Qualifying Free Zone Income and the Qualifying Free Zone Person, Explained

A free zone licence does not give you 0% corporate tax. The honest version is narrower: a free zone company that is not a Qualifying Free Zone Person pays exactly what a mainland company pays — 0% on the first AED 375,000 of taxable profit, 9% above it. (Mainland here means licensed by the emirate itself rather than by a free zone.) A Qualifying Free Zone Person does not get that AED 375,000 band at all.

The 0% you have heard about applies only to qualifying income earned by a Qualifying Free Zone Person — a separate status, with conditions, that most free zone companies do not meet. If you are moving a real business to the UAE, it is worth understanding the difference before you pick a licence, not after your first tax return.

Does a free zone licence mean 0% corporate tax?

No. UAE corporate tax has two layers, and the 0% headline lives in the second one.

The first layer is the default that everyone is on. Mainland, free zone, foreign-owned, family-owned — the same rule applies: nothing on the first AED 375,000 of taxable profit, 9% on the rest. A free zone licence does not change this.

The second layer is the Qualifying Free Zone Person regime. It sits on top of the default and offers 0% on a defined slice of income, with no AED 375,000 cap. It is optional, conditional, and a lot narrower than the marketing suggests. Most free zone companies are not Qualifying Free Zone Persons. They are free zone companies paying the standard 0% / 9% rate, the same as a mainland company of the same size.

That is the whole misunderstanding in one sentence: “free zone” and “qualifying free zone” are not the same thing. Read more on the wider picture on our UAE corporate tax page.

What does a Qualifying Free Zone Person have to do?

To get 0% on qualifying income, a company has to meet all of the following at the same time. Miss one and the status falls away.

• Be incorporated, established or registered in a UAE free zone.
• Keep adequate substance in the UAE — real activity, real people, real decisions taken in the free zone. Not a paper shell.
• Earn qualifying income, as defined in the legal sources.
• Meet arm’s-length and transfer-pricing rules under the Corporate Tax Law. In plain terms, anything the company buys from or sells to you, your family or another company you own has to be priced as it would be with a stranger.
• Prepare audited financial statements.
• Keep non-qualifying revenue inside the de minimis limit.
• Not have elected to be taxed under the standard regime instead.

The word “all” matters. Every condition has to hold. A single weak point — substance, audit, transfer pricing, de minimis — collapses the regime. And the penalty is structural, not a fine: lose the status and you lose it for that tax period and the next four after it.

The Ministry of Finance’s decision on qualifying activities spells out that cost: a company that fails any of the conditions “shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent (4) four Tax Periods”.

Sources: Corporate Tax Law, the Qualifying Free Zone Person conditions · Ministry of Finance, qualifying and excluded activities · Ministry of Finance, audited financial statements

What counts as qualifying free zone income?

Three main kinds of income count. Income from another free zone company that is the real recipient of what you sell, for any activity that is not on the excluded list. Income from anyone else, but only from an activity on the qualifying list. And income from qualifying intellectual property.

The Ministry of Finance publishes the qualifying list. In short, the activities are:

• manufacturing and processing of goods
• trading of qualifying commodities
• holding shares and securities for investment (held at least twelve months)
• owning and operating ships in international transport
• reinsurance
• regulated fund management
• regulated wealth and investment management
• headquarter services to related parties
• treasury and financing services to related parties or for the company’s own account
• aircraft financing and leasing
• distribution of goods in or from a Designated Zone (a free zone the UAE Cabinet has named for this; not every free zone is one)
• logistics
• and activities ancillary to any of those

Two things to hold onto. First, the list limits what you earn from customers that are not free zone companies. Income from a mainland business, an overseas client or an individual qualifies only if the activity is on the list, or genuinely ancillary to something on it, however it is invoiced. Second, “ancillary” has a defined meaning: necessary for the main activity or a minor part of it, not a separate business in its own right.

Selling to another free zone company works differently. If that company is the one actually using what you sell, rather than passing it on to someone else, the income qualifies whatever the activity, as long as it is not on the excluded list. The Cabinet decision on qualifying income puts it in one line: “Income derived from transactions with a Free Zone Person, except for income derived from Excluded Activities.”

