Qualifying Free Zone Persons: How the 0% Corporate Tax Rate Really Works.

Free zones remain one of the main reasons businesses set up in the UAE, and Corporate Tax kept a special regime for them. But the regime is narrower than many owners think. The 0% rate is not a free zone discount on everything. It is a rate on specific income, for companies that pass a set of tests each year.

Here is what the rules say, and where free zone companies most often slip.

What a Qualifying Free Zone Person is

A Free Zone Person is a juridical person, such as a company or a registered branch, incorporated, established or registered in a free zone. Individuals and unincorporated partnerships cannot be Free Zone Persons.

A Free Zone Person becomes a Qualifying Free Zone Person, or QFZP, when it meets all of these conditions:

• Adequate substance. It carries out its core income-generating activities in a free zone.
• Qualifying Income. It earns income of the kind the rules allow.
• No opt-out. It has not elected to be taxed under the standard rules.
• Transfer pricing. It follows the arm's length principle and keeps transfer pricing documentation where required.
• De minimis. Its non-qualifying revenue stays within the limit explained below.
• Audited financial statements. It prepares and maintains audited accounts.

The FTA treats a Free Zone Person as a QFZP unless it fails a condition or opts out.

The 0% rate, and what it covers

A QFZP pays:

• 0% on its Qualifying Income, and
• 9% on its taxable income that is not Qualifying Income.

There is no 0% band on the first AED 375,000 for a QFZP. That band belongs to the standard regime only.

Qualifying Income broadly comes from four places: transactions with other Free Zone Persons that are the beneficial recipients of the goods or services, transactions in Qualifying Activities, income from qualifying intellectual property, and other income as long as the de minimis test is met.

Qualifying Activities are set by Ministerial Decision No. 229 of 2025, which replaced the 2023 list. They include manufacturing, processing, trading qualifying commodities, holding shares for investment, headquarter services and treasury services to related parties, distribution in or from a Designated Zone, and logistics, among others.

Some activities are Excluded Activities. The most important for SMEs: transactions with natural persons are excluded, apart from a few named activities such as fund management and aircraft leasing. A free zone company selling directly to consumers is earning non-qualifying revenue.

Substance

The company must do its core income-generating activities in the free zone, with adequate assets, adequate full-time qualified employees and adequate operating spend there. For distribution, this needs to be a Designated Zone.

Core activities can be outsourced to other persons in a free zone, provided the company adequately supervises them. A licence and a desk with no people behind the revenue will not meet this test.

The de minimis rule

A QFZP may earn a small amount of non-qualifying revenue. The limit is the lower of:

• 5% of its total revenue for the tax period, or
• AED 5,000,000.

Non-qualifying revenue includes revenue from Excluded Activities, from non-qualifying activities with mainland or other non-free zone customers, and from sales to Free Zone Persons that are not the beneficial recipient.

Some revenue is left out of both sides of the calculation, including revenue attributable to a branch outside the free zone and certain property and intellectual property income. That income is taxed at 9% but does not break the de minimis test.

A worked example

"We are a free zone logistics company. Total revenue this year is AED 20,000,000. AED 1,200,000 of it came from a side service to mainland customers that is not a Qualifying Activity."

• 5% of AED 20,000,000 is AED 1,000,000. That is lower than AED 5,000,000, so the limit is AED 1,000,000.
• Non-qualifying revenue of AED 1,200,000 is over the limit. The company fails the de minimis test for the year.

Had the side service earned AED 800,000, the company would have passed. For a company with AED 150,000,000 of revenue, 5% would be AED 7,500,000, so the AED 5,000,000 cap would apply instead.

What happens if a company fails

This is the part that hurts. A QFZP that fails any condition at any point in a tax period stops being a QFZP from the beginning of that period, and for the four following tax periods. That is five years on the standard rules, even if the problem is fixed the next month.

On the standard rules, the company pays 0% on taxable income up to AED 375,000 and 9% above. In the example above, taxable income of AED 4,000,000 would mean tax of 9% on AED 3,625,000, which is AED 326,250, for that year alone.

Losses also work differently for a QFZP. Losses on the 0% Qualifying Income cannot be set against other income or carried forward, and a QFZP cannot transfer losses to or from another company. A QFZP also cannot elect Small Business Relief.

Staying qualified

• Tag every revenue line as qualifying, non-qualifying or excluded from the test, at the point of invoicing.
• Watch the de minimis total monthly, not at year end.
• Get written confirmation from free zone customers that they are the beneficial recipient.
• Book the audit early and keep substance evidence: payroll, leases and asset registers in the free zone.

Clean monthly bookkeeping with revenue tagged by source is what makes all of this possible.

How we help

For free zone clients, we set up revenue tagging in the ledger, track the de minimis position through the year, and prepare the Corporate Tax working and return figures as part of our Corporate Tax filing service.

Frequently asked questions

Does a Qualifying Free Zone Person get the 0% band on the first AED 375,000?

No. A Qualifying Free Zone Person pays 0% on qualifying income and 9% on taxable income that is not qualifying income, with no AED 375,000 band.

Do small free zone companies need audited accounts?

Yes. A Qualifying Free Zone Person must prepare and maintain audited financial statements whatever its revenue.

Can a Qualifying Free Zone Person elect Small Business Relief?

No. Small Business Relief is not available to a Qualifying Free Zone Person.

Can a free zone company sell to individuals and keep the 0% rate?

Transactions with natural persons are Excluded Activities, apart from a few named activities such as fund management and aircraft leasing. That revenue counts as non-qualifying and must stay within the de minimis limit.