The 0% free zone rate: how QFZP status really works
Zero percent is available to free zone companies that meet every condition, every year, on the right kind of income. Here are the conditions, the qualifying activities, the de minimis trap and how to keep the status.
A status earned every year
Under the UAE Corporate Tax Law, Federal Decree-Law No. 47 of 2022, a company or branch registered in a free zone can be a Qualifying Free Zone Person (QFZP). A QFZP pays 0% on its qualifying income and 9% on its taxable income that is not qualifying. The detail is set by Cabinet Decision No. 100 of 2023, which defines qualifying income and the conditions, and Ministerial Decision No. 265 of 2023, which lists the qualifying and excluded activities. The Federal Tax Authority has published guidance and, in 2026, further clarifications on the scope of specific qualifying activities.
Three features make the regime demanding. It is not elective in the ordinary sense: a free zone company either meets every condition for the period or it does not, although it can elect to be taxed under the ordinary rules. It is tested every tax period. And failure has a long tail: a company that fails a condition is taxed at 9% for that period and the following four. The 0% rate is therefore a compliance position to be maintained, not a benefit that comes with the licence.
All must be met, every period
| Condition | What it means in practice |
|---|---|
| Adequate substance in the free zone | Core income-generating activities carried out in the zone, with adequate assets, qualified full-time employees and operating expenditure there; outsourcing is possible only within the zone and under supervision |
| Qualifying income | Income from transactions with other free zone persons and from qualifying activities with non-free zone persons, as defined |
| De minimis | Non-qualifying revenue no higher than the lower of AED 5 million or 5% of total revenue |
| No election out | The company has not elected to be taxed under the ordinary 9% rules |
| Transfer pricing | Compliance with arm's-length rules and documentation requirements |
| Audited financial statements | Accounts audited for every tax period |
The FTA's position is that adequate substance is a fact-specific assessment. Having employees or assets in the zone does not by itself prove it; the question is whether the activities that generate the income are actually carried out there, by people with the skills to do them.
Ministerial Decision No. 265 of 2023
Qualifying activities include
Manufacturing and processing of goods; trading of qualifying commodities on recognised exchanges; holding of shares and securities; ship ownership and management; reinsurance; fund management and wealth and investment management regulated by a competent authority; headquarter services and treasury and financing services to related parties; financing and leasing of aircraft; distribution of goods from a designated zone to customers who resell or process them; logistics services; and ancillary activities.
Excluded activities include
Transactions with natural persons, except in specific cases; banking, insurance and finance and leasing activities outside the defined exceptions; ownership or exploitation of UAE immovable property, other than commercial property in a free zone dealt with other free zone persons; ownership or exploitation of intellectual property assets except to the extent of qualifying IP income; and activities ancillary to excluded activities.
Two consequences follow. First, many service businesses are not on the qualifying list as such: a consultancy or a software company earns qualifying income mainly from transactions with other free zone persons, not automatically from foreign clients. Second, the exact wording of the activity matters, which is why the FTA's clarifications on the scope of specific activities are worth reading before relying on 0%.
The transaction test
| Type of income | Generally treated as |
|---|---|
| Income from transactions with other free zone persons (not excluded activities) | Qualifying, subject to the recipient being the beneficial recipient |
| Income from a qualifying activity with a non-free zone person, including foreign customers | Qualifying |
| Income from an excluded activity | Non-qualifying |
| Income from transactions with UAE mainland persons, outside the qualifying activities | Non-qualifying |
| Income attributable to a domestic or foreign permanent establishment | Non-qualifying |
| Income from immovable property, other than defined free zone commercial property transactions | Non-qualifying |
Non-qualifying revenue counts toward the de minimis limit, the lower of AED 5 million or 5% of total revenue. Certain items, such as revenue from some immovable property transactions, are disregarded for the de minimis calculation under the rules. Above the limit, the company ceases to be a QFZP for that period and the following four.
Failure, the five-year rule and the alternatives
If a QFZP fails any condition during a tax period, or exceeds the de minimis limit, it is treated as a taxable person subject to the ordinary rules from the beginning of that period and for the following four tax periods. In practice, a single year of mainland sales above the limit can cost five years of 0%. The FTA reviews QFZP positions through tax returns, audited accounts and transfer pricing information, and the information a company files will need to support every condition.
