By Nadeem Afzal, ACCA, CPA, UAECA | Founder and Managing Partner, AL SAQR (VAT Account), Dubai | Published 29 October 2026
Short answer: A free zone company is a Qualifying Free Zone Person (QFZP) when it keeps adequate substance in the free zone, earns Qualifying Income, has not elected to pay corporate tax at the standard rate, complies with transfer pricing rules, prepares audited financial statements and keeps its non-qualifying revenue within the de minimis limit. A QFZP pays 0% corporate tax on Qualifying Income and 9% on the rest. Failing a condition, including the de minimis test, removes QFZP status for the year of failure and the next four tax periods.
Free zone registration alone does not bring a 0% rate. Many free zone companies assume it does, and the first corporate tax return is where that assumption is tested. This article sets out each condition, how Qualifying Income is determined and how to monitor the de minimis threshold during the year. For help with free zone structures, see our free zone business setup in Dubai page.
The Six Conditions for QFZP Status
| # | Condition | What it means in practice |
|---|---|---|
| 1 | Adequate substance | The business is carried out in the free zone with adequate assets, adequate qualified employees and adequate operating expenditure there, matching the income-generating activities |
| 2 | Qualifying Income | The company derives income that is Qualifying Income |
| 3 | No election out | The company has not elected to be subject to the standard 9% regime |
| 4 | Transfer pricing | Related party and connected person transactions follow arm’s length rules, with documentation where required |
| 5 | Audited financial statements | Financial statements are prepared and audited by a licensed auditor, a task for a licensed audit firm and not for AL SAQR |
| 6 | De minimis | Non-qualifying revenue stays below the permitted limit |
A company that meets all six is a QFZP for that tax period. The test is applied each tax period, so status is not permanent.
What Counts as Qualifying Income
Qualifying Income falls into broad categories:
- Income from transactions with other free zone persons, except income from excluded activities.
- Income from transactions with non-free zone persons, but only where the income comes from a qualifying activity that is not an excluded activity.
- Qualifying intellectual property income, within the rules on qualifying IP.
- Income from ownership or disposal of qualifying immovable property in a free zone, such as commercial property let to other free zone persons.
Qualifying Activities
The Ministry of Finance has published a list of qualifying activities. It includes, among others, manufacturing and processing of goods, trading of qualifying commodities, holding of shares and securities, ownership and operation of ships, reinsurance, fund and wealth management, headquarter services to related parties, treasury and financing services to related parties, logistics services and distribution of goods from a designated zone. The list has been amended since first issued, so check the current text before relying on it.
Excluded Activities
Income from the following is not Qualifying Income, even if earned by a free zone company:
- transactions with natural persons, other than certain qualifying activities;
- banking, insurance and finance and leasing activities (other than qualifying exceptions);
- ownership or exploitation of immovable property other than qualifying commercial property in a free zone;
- ownership or exploitation of intellectual property assets other than qualifying IP, and ancillary activities.
Trading with mainland customers is the most common trap. A free zone trading company that sells to mainland businesses earns income from a non-free zone person. Unless the activity is a qualifying activity, that income is non-qualifying.
The De Minimis Test
A QFZP may earn a limited amount of non-qualifying revenue without losing status. The limit is the lower of 5% of total revenue and AED 5 million for the tax period. If non-qualifying revenue, including revenue from excluded activities, exceeds that limit, the company is not a QFZP for that period.
Worked example:
| Item | AED |
|---|---|
| Total revenue for the year | 40,000,000 |
| Non-qualifying revenue | 2,600,000 |
| 5% of total revenue | 2,000,000 |
| Limit applied (lower of 2,000,000 and 5,000,000) | 2,000,000 |
| Result | Exceeded by AED 600,000: QFZP status lost |
The consequence is severe. The company is taxed at 9% on taxable income above the zero-rate band for the period of failure and the following four tax periods, not only on the excess. A 3% overshoot in one year can therefore cost five years of tax planning.
Managing the Test During the Year
- Tag every revenue stream at invoice level as qualifying or non-qualifying, by customer type (free zone person, mainland, natural person, overseas) and by activity.
