A UAE free zone company keeps the 0% corporate tax rate only if it is a Qualifying Free Zone Person (QFZP) earning Qualifying Income and meeting every condition in the law. Everything else it earns is taxed at the standard 9%. The single number that decides most cases is the de minimis limit: non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue in a tax period. Cross that line, or fail any other condition, and the company loses QFZP status for that year and the four tax periods that follow. Consultancies in particular sit outside the Qualifying Activities list, which our solo consultancy route works through with the practical consequences.
This guide explains how the 0% and 9% split works in practice, the five conditions a free zone company must meet, which activities count as qualifying versus excluded, how the de minimis test is calculated, and the specific triggers that push a free zone business onto the 9% rate. It applies to companies in Dubai free zones such as DMCC, JAFZA, DIFC, and Meydan, and to free zones across the other emirates.
How Free Zone Corporate Tax Actually Works: 0% vs 9%
The UAE introduced federal corporate tax under Federal Decree-Law No. 47 of 2022, effective for financial years starting on or after 1 June 2023. Mainland businesses pay 0% on taxable income up to AED 375,000 and 9% above that. Free zone companies sit under a separate regime. A company established in a free zone is a Free Zone Person, but that alone does not grant any tax benefit. The benefit exists only for a Qualifying Free Zone Person, and even then it applies at the income level, not the company level.
The distinction that catches most founders off guard is that the 0% rate is not automatic and does not cover the whole company. A QFZP pays 0% on its Qualifying Income and 9% on any Taxable Income that is not qualifying. The two streams are assessed together on one corporate tax return. Understanding the corporate tax basics for small businesses helps before diving into the free zone rules, because the qualifying test sits on top of the ordinary corporate tax framework.
A Qualifying Free Zone Person pays 0% corporate tax on Qualifying Income and 9% on non-qualifying Taxable Income. Free zone status alone gives no benefit. The 0% rate is tested at the income level under Federal Decree-Law No. 47 of 2022 and Cabinet Decision No. 100 of 2023, and it applies only while all QFZP conditions are met.
The Five Conditions to Be a Qualifying Free Zone Person
To hold QFZP status, a free zone company must satisfy all conditions at the same time, in every tax period. Missing one condition removes the 0% rate entirely for that year. The conditions come from Article 18 of the Corporate Tax Law, expanded by Cabinet Decision No. 100 of 2023.
Five conditions must all hold in the same tax period: adequate substance in the free zone, income that qualifies, no election into the standard regime, transfer pricing compliance with documentation, and audited financial statements. These are cumulative. Failing any one of them strips QFZP status and taxes the entire company at 9% for that year and the following four.
| Condition | What it means in practice |
|---|---|
| Adequate substance | The core income-generating activities must be carried out in the free zone, with adequate assets, qualified employees, and operating expenditure. A mailbox company with no real presence fails this test. Substance can be outsourced within the free zone if the QFZP has adequate supervision. |
| Derives Qualifying Income | Income must come from qualifying activities or qualifying transactions, and non-qualifying revenue must stay within the de minimis limit. |
| No election for standard tax | The company must not have elected to be taxed under the standard 9% regime. A QFZP can choose to opt out, but the choice is generally binding for the tax period and the following four. |
| Transfer pricing compliance | The company must apply the arm’s length principle to related-party transactions and maintain transfer pricing documentation, including a master file and local file where thresholds are met. |
| Audited financial statements | The company must prepare audited financial statements, regardless of revenue size. This is a hard requirement for QFZP status, not just a filing formality. |
The audited accounts requirement deserves emphasis because it applies to every QFZP, including small ones with modest revenue. If a company wants the 0% rate, an annual audit is mandatory. Companies that assume they are too small to need an audit often discover the requirement only when they attempt to claim qualifying status on the return.
What Counts as Qualifying Income
Qualifying Income is defined by Cabinet Decision No. 100 of 2023. It falls into three broad buckets: income from transactions with other Free Zone Persons where they are the beneficial recipient, income from qualifying activities conducted with any person, and income from the ownership or exploitation of qualifying intellectual property calculated under the OECD nexus approach.