There are three common responses. A company with significant mainland or non-qualifying business can split it into a separate entity, so the free zone company remains within the de minimis limit. A company that cannot meet substance can either build it, which means real people and decisions in the zone, or elect out and accept 9%, with the planning certainty that brings. And a company inside a multinational group with EUR 750 million or more of revenue should recognise that the 15% domestic minimum top-up tax, applying from 2025, can remove most of the benefit of 0% anyway.
Corporate tax registration, returns, audited accounts and transfer pricing documentation are all part of the QFZP position. Missing any of them is a penalty risk under the corporate tax penalty rules and a reason for the FTA to question the status itself.
Distribution from a designated zone
A trading company in a designated free zone imports goods, stores them in the zone and sells them. Revenue is AED 60 million: AED 50 million to distributors in other GCC countries and Africa, AED 7 million to other free zone companies, and AED 3 million to retailers on the UAE mainland. Distribution of goods from a designated zone to customers who resell them can be a qualifying activity, and sales to other free zone persons are qualifying, so AED 57 million may be qualifying income if the conditions are met.
The AED 3 million of mainland retail sales is the problem. It is below AED 5 million, but 5% of AED 60 million is AED 3 million, and the de minimis limit is the lower of the two. At exactly the limit the company passes; one more mainland order and it fails, losing 0% for five periods. The fix is structural: route mainland sales through a separate mainland distributor, related or not, and keep the free zone company's mainland revenue well inside the limit with headroom for growth.
What to have in place
Activity mapping
Map every revenue line to qualifying, excluded or non-qualifying, by customer type and activity, and update it every year.
Substance file
Employees, premises, assets and decision-making in the zone, documented: employment contracts, board minutes, office lease, payroll.
De minimis monitoring
Track non-qualifying revenue monthly against the lower of AED 5 million or 5% of revenue, with an early warning well before the limit.
Audit and TP
Audited accounts for every period and transfer pricing documentation for related-party transactions, consistent with the tax return.
Where QFZP often works best
Free zone holding companies and regional headquarters are among the structures where the QFZP regime fits most naturally. Holding shares and other securities for investment purposes is a qualifying activity, and dividends and capital gains from qualifying participations can in any case be exempt under the participation rules. Headquarter services to related parties and treasury and financing services to related parties are also qualifying activities, which allows a group to centralise management, finance and support functions in a free zone entity serving the group across the region.
The conditions still apply in full. A holding company needs adequate substance for what it actually does, which for a pure holding entity can be modest but must be real: decisions on the investments taken in the zone, by directors or staff with the competence to take them. A headquarter company providing services needs the people who provide them. And because these services are charged to related parties, transfer pricing documentation is central: the fees must be at arm's length, and the free zone entity's profit must reflect the functions it really performs. Groups that use a free zone headquarters as a booking centre without the people behind it are exactly the cases the FTA's substance guidance is aimed at.
Questions we get asked first
What is a Qualifying Free Zone Person in the UAE?
A free zone company or branch that meets all the conditions in the Corporate Tax Law and Cabinet Decision No. 100 of 2023, and therefore pays 0% on qualifying income and 9% on other taxable income.
What are the QFZP conditions?
Adequate substance in the free zone, qualifying income, non-qualifying revenue within the de minimis limit, no election for the ordinary rules, compliance with transfer pricing rules, and audited financial statements.
What is the de minimis limit?
Non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue in the tax period.
What happens if a free zone company fails a QFZP condition?
It is taxed under the ordinary rules, 9% above AED 375,000, for that tax period and the following four.
Is income from foreign clients automatically qualifying?
No. Income from non-free zone persons, including foreign clients, is qualifying only if it comes from a qualifying activity listed in Ministerial Decision No. 265 of 2023. Many services are not on that list.
Does the 15% minimum tax affect QFZPs?
Yes, for groups with consolidated revenue of EUR 750 million or more. The domestic minimum top-up tax applies from 2025 regardless of free zone status.
Zero percent is a position you defend every year
The QFZP regime rewards free zone companies that genuinely operate in the zone, earn the right kinds of income and keep everything else small. Map your revenue, document your substance, monitor the de minimis limit and keep audited accounts and transfer pricing files current. One bad year costs five.
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This article is general information, current as of 2026, and is not advice for any specific situation. Confirm current rules with the MOIC, the NBR or the relevant authority before acting.