Free zone corporate tax: QFZP, qualifying income and the 0% rate

A free zone licence does not mean 0% tax. Learn the QFZP conditions, qualifying activities, the 5% / AED 5m de minimis test, audit rules, VAT and e-invoicing.

At a glance

Being licensed in a free zone does not make your profits tax-free. The 0% rate applies only to a Qualifying Free Zone Person, only on qualifying income, and only while every condition holds for the whole year.

Free zone companies are taxable persons. Only a QFZP gets 0% on Qualifying Income; everything else is taxed at 9%.

Non-qualifying revenue must stay at or below 5% of total revenue or AED 5,000,000, whichever is lower (MD 229/2025 Art 3).

Fail one condition and you lose QFZP status from the start of that tax period and for the next 4 periods.

A QFZP must prepare audited financial statements whatever its revenue, and cannot use Small Business Relief.

For VAT, most free zones are inside the State. Only Cabinet-listed Designated Zones get special treatment for goods.

E-invoicing applies to free zone businesses too, with a free-zone flag on the invoice.

Key dates

1 Jun 2023: MD 229/2025 qualifying activity lists apply from this date

30 Sep 2026: FY2025 corporate tax return and payment due (calendar-year companies)

31 Mar 2027: Appoint an accredited service provider (e-invoicing Phase 2, revenue below AED 50m)

1 Jul 2027: E-invoicing go-live for Phase 2 businesses

30 Sep 2027: FY2026 corporate tax return and payment due (calendar-year companies)

A free zone licence is not a 0% guarantee

Companies incorporated in a UAE free zone are taxable persons under Federal Decree-Law 47/2022, exactly like mainland companies. They must register for corporate tax (within 3 months of incorporation for companies formed on or after 1 March 2024), file a return and pay within 9 months of the year end.

The 0% rate is a special regime. Under Art 3(2) and Art 18, it applies only to a Qualifying Free Zone Person (QFZP), and only to its Qualifying Income. Everything else the QFZP earns is taxed at 9%, and a free zone company that does not qualify at all is taxed under the standard rules: 0% on the first AED 375,000 of taxable income and 9% above that.

Three separate questions: Am I a QFZP this year? Which of my income is qualifying? Is my non-qualifying revenue small enough to keep the status? You need a yes to the first and a clear answer to the other two before you can rely on 0%.

The QFZP conditions

Art 18 of the CT Law, Cabinet Decision 100/2023 and Ministerial Decision 229/2025 set the conditions. All of them must hold throughout the tax period, not just at year end:

Adequate substance in the State: your core income-generating activities are carried out in the free zone, with adequate assets, qualified staff and operating expenditure.

Derives Qualifying Income: income from Qualifying Activities, from transactions with other free zone persons (unless they are excluded activities), and certain transactions with non-free-zone persons.

Has not elected to be taxed at the standard rates (Art 19).

Complies with transfer pricing rules: related-party dealings at arm's length, with documentation where required (Arts 34 and 55).

Prepares audited financial statements (MD 84/2025).

Meets the de minimis test: non-qualifying revenue is no more than 5% of total revenue or AED 5,000,000, whichever is lower (MD 229/2025 Art 3).

Losing status is a five-year problem: If any condition fails at any point, you cease to be a QFZP from the beginning of that tax period and for the following 4 tax periods (CT Law Art 18(2)-(3); MD 229/2025 Art 5(2)). One bad year can put five years of profit under the standard rules.

Qualifying and excluded activities (MD 229/2025)

MD 229/2025 was issued on 28 August 2025, applies from 1 June 2023 and repeals the earlier MD 265/2023. It lists the activities that can produce Qualifying Income and the activities that never can.

Qualifying Activities (Art 2(1))

Manufacturing and processing.

Trading of Qualifying Commodities (the list now includes industrial chemicals, by-products and environmental commodities).

Holding shares and other securities for investment.

Ownership, management and operation of ships; financing and leasing of aircraft.

Reinsurance, fund management, and wealth and investment management.

Headquarter services to Related Parties; treasury and financing services to Related Parties or for its own account.

Distribution of goods imported through a Designated Zone to a reseller, processor or public benefit entity.