Qualifying Income covers transactions with other Free Zone Persons (where they benefit from the goods or services), income from qualifying activities listed in the ministerial decision, and qualifying intellectual property income. Income from excluded activities, and dealings with mainland or natural persons outside a qualifying activity, is non-qualifying and taxed at 9%.
Transactions With Other Free Zone Persons
Income from selling goods or supplying services to another Free Zone Person is generally qualifying, provided that other person is the beneficial recipient of the goods or service and the transaction is not an excluded activity. This is the reason many free zone supply chains keep transactions within the free zone ecosystem. If the counterparty simply passes the benefit on to a mainland customer, the beneficial recipient test can fail.
Transactions With Mainland and Foreign Customers
Selling to a mainland UAE business is non-qualifying unless the income comes from a listed qualifying activity, such as manufacturing goods or distributing goods from a Designated Zone. Sales to foreign customers can be qualifying where they arise from a qualifying activity. A common qualifying route is distribution of goods in or from a Designated Zone, provided the goods are not imported into the UAE mainland for domestic use. Companies weighing mainland access should read our guide on converting a free zone company to mainland before restructuring.
Qualifying Activities vs Excluded Activities
The activity lists were originally set by Ministerial Decision No. 265 of 2023 and are now governed by Ministerial Decision No. 229 of 2025, which repealed and replaced MD 265 while remaining effective retroactively from 1 June 2023. MD 229 broadened the qualifying commodities definition to include industrial chemicals, by-products, and environmental commodities such as carbon credits, and it recognized structured financing arrangements linked to commodity trading. The core structure of the two lists is unchanged.
Qualifying activities include manufacturing, processing, trading of qualifying commodities, holding of shares and securities, ship operation, reinsurance, fund and wealth management, headquarter and treasury services to related parties, financing and leasing of aircraft, and distribution from a Designated Zone. Excluded activities include most transactions with natural persons, UAE-regulated banking and insurance, and income from UAE immovable property.
| Qualifying Activities (0% eligible) | Excluded Activities (9%, cannot be qualifying) |
|---|---|
| Manufacturing and processing of goods or materials | Transactions with natural persons (individuals), except certain regulated activities such as fund, wealth, and reinsurance services |
| Trading of qualifying commodities (metals, minerals, energy, agricultural and environmental commodities) | Regulated banking, insurance, finance, and leasing activities (other than treasury and financing to related parties, and aircraft finance/leasing) |
| Holding of shares and other securities for investment purposes | Ownership or exploitation of UAE immovable property, other than commercial property inside a free zone let to another Free Zone Person |
| Ownership, management, and operation of ships | Ownership or exploitation of intellectual property that is not qualifying IP |
| Fund management, wealth and investment management, and regulated reinsurance services | Any activity that is ancillary to an excluded activity |
| Headquarter services, treasury and financing services to related parties, and financing/leasing of aircraft | |
| Distribution of goods in or from a Designated Zone, and logistics services |
Note the crossover: income from an excluded activity is never qualifying, even if the counterparty is another Free Zone Person. And income from a qualifying activity can lose its status if it becomes ancillary to an excluded activity. The activity list is the first filter, and the counterparty and location tests apply on top of it. This is different from VAT registration thresholds, which follow separate rules and are unaffected by QFZP status.
The De Minimis Rule: How Much Non-Qualifying Revenue Is Allowed
The de minimis rule is the safety valve that lets a QFZP earn a small amount of non-qualifying revenue without losing the 0% rate. It is also the most common point of failure, because it is a revenue test, not a profit test, and it uses a hard ceiling.
The de minimis requirement is met when non-qualifying revenue does not exceed the lower of AED 5 million or 5% of total revenue in a tax period. A company with AED 40 million total revenue is capped at AED 2 million of non-qualifying revenue, because 5% of 40 million is below the AED 5 million ceiling. Exceed the limit and QFZP status is lost.
