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Free zone companies hear “0% corporate tax” a lot, often from the same brochures that sold them the licence. The reality is narrower. A free zone company only pays 0% on income the law calls “qualifying income”. It must also meet a set of conditions as a Qualifying Free Zone Person, or QFZP. Miss one condition, and the standard UAE corporate tax rate of 9% applies instead. DASA Consulting offers corporate tax advisory on registration and on whether your income qualifies for the 0% rate.
This article sets out what QFZP status needs, and where free zone companies most often lose it without noticing.
Every Free Zone Company Is Still a Taxable Person
Start with the baseline. A free zone licence doesn’t take a company out of corporate tax scope. Every free zone company is a taxable person under the law. It must register for corporate tax and file a return, even if it ends up paying nothing. The 0% rate is a benefit some free zone companies earn. It isn’t a blanket exemption that comes with the licence.
The Conditions for Qualifying Free Zone Person Status
A free zone company generally needs all of the main conditions below to get the 0% rate:
Be a Free Zone Person. This means a juridical person set up or registered in a UAE free zone, including free zone branches.
Maintain adequate substance in the free zone. The company needs real presence there: employees, physical assets, and activity that fit the income it earns. A registered address with no staff and no real activity does not meet this bar.
Derive qualifying income. Income qualifies by the activity and by who you deal with. Where the customer sits doesn’t decide it. Income from other free zone persons qualifies, unless it comes from an excluded activity. Income from anyone else qualifies only if it comes from a qualifying activity. So a sale to a foreign customer can still be non-qualifying.
Prepare audited financial statements. Every QFZP must keep audited financial statements. Ministerial Decision No. 84 of 2025 sets this rule.
Not have elected into the standard regime. A free zone company can choose the standard 0%/9% structure instead of the QFZP regime. Once made, that choice generally applies for a set number of years.
Fail any one of these and the company is not a QFZP. It loses the status for that tax period and the next four. The 9% standard rate then applies to its income above AED 375,000, as it would for a mainland company.
Qualifying and Excluded Activities
Whether your income gets the 0% rate depends on what you actually do. The law splits activities into two lists. Ministerial Decision No. 229 of 2025 now sets both lists. It replaced Ministerial Decision No. 265 of 2023.
Qualifying activities get the 0% rate when the other conditions hold:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of qualifying commodities, now including some industrial chemicals and carbon credits
- Holding shares and securities for investment
- Owning, managing, and operating ships
- Reinsurance services
- Fund management services
- Wealth and investment management services
- Headquarter services to related parties
- Treasury and financing services to related parties, or for the company’s own account
- Financing and leasing of aircraft
- Logistics services
- Distributing goods in or from a Designated Zone
- Activities that support any of the above
Excluded activities don’t produce qualifying income, even inside a free zone:
- Deals with individuals, apart from some shipping, aircraft, and fund exceptions
- Regulated banking, finance, leasing, and insurance
- Owning or using property, apart from commercial property in a free zone dealt with other free zone persons
- Owning or using intellectual property, apart from qualifying IP
Revenue from an excluded activity counts toward the non-qualifying revenue cap below. The FTA free zone persons guidance lists each activity in full.
The Non-Qualifying Revenue Cap: Where Companies Lose 0% Status Without Realising It
A free zone company can meet every other QFZP condition and still lose the benefit. The cause is its non-qualifying revenue. The law caps how much non-qualifying revenue a QFZP can earn. This is the de minimis rule. The cap is the lower of 5% of total revenue or AED 5 million. Cross it and the company fails the test. It then loses QFZP status for that year and the next four years. It can retest its QFZP status in the sixth year.
This matters for free zone companies with a small side line of non-qualifying work. Sales to individuals are a common example. Crossing the cap doesn’t just tax the excess at 9%. The company loses QFZP status for that period and the next four. All its income then moves to the standard rates, including income that would otherwise qualify. This is the most common way free zone companies lose the 0% rate without meaning to.
Substance Requirements in Practice
The FTA judges “adequate substance” against the size and type of the business. There’s no fixed checklist. A free zone company earning passive income needs less physical presence than a logistics firm with stock and staff. The Federal Tax Authority asks one question. Does the company really carry out the income-earning activity in the free zone? Its people and assets should match the scale of that income. A flexi-desk licence with no staff and large trading income invites a closer look.
If you’re still choosing a free zone structure, plan for QFZP status from day one. Our team handling free zone company formation in UAE can build the structure around it. Then you don’t fix it later.
A Simple Illustration of the Non-Qualifying Revenue Problem
Picture a free zone logistics company. Most of its revenue comes from handling goods for other businesses. That income qualifies for the 0% rate. It also does some home deliveries for individual shoppers. Deals with individuals are an excluded activity, so that income doesn’t qualify.
The company keeps its QFZP status while that revenue stays under the cap. Now say the home delivery side grows fast in one year. It pushes non-qualifying revenue over the cap. The company doesn’t just lose the 0% rate on the delivery income. It loses QFZP status for that period and the next four. Its business-to-business income then falls under the standard 9% rate too. So a growing non-qualifying side line needs watching every period, not just once at setup.
What This Means If You’re Not Sure Your Company Qualifies
QFZP status turns on facts specific to each company. What income does it earn, from whom, and with how much substance? No general article can confirm your status. This article can flag the areas most worth checking. Is non-qualifying revenue near the cap? Does your substance match your income? Has anyone checked this since your business activity changed? A formal QFZP status review covers each area against your real structure and income.
Frequently Asked Questions
If my free zone company doesn’t qualify as a QFZP, do I pay 9% on everything?
No. You move onto the standard 0%/9% structure, like any other UAE company. That’s 0% on taxable income up to AED 375,000 and 9% above it. You don’t pay 9% on all income from the first dirham.
Can a free zone company choose not to be a QFZP?
Yes. A free zone company can elect the standard regime instead of the QFZP regime. Once made, this election generally locks in for a set period.
Does trading with mainland UAE customers automatically disqualify a free zone company?
No. The activity decides it. Income from a qualifying activity can qualify even when the customer is on the mainland. Income from other activities counts as non-qualifying revenue. Too much of it, over the cap, ends QFZP status.
How often should QFZP status be reviewed?
At minimum, every tax period. Also review it when the company’s activities, customers, or staffing change a lot. QFZP status applies period by period. It isn’t locked in once granted.
This article explains the general QFZP framework. It isn’t a ruling on any company’s tax status. Qualifying income, substance, and the non-qualifying revenue cap depend on each company’s facts. Speak with a corporate tax consultant in Dubai before relying on QFZP status in a filing.