Logistics services, and activities ancillary to the above.

Excluded Activities (Art 2(2))

Transactions with natural persons, except for shipping, fund management, wealth and investment management, and aircraft financing and leasing.

Banking, insurance (reinsurance and captive insurance under HQ services aside), and finance and leasing outside the listed qualifying activities.

Immovable property, other than Free Zone Commercial Property transactions with a Free Zone Person.

Activities ancillary to any excluded activity.

Notice what is missing: general services sold to mainland customers, and almost anything sold to individuals. A free zone consultancy billing mainland clients, or an e-commerce store selling to consumers, will usually find most of its revenue is non-qualifying. Income from qualifying IP is dealt with separately under CD 100/2023.

Classification depends on the facts of each contract. Write down which activity each revenue stream falls under and have a tax adviser confirm it before you file.

The de minimis test, with worked examples

A QFZP can earn a little non-qualifying revenue without losing its status. The limit is the lower of 5% of total revenue and AED 5,000,000. Note that the test is on revenue, while tax is charged on taxable income.

Total revenue (AED) | 5% of revenue | Limit (lower of 5% and 5m) | Non-qualifying revenue | Result

30,000,000 | 1,500,000 | 1,500,000 | 1,200,000 | Passes

30,000,000 | 1,500,000 | 1,500,000 | 1,800,000 | Fails: status lost

150,000,000 | 7,500,000 | 5,000,000 | 6,000,000 | Fails: above the AED 5m cap

In the third row, 6m is only 4% of revenue, but it is above the AED 5m cap, so the test fails. Large free zone businesses hit the fixed cap first.

How the tax is worked out

Say a QFZP that passes the test has taxable income of AED 4,000,000 from qualifying activities and AED 600,000 from non-qualifying revenue. The qualifying part is taxed at 0%. The non-qualifying part is taxed at 9% with no AED 375,000 band: 600,000 × 9% = AED 54,000.

Compare a mainland company with AED 600,000 of taxable income: (600,000 − 375,000) × 9% = AED 20,250. The QFZP pays more on that slice because the 0% band does not apply to it (Art 3(2)(b)).

Audit, transfer pricing, substance and reliefs

Audited financial statements

Every QFZP must prepare audited financial statements, whatever its revenue (MD 84/2025 Art 2(1)(b)). Mainland companies only face the CT audit requirement above AED 50m of revenue. Many zones (for example JAFZA, DMCC and RAKEZ) also require audited accounts for licence renewal.

Transfer pricing

Dealings with related parties and connected persons must be at arm's length. Because a QFZP is taxed at a different rate from mainland companies, transactions between a QFZP and its mainland related parties fall inside the local file scope where MD 97/2023 requires a master and local file (group revenue of AED 3.15bn or entity revenue of AED 200m). Smaller businesses still need benchmark support and must report related-party transactions in the return disclosures when the thresholds are crossed.

Substance

The Economic Substance Regulations were effectively abolished by Cabinet Decision 98/2024: no ESR notification or report is needed for financial years starting on or after 1 January 2023. But substance still matters, because it is a QFZP condition under Art 18. Keep evidence of staff, premises, operating costs and decision-making in the free zone.

Reliefs you give up

No Small Business Relief: QFZPs are excluded from SBR even if revenue is under AED 3m (MD 73/2023 Art 3).

No tax group: a QFZP cannot join a corporate tax group (Art 40).

No AED 375,000 band on non-qualifying income.

QFZP or elect standard rates?

A free zone company can elect to be taxed at the standard rates under Art 19. Sometimes that is the better answer. Use this as a starting point for the conversation with your adviser:

Your situation | Likely direction | Why

Most revenue from qualifying activities, well under the de minimis limit | QFZP | 0% on most profit outweighs the audit and documentation cost

Most customers are mainland businesses buying services | Standard rates | Revenue is largely non-qualifying, so the de minimis test is likely to fail

Selling mainly to individuals (B2C) | Standard rates | Transactions with natural persons are excluded for most activities

Small business, taxable income under AED 375,000, revenue under AED 3m | Compare carefully | Standard rates give the 375k band and possibly SBR; QFZP requires an audit every year

Non-qualifying revenue close to the limit each year | Standard rates or restructure | A single breach costs status for 5 periods

Run both scenarios through the corporate tax calculator. For the standard-rate rules in full, see the UAE corporate tax guide.

