activities, unless they hold a dual license, appoint a commercial agent or distributor for mainland activities or are registered with a mainland branch where permitted.
Excluded Activities for QFZPs
Type of Activity |
Examples |
|---|---|
Financing services |
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Leasing activities |
Headquarter services |
Ownership or exploitation of immovable property |
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Ownership or exploitation of intellectual property |
Only Qualifying Intellectual Property receives special treatment under the QFZP regime |
Transactions with natural or tax resident persons |
Income earned from individuals (rather than businesses) is generally excluded. |
Ancillary activities related to excluded activities |
Activities that are closely connected to and support an excluded activity may themselves be treated as excluded. |
Income from excluded activities automatically falls under non-qualifying income which becomes subject to the 9% Corporate Tax rate, and is considered when assessing the de minimis requirement.
Filing Tax Returns & Corporate Tax Registration (Mandatory Process for QFZPs)
All Free Zone entities, including Qualifying Free Zone Persons (QFZPs), must register for corporate tax with the Federal Tax Authority (FTA) via the EmaraTax portal, regardless of whether they are liable to pay their corporate tax liabilities.
What documents do you need to register?
Businesses are generally asked to provide:
- Trade License
- Company’s CT (corporate tax) Tax Registration Number
- Certificate of Incorporation or Registration
- Emirates ID, passport, or identification documents of owners, partners, or authorized signatories
- Memorandum of Association (MOA) or equivalent constitutional documents
- Contact details and business information
- Authorized signatory details
- Proof of authorization where a tax agent or representative is acting on behalf of the company
The FTA may request additional supporting documents depending on the legal structure of the business.
Businesses can elect QFZP status in their tax returns. The company declares itself as QFZP, tags the derived qualifying income vs non-qualifying income, and applies equivalent tax rates to calculate their tax savings for that period.
What happens if a company loses QFZP status?
If a Qualifying Free Zone Person (QFZP) fails to meet the 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 next four tax periods.
QFZPs are required to file their annual tax return within nine months after the end of their fiscal year, even if no tax is payable, and must disclose their qualifying and non-qualifying income.
QFZP status is not a one-time qualification. A company must continuously monitor its revenue mix, transfer pricing compliance, and operational substance throughout the year. Many compliance issues arise not from the business activity itself, but from failing to track whether the QFZP conditions continue to be met.
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