Qualifying Free Zone Person Rules in the UAE Corporate Tax System
The UAE has long used Free Zones to attract investors, but corporate tax introduced new conditions for keeping those incentives. At the center is the Qualifying Free Zone Person (QFZP) regime, which offers a 0 percent rate on specific income streams. To benefit, companies must meet detailed conditions and prove genuine operations in the Free Zone. If they fail, they lose eligibility and face the regular 9 percent tax.
For business owners, the question is not just whether they are in a Free Zone. It is whether they qualify, remain compliant, and avoid the mistakes that could cost them years of tax benefits.
The Concept of a Qualifying Free Zone Person
A QFZP is a Free Zone company that enjoys a 0 percent corporate tax rate on qualifying income. At the same time, non qualifying income is taxed at 9 percent. Companies that want this benefit must maintain audited financial statements, follow transfer pricing, and show substance in their Free Zone operations.
Failure to meet the conditions strips away the 0 percent rate, turning the company into a regular taxpayer for the year in question and the next four tax periods.
Key Points to Keep in Mind
- Qualifying income can be taxed at 0 percent.
- Non qualifying income is always taxed at 9 percent.
- Companies must have audited accounts and meet substance requirements.
- Breaching the rules causes an automatic loss of QFZP status for up to five years.
Conditions for Qualifying
Substance in the Free Zone
Businesses must prove that their operations are real. This means having adequate staff, premises, and operating costs that match the activity.
Audited Financial Accounts
From 2025 onward, all QFZPs must maintain audited statements. These accounts verify the split between qualifying and non qualifying income.
Transfer Pricing Rules
Transactions with related parties must reflect fair market value. Transfer pricing disclosures and documentation are required when thresholds are met.
Voluntary Exit
A Free Zone company can choose to opt out of the QFZP regime and pay 9 percent on all income. Once out, it cannot re enter for at least five years.
Income Subject to 0 Percent and 9 Percent
What Counts as Qualifying Income
- Transactions between Free Zone entities.
- Activities from the official Qualifying Activities list, including manufacturing, logistics, investment management, and aircraft leasing.
- Qualifying intellectual property that meets development requirements.
What Falls Under the 9 Percent Rate
- Banking and conventional insurance.
- Most real estate activities outside Free Zones.
- Sales to individuals, except for narrow cases such as aviation or fund management.
- Any activity specifically listed as excluded.
No Small Business Relief
Mainland companies can benefit from the AED 375,000 threshold, but QFZPs cannot. Their 0 percent rate only applies to qualifying income.
Activities That Qualify vs Those That Do Not
Activities Eligible for the 0 Percent Rate
- Manufacturing and processing of goods.
- Trading of commodities such as gold, energy, chemicals, or agricultural products, provided revenue from logistics or warehousing does not exceed 51 percent.
- Holding shares or securities for investment.
- Managing and operating ships.
- Reinsurance services.
- Fund management and wealth management under financial oversight.
- Providing headquarters, treasury, or financing services to related parties.
- Aircraft financing and leasing.
- Distribution of goods through Designated Zones when conditions are met.
- Ancillary services tied to the above.
Activities That Are Excluded
- Banking and conventional insurance.
- Finance and leasing outside treasury or aviation exceptions.
- Real estate income other than Free Zone commercial property leased to Free Zone Persons.
- Retail sales to individuals, except where exceptions apply.
- Any activity linked to excluded sectors.
Serving the UAE Market While Maintaining QFZP Status
Free Zone companies are not barred from working with the mainland, but rules are strict.
- Profits from a mainland branch are taxed at 9 percent.
- Some qualifying activities, such as logistics or manufacturing, can still be supplied to mainland customers at 0 percent.
- For distribution, two conditions apply: goods must enter through a Designated Zone, and they must be sold to resellers, processors, or public benefit entities, not final consumers.
- Real estate rules are narrow: only Free Zone commercial property leased to Free Zone Persons qualifies for 0 percent.
The De Minimis Test
The de minimis threshold ensures companies do not abuse the regime by mixing large amounts of non qualifying income with a small Free Zone operation.
- Non qualifying income must stay below the lower of 5 percent of total revenue or AED 5 million in a period.
- If breached, QFZP status is lost for that year and the following four years.
- Loss of status means all income is taxed at 9 percent during that time.
Comparing QFZP, Non QFZP, and Mainland Entities
- QFZP: 0 percent on qualifying income, 9 percent on non qualifying income, not allowed to form tax groups.
- Non QFZP: 9 percent on all income, tax grouping permitted.
- Mainland: 9 percent above AED 375,000, can form tax groups.
The choice depends on business activity. For B2C businesses, banks, insurers, or developers, a mainland setup may be more suitable.
Compliance and Ongoing Documentation
- Registration: All Free Zone companies must register with the FTA and file returns within nine months of year end.
- Audited financials: Required for all QFZPs from January 2025 onwards.
- Record keeping: Contracts, invoices, and supporting evidence must be maintained.
- Transfer pricing: Documentation and disclosures apply when thresholds are triggered.
A Self Check Framework for Businesses
Free Zone companies can ask themselves five questions to know if they qualify:
- Location: Is the company licensed in a UAE Free Zone?
- Activity: Is the licensed business on the qualifying activities list?
- Substance: Does the company have staff, premises, and expenses to prove real presence?
- Compliance: Are audited accounts prepared and transfer pricing rules followed?
- Revenue mix: Does non qualifying income remain under the de minimis threshold?
If the answer is “no” to any of these, QFZP status is not available.
Misconceptions That Lead to Disqualification
- Believing that a Free Zone licence alone guarantees 0 percent tax.
- Assuming B2C e commerce in a Free Zone is tax free.
- Thinking all intellectual property income qualifies, when in reality only IP developed with real research and development qualifies.
Want to know if your Free Zone business qualifies for the 0 percent rate? Contact Alpha Pro Partners for tailored advice. Our experts can help you structure operations, maintain compliance, and protect your QFZP status.
FAQs on Qualifying Free Zone Person Status
Can foreign investors establish QFZPs?
Yes. Foreign ownership is allowed if all conditions are met.
Can Free Zone companies sell to mainland customers at 0 percent?
Yes, but only when the supply is a qualifying activity and conditions are met.
What happens if the de minimis threshold is breached?
QFZP status is lost from the start of that tax period and for the next four years.
Can QFZPs join tax groups?
No. They are excluded from tax grouping.
Do small Free Zone companies need audited accounts?
Yes. From 2025, all QFZPs must prepare audited accounts regardless of size.
Can a company voluntarily leave the QFZP regime?
Yes. But once out, it cannot reapply for five tax periods.
Does a mainland branch of a Free Zone company qualify for 0 percent?
No. Mainland branch profits are taxed at 9 percent.
Can real estate companies qualify?
Only commercial property leased to Free Zone Persons within Free Zones can qualify for the 0 percent rate.
Are commodity traders treated differently?
Yes. They must use prices from recognised exchanges or agencies when calculating income.
What is the lockout period for non compliance?
Five years, including the year of breach plus four following periods.
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