Two points are easy to miss. First, the test looks at revenue, not net profit, so a low-margin non-qualifying line can breach the limit even if it earns little. Second, certain revenue is excluded from both sides of the calculation. Under Cabinet Decision No. 100 of 2023, revenue attributable to a domestic or foreign permanent establishment, and revenue from immovable property that is taxed at 9% anyway, is left out of both the non-qualifying figure and the total revenue figure, because that income is already outside the 0% regime.
Decision point: stay QFZP or elect the standard 9%. If your non-qualifying revenue regularly sits near the de minimis ceiling, the 0% rate is fragile. One large mainland contract can breach the limit and trigger 9% on all income for five tax periods. Some companies deliberately elect the standard 9% regime for predictability, or route non-qualifying business through a separate mainland entity. A QFZP also cannot use Small Business Relief, so the choice between chasing 0% and accepting 9% should be modeled before the tax period, not after.
What Tips a Free Zone Company Into the 9% Rate
Several distinct triggers move a free zone company, or part of its income, onto the 9% rate. Some affect only a slice of income; others remove QFZP status entirely.
A free zone company pays 9% when it breaches the de minimis limit, fails any of the five conditions, earns income from an excluded activity, operates through a mainland or foreign permanent establishment, or earns non-qualifying income from mainland customers. A full breach of QFZP conditions taxes all income at 9% for that tax period and the next four.
| Scenario | Tax outcome |
|---|---|
| QFZP, all income from qualifying activities, within de minimis | 0% on qualifying income |
| QFZP with small non-qualifying revenue below the de minimis limit | 0% on qualifying income; 9% on the non-qualifying portion |
| Non-qualifying revenue exceeds AED 5 million or 5% of total revenue | 9% on all taxable income; QFZP status lost for that year plus 4 following |
| Income attributable to a mainland or foreign permanent establishment | 9% on that PE income, even if the rest stays 0% |
| No audited financial statements, or transfer pricing not documented | 9% on all income; condition failure removes QFZP status |
| Company elects the standard corporate tax regime | 9% above AED 375,000, standard rules apply |
The five-year consequence is the harshest feature of the regime. Losing QFZP status is not a one-year setback. The company is taxed at 9% on all its income in the year of failure and in the four subsequent tax periods, even if it fixes the underlying issue the following year. This is why substance, de minimis headroom, and audit readiness are worth protecting well before year end.
Does the AED 375,000 Threshold Apply to Free Zone Companies?
No. The AED 375,000 zero-rate band that mainland businesses enjoy does not layer on top of the QFZP regime. A Qualifying Free Zone Person’s non-qualifying Taxable Income is taxed at 9% from the first dirham, with no 0% starting band. The 0%/9% split on qualifying versus non-qualifying income is the whole benefit, and there is no additional threshold relief.
This surprises many founders who assume the free zone regime is simply the mainland regime with a bigger 0% allowance. It is not. A mainland company earning AED 400,000 of profit pays 9% only on AED 25,000. A QFZP earning AED 400,000 of non-qualifying profit pays 9% on the full AED 400,000. The trade-off is that genuinely qualifying income is taxed at 0% with no cap, which is far more valuable for businesses whose income is mostly qualifying. Before registering, confirm your position through corporate tax registration on EmaraTax.
What Actually Happens on the Corporate Tax Return
In practice, a QFZP files one corporate tax return that reports both income streams. The company calculates qualifying income taxed at 0% and non-qualifying taxable income taxed at 9%, supported by audited financial statements that let the Federal Tax Authority trace how each figure was reached. The audit does not need to split the accounts by income type, but the company must hold documentation showing the qualifying income calculation.
When you register on EmaraTax, the system records whether you are claiming QFZP status. On the return, you report total revenue, then break out non-qualifying revenue to demonstrate the de minimis test is met, then apply 0% and 9% to the respective income. The FTA can request the audited statements and transfer pricing documentation on review. Missing the corporate tax return filing deadlines carries penalties regardless of whether your rate is 0% or 9%, so a 0% liability does not remove the filing obligation. Businesses in financial free zones such as DIFC and ADGM follow the same federal corporate tax rules, since the QFZP regime is national.