- Run a monthly de minimis report comparing cumulative non-qualifying revenue to 5% of cumulative total revenue and to AED 5 million.
- Set an internal trigger at 70% of the limit so that the board can redirect sales or restructure before the limit is reached.
- Review contracts with mainland customers and natural persons before signing.
- Document substance: lease, staff contracts, payroll, local decision-making, expenses.
- Check transfer pricing files for any transactions with related parties or connected persons.
Common Mistakes
- Assuming free zone equals 0%. Only Qualifying Income receives the zero rate.
- Ignoring sales to natural persons. These are usually excluded.
- Measuring the test once a year. By then it cannot be fixed.
- Treating a shared flexi-desk as substance. The company needs real assets, qualified staff and spend in the zone.
- Forgetting registration. Every taxable person, including QFZPs, must register for corporate tax and file a return.
- Confusing corporate tax with VAT. QFZP status has no effect on VAT treatment, which follows its own rules.
How AL SAQR (VAT Account) Supports Free Zone Companies
We assess whether your structure and revenue mix support QFZP status, build the revenue tagging and monthly threshold monitoring, prepare the corporate tax computation and return, and review transfer pricing exposure. Statutory audits are carried out by licensed audit firms, and we coordinate with your auditor on the information they need. See our corporate tax consultant in Dubai page and our accounting services for details.
Frequently Asked Questions
What is a Qualifying Free Zone Person in the UAE?
A free zone company that meets the conditions in the Corporate Tax Law and related Cabinet and Ministerial Decisions, and therefore pays 0% corporate tax on Qualifying Income and 9% on other income.
Is every free zone company a QFZP?
No. Each company must meet all of the conditions in each tax period. Registration in a free zone alone is not enough.
What is the de minimis threshold for QFZPs?
Non-qualifying revenue must not exceed the lower of 5% of total revenue and AED 5 million in the tax period.
What happens if a free zone company fails the QFZP conditions?
It loses QFZP status for the tax period of failure and the following four tax periods and is taxed under the standard regime.
Can a QFZP sell to mainland customers?
Only within the rules. Income from non-free zone persons is Qualifying Income only where it arises from a qualifying activity that is not excluded, and non-qualifying amounts must stay within the de minimis limit.
Conclusion
QFZP status is earned each year through substance, income mix, documentation and an audited set of accounts. The de minimis test is the condition most easily lost without noticing, because it depends on revenue patterns across the whole year. Tag revenue at source, monitor the threshold monthly and agree the position with your adviser before year end, not after.
Speak to AL SAQR (VAT Account) about free zone corporate tax
www.vataccount.com | info@vataccount.com | +971 55 316 7569
About the author
Nadeem Afzal, ACCA, CPA, UAECA
Founder & Managing Partner, AL SAQR (VAT Account) | UAE Tax & Accounting Advisor
Nadeem advises UAE SMEs, startups and corporations, on the mainland and in free zones, on VAT, Corporate Tax, e-invoicing readiness, accounting and bookkeeping, drawing on more than 15 years of UAE and UK practice.
Sources
- Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Article 18)
- Cabinet Decision No. 100 of 2023 on Qualifying Income and the de minimis conditions
- Ministerial Decision No. 265 of 2023 (Qualifying and Excluded Activities), as amended by Ministerial Decision No. 229 of 2025
- UAE Ministry of Finance and Federal Tax Authority: Corporate Tax Guide on Qualifying Free Zone Persons
Important Notice
This article has been prepared by AL SAQR Accounting & Bookkeeping for informational purposes only. The content is based on applicable UAE laws and regulations in effect at the time of publication and does not constitute legal advice. While every effort has been made to ensure accuracy, AL SAQR Accounting & Bookkeeping accepts no liability for any loss or damage arising from reliance on this article without prior written engagement.
Tax laws, Ministry of Finance decisions and FTA regulations are subject to change. The positions presented are based on legislation and published guidance current as of the date of this article and do not constitute a formal tax ruling. Businesses should obtain independent professional advice or formal clarification from the relevant authority before acting on any compliance position with significant financial impact.