There is also a list of excluded activities that produce non-qualifying income even inside a free zone — chiefly transactions with individuals (with narrow exceptions for ships, fund management, wealth management and aircraft financing), banking, most insurance, most finance and leasing, and ownership of property other than commercial property inside a free zone let to another free zone person. This is where businesses selling to UAE consumers tend to get caught.

Sources: Cabinet decision on qualifying income · Ministry of Finance, qualifying and excluded activities

How much non-qualifying income is allowed?

QFZP is short for Qualifying Free Zone Person. A QFZP is allowed a little non-qualifying revenue without losing status. The limit is whichever is lower of:

• 5% of total revenue, or
• AED 5,000,000.

The AED 5m figure is a ceiling, not the limit. For a smaller business the limit is lower. Take a free zone trader with AED 40 million of revenue: 5% is AED 2 million, which is below the AED 5 million ceiling, so its de minimis limit is AED 2 million. If non-qualifying revenue — say sales to individuals in the UAE — passes AED 2 million in the period, the status is gone.

Inside the limit, that small amount of non-qualifying revenue counts as qualifying income, so it is taxed at 0% like the rest. The exceptions are income from a branch outside the free zone, certain property income and income from intellectual property that does not qualify, which are taxed at 9% whatever happens.

Sources: Ministry of Finance, the de minimis limit · Cabinet decision on qualifying income

Where do most free zone companies fall down?

The most common failure we see is not the activity definition. It is substance. A QFZP needs real presence in the UAE free zone — premises, people, decisions made there. The audited-accounts requirement puts a documentary layer on top of that: a third party signs the accounts, so the substance has to genuinely exist to stand up to an audit.

An owner who sets up under a desk-only arrangement and runs the company from home in London or Sydney is in a difficult spot. The licence test might pass. Substance, management and control, and the audit are where it comes apart.

Sources: Ministry of Finance, audited financial statements

Does a free zone consultancy earn qualifying income?

Not when its clients are overseas, on the mainland or individuals, and a worked example shows why. An owner sets up a consultancy in a Dubai free zone and, in a tax period, invoices AED 1.2 million: AED 1,050,000 to UK and European corporate clients for management and strategy work, AED 100,000 to a UAE mainland company, and AED 50,000 to an individual in the UAE.

None of these clients is a free zone company, so the qualifying list decides it. General management consulting is not on that list. It is not manufacturing, not headquarter or treasury services to a related party, not fund or wealth management, not ancillary to any of them. So none of the AED 1.05 million from foreign clients is qualifying income — even though it is foreign-sourced. The AED 100,000 from the mainland company is non-qualifying for the same reason. The AED 50,000 to an individual is caught by the transactions-with-individuals exclusion.

This company is a free zone company, not a Qualifying Free Zone Person. The 0% headline does not apply. The outcome is the standard one: 0% on the first AED 375,000 of taxable profit, 9% above. The same as a mainland company of that size.

That is not a failure. For a lot of consultancy, agency and operator businesses the standard regime is simply the regime, and the work is to plan around it properly. The free zone still earns its place for other reasons — ownership flexibility, UAE residency, banking access, a stable base to trade from. Where the QFZP regime genuinely fits — manufacturing, qualifying commodity trading, regulated fund or wealth management, a real group treasury or headquarter function — it has to be designed for from the start, not bolted on later.

What did the 2025 update change?

The 2025 decision on qualifying activities replaced the earlier 2023 decision, with effect back to 1 June 2023, and rewrote three of the qualifying activities. Commodity trading moved from a “raw form” test to a clearer market-referenced one: if the commodity has a quoted price on a recognised exchange or price reporting agency, it is in scope, and the list now covers industrial chemicals, agricultural by-products and environmental commodities such as carbon credits.

Treasury and financing now expressly includes the company’s own account, so interest on the company’s own deposits can sit inside the qualifying activity. And distribution from a Designated Zone was extended to cover supplies to public benefit entities. The audit condition was aligned with the Ministry of Finance’s rules on audited accounts.