VAT, e-invoicing and other obligations

VAT: free zone is not the same as Designated Zone

For VAT, every free zone is inside the State unless it is a Cabinet-listed Designated Zone (CD 59/2017 and the FTA list). Only Designated Zones get the "outside the State" treatment, and only for goods, with conditions (VAT Law Arts 50-52; ER Art 51). Services supplied in a Designated Zone are inside the State, and so are goods supplied for consumption there.

So a free zone consultancy charges 5% VAT to UAE clients like any mainland firm, and registers once taxable supplies pass AED 375,000 over 12 months. See the UAE VAT guide.

E-invoicing

Free zone businesses are in scope of e-invoicing under MD 244/2025 as amended by MD 66/2026. Companies with revenue below AED 50m must appoint an accredited service provider by 31 March 2027 and go live on 1 July 2027. The PINT-AE invoice carries a transaction-type flag for free zone transactions, which also requires the beneficiary ID. Details in the e-invoicing guide.

UBO register

Commercial free zone companies must keep an Ultimate Beneficial Owner register under Cabinet Resolution 109/2023 and file it with the free zone authority. DIFC and ADGM run their own regimes.

Checklist and common mistakes

What to do this quarter

List every revenue stream and map it to a qualifying or excluded activity under MD 229/2025.

Split revenue in your ledger so qualifying and non-qualifying amounts can be reported separately.

Calculate your de minimis limit (lower of 5% and AED 5m) and track non-qualifying revenue against it monthly.

Appoint an auditor for the current year if you plan to claim QFZP status.

Document related-party transactions and the pricing basis for each.

Keep a substance file: headcount, lease, operating costs and where key decisions are made.

Check whether you are inside a Designated Zone before treating any goods supply as outside scope for VAT.

Diary the e-invoicing dates on your compliance calendar.

Common mistakes

Assuming the free zone licence alone means 0% tax.

Only checking the de minimis test at year end, when it is too late to act.

Applying the AED 375,000 band to a QFZP's non-qualifying income.

Claiming Small Business Relief while also claiming QFZP status.

Treating a free zone as outside the UAE for VAT on services.

Skipping the audit because revenue is small.

Done right: A QFZP that keeps its revenue split monthly, has an auditor engaged and a substance file ready can claim 0% with confidence and defend it if the FTA asks. Terms like QFZP and Designated Zone are explained in the glossary.

How Rami handles this

Layla tags each revenue line as qualifying or non-qualifying based on the activity type you confirm, and tracks it against the de minimis limit during the year.

She warns you early if non-qualifying revenue is approaching 5% or AED 5m, so you can talk to your adviser before the year closes.

She flags related-party transactions and the audited financial statements requirement, and keeps a substance checklist on file.

She drafts the corporate tax return workings for your review. You or your adviser approve and file; activity classification stays with a tax adviser.

Sources

Federal Decree-Law 47/2022 on Corporate Tax (amended by DL 60/2023 and DL 40/2024), Arts 3, 18, 19, 21, 34, 40, 48, 53, 55

Cabinet Decision 100/2023 (Qualifying Income)

Ministerial Decision 229/2025 (Qualifying and Excluded Activities; replaces MD 265/2023)

Ministerial Decision 84/2025 (Audited Financial Statements)

Ministerial Decision 97/2023 (Transfer pricing documentation)

Ministerial Decision 73/2023 as amended by MD 131/2026 (Small Business Relief)

Cabinet Decision 116/2022 (AED 375,000 band)

Federal Decree-Law 8/2017 on VAT, Arts 50-52; Executive Regulation Art 51; Cabinet Decision 59/2017 (Designated Zones)

Cabinet Resolution 57/2020 as amended by Cabinet Decision 98/2024 (ESR)

Cabinet Resolution 109/2023 (Ultimate Beneficial Owner)

Ministerial Decision 244/2025 as amended by MD 66/2026 (E-invoicing timeline)

Last updated 2026-10-19. This guide is general information as of October 2026, not legal or tax advice.