FAQ
Do free zone companies pay corporate tax in the UAE?
Free zone companies are within the scope of UAE corporate tax, but a Qualifying Free Zone Person pays 0% on Qualifying Income. Non-qualifying income is taxed at 9%. Free zone status by itself does not exempt a company; the 0% rate depends on meeting all QFZP conditions.
What is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a free zone company that meets five conditions: adequate substance in the free zone, deriving Qualifying Income within the de minimis limit, not electing the standard regime, transfer pricing compliance, and audited financial statements. Meeting all of them unlocks the 0% rate on qualifying income.
What is qualifying income for a free zone company?
Qualifying Income includes transactions with other Free Zone Persons who are the beneficial recipient, income from qualifying activities such as manufacturing or distribution from a Designated Zone, and qualifying intellectual property income. It is defined by Cabinet Decision No. 100 of 2023 and taxed at 0%.
Do I still get 0% if I sell to mainland customers?
Selling to mainland UAE customers is generally non-qualifying and taxed at 9%, unless the income comes from a listed qualifying activity such as manufacturing or distribution from a Designated Zone. Small amounts of non-qualifying revenue are tolerated under the de minimis rule, but larger mainland sales can remove QFZP status.
What is the de minimis rule?
The de minimis rule allows a QFZP to earn non-qualifying revenue up to the lower of AED 5 million or 5% of total revenue in a tax period. Staying below this limit preserves QFZP status. Exceeding it means the company loses the 0% rate on all income for that year and the following four tax periods.
Does the AED 375,000 threshold apply to free zone companies?
No. The AED 375,000 zero-rate band does not apply to a Qualifying Free Zone Person. Non-qualifying taxable income is taxed at 9% from the first dirham. The benefit of the QFZP regime is the 0% rate on qualifying income, not an additional threshold on non-qualifying income.
Do I need audited accounts to keep the 0% rate?
Yes. Preparing audited financial statements is a mandatory QFZP condition, regardless of revenue size. A company that does not have audited accounts cannot claim qualifying status and is taxed at 9% on all income. The audit supports the qualifying income calculation on the corporate tax return.
Can I lose QFZP status, and for how long?
Yes. Failing any of the five conditions, or breaching the de minimis limit, removes QFZP status. The loss applies for the tax period of the failure and the four subsequent tax periods, so the company is taxed at 9% on all income for a total of five years, even if the issue is corrected the next year.
Free zone vs mainland: which corporate tax treatment is better?
It depends on where income comes from. A business with mostly qualifying income benefits from the uncapped 0% rate as a QFZP. A business selling largely to the mainland may find the standard 9% regime, with its AED 375,000 zero band, simpler and sometimes cheaper. Model both before choosing.
Can a free zone company use Small Business Relief?
A Qualifying Free Zone Person cannot claim Small Business Relief. A free zone company that elects out of the QFZP regime into the standard regime may access Small Business Relief if it meets the revenue threshold. The two reliefs are mutually exclusive for a given tax period.
Official Sources
- Federal Tax Authority — UAE Corporate Tax (Federal Decree-Law No. 47 of 2022)
- Cabinet Decision No. 100 of 2023 — Determining Qualifying Income for the Qualifying Free Zone Person
- Ministerial Decision No. 265 of 2023 — Qualifying Activities and Excluded Activities (superseded)
- Ministerial Decision No. 229 of 2025 — Qualifying Activities and Excluded Activities (current)
- Federal Tax Authority — Corporate Tax Guide on Free Zone Persons (CTGFZP)
- UAE Ministry of Finance — Corporate Tax
Information current as of July 2026. Corporate tax rules, thresholds, and activity lists can change, and their application depends on your specific facts, free zone, and income mix. This article is general information, not tax advice. Verify your position with the Federal Tax Authority or a qualified tax advisor before filing.