Sources: Ministry of Finance, qualifying and excluded activities · Ministry of Finance, audited financial statements

How does Start Business Services handle this?

We start from the activity, not the licence. Before recommending a free zone or a licence category we look at what the business actually does, who the customers are, and whether the activity falls inside the qualifying list. If it does, the conversation moves to substance, banking and audit. If it doesn’t, we plan around the standard 9% / 0% regime properly rather than promise a 0% outcome the activity will never deliver. We handle the corporate tax side in-house, so this is the same team that runs the accounts, not a hand-off.

Most of the Dubai free zone companies we set up at Start Business Services will never be Qualifying Free Zone Persons, and we say so on the first call, before anyone buys a licence on the strength of a 0% headline.

The same discipline we apply to opening the bank account applies here. We speak to the bank about the company before it is set up, and banks now pay close attention to a company’s corporate tax classification, because a misclassification creates exposure for them too. A clean structure the bank can read at face value is part of getting and keeping the account. In this environment the boring answers — proper structure, real substance, audited accounts, conservative activity classification — are the ones that hold up.

None of this is formal tax advice; it is the practical picture, and how the rules read at the time of writing. The text itself is published in English by the UAE Ministry of Finance, and the Federal Tax Authority publishes practitioner guides — both are the primary sources behind this article. If you want to talk through where your business sits, speak to us.

Common questions

What is qualifying free zone income?

It is the income of a Qualifying Free Zone Person that is taxed at 0%. It covers income from another free zone company that is the real recipient, for any activity that is not excluded; income from anyone else, but only from an activity on the qualifying list; income from qualifying intellectual property; and any other income, as long as the company stays inside the de minimis limit. The company also has to meet every other QFZP condition.

Is every free zone company a Qualifying Free Zone Person?

No. QFZP is a separate status that requires meeting a defined set of conditions. A free zone company that does not meet them is taxed at the standard 0% / 9% rate.

What corporate tax rate applies to a QFZP?

0% on qualifying income; 9% on non-qualifying taxable income.

What happens if a QFZP fails the de minimis test?

The company ceases to be a QFZP from the start of that tax period and for the four following tax periods. All income in those years is then taxed under the standard regime — 0% on the first AED 375,000 of taxable income and 9% above.

Is the AED 5,000,000 de minimis limit absolute?

No. It is a ceiling. The actual limit is the lower of 5% of total revenue or AED 5 million. A smaller business has a smaller limit.

Is selling to UAE consumers from a free zone licence qualifying income?

Generally not. Transactions with natural persons are excluded activities, with narrow exceptions for ship operations, fund management, wealth management and aircraft financing.

Does the QFZP regime apply to mainland companies?

No. The regime is specific to free zone persons. Mainland companies are taxed at the standard 0% / 9% rate.

What is a Designated Zone?

A subset of free zones that the UAE Cabinet has specifically designated for certain VAT and corporate tax purposes. Distribution as a qualifying activity has to be conducted in or from a Designated Zone. Not every free zone is a Designated Zone.

Are audited accounts compulsory for a QFZP?

Yes. The Ministry of Finance's rules on audited accounts require audited financial statements for any company claiming QFZP status, regardless of revenue.

What changed in the 2025 rules?

The 2025 decision replaced the earlier 2023 one and rewrote three qualifying activities: trading of qualifying commodities (new quoted-price test), treasury and financing services (now expressly includes the company's own account), and distribution in or from a Designated Zone (now extends to supplies to public benefit entities). It also aligned the audit condition with the Ministry of Finance's rules on audited accounts.

Can a QFZP also use Small Business Relief?

No. Small Business Relief and QFZP status are alternatives — a taxpayer elects one regime or the other.

Where can I read the rules myself?

The UAE Ministry of Finance publishes the cabinet and ministerial decisions in English on mof.gov.ae. The Federal Tax Authority publishes practitioner-facing guides at tax.gov.ae. Both are the primary sources behind this article.