Free Zone Qualifying Income: Keeping the 0% UAE Rate

What a Qualifying Free Zone Person is

A free zone licence does not, on its own, mean you pay 0% corporate tax. The 0% rate applies only to a Qualifying Free Zone Person (QFZP), and only to that company's Qualifying Income. Under Article 3(2) of Federal Decree-Law No. 47 of 2022 (the Corporate Tax Law), any other taxable income of a QFZP is taxed at 9%. The AED 375,000 nil band that mainland companies get does not apply to that income: the 9% starts from the first dirham.

A Free Zone Person is a company or other juridical person incorporated, established or registered in a free zone, including the free zone branch of a foreign company. Whether it qualifies is tested every tax period, against rules in three layers:

• Article 18 of the Corporate Tax Law sets the headline conditions.
• Cabinet Decision No. 100 of 2023 defines Qualifying Income, the de minimis test and the substance rules. It applies from 1 June 2023.
• Ministerial Decision No. 229 of 2025, issued on 28 August 2025, lists the Qualifying and Excluded Activities and fixes the de minimis thresholds. It repealed Ministerial Decision No. 265 of 2023 and applies from 1 June 2023, so any guidance still citing MD 265 is out of date.

A QFZP still has to register and file annually, and cannot claim Small Business Relief. This guide covers free-zone corporate tax, not multinational top-up tax. If you have not registered, see the corporate tax registration deadline.

The conditions for the 0% rate

Article 18(1) of the Corporate Tax Law and Article 5 of MD 229 of 2025 together set six conditions. A QFZP must satisfy all of them for the tax period.

Transfer pricing catches many owner-managed groups. A free zone company that sells to a mainland sister company, or pays its owner a management fee, is dealing with related parties. Our transfer pricing guide for small businesses covers the arm's length test and the documentation thresholds.

Qualifying vs excluded activities under MD 229

Under Article 3 of CD 100/2023, a QFZP's income is qualifying if it comes from: transactions with another Free Zone Person, unless the activity is excluded; transactions with a non-free-zone person, but only for a Qualifying Activity that is not excluded; or qualifying intellectual property (patents and copyrighted software, under a formula in MD 229 Art 4). A fourth route treats any other income as qualifying, but only if the company passes the de minimis test.

Two definitions matter here. A non-free-zone person is anyone who is not a Free Zone Person, so overseas customers count, not just mainland ones. And for sales to another free zone company, that company must be the beneficial recipient: the person that uses and enjoys the goods or services, not one contractually obliged to pass them on.

Qualifying Activities (MD 229 Art 2(1))

• Manufacturing of goods or materials.
• Processing of goods or materials.
• Trading of Qualifying Commodities: physical trading of metals, minerals, industrial chemicals, energy and agricultural commodities with a quoted price (not products packaged for retail), plus environmental commodities such as carbon credits, related hedging and structured commodity financing.
• Holding shares and other securities for investment purposes (held for at least 12 months).
• Ownership, management and operation of ships used in international transport.
• Reinsurance services.
• Fund management services and wealth and investment management services, where regulated by a UAE Competent Authority.
• Headquarter services to related parties.
• Treasury and financing services to related parties or for the company's own account.
• Financing and leasing of aircraft.
• Distribution of goods or materials in or from a Designated Zone.
• Logistics services (storage and transport for others without taking title, freight forwarding, customs brokerage and similar).
• Activities ancillary to any of the above.

Excluded Activities (MD 229 Art 2(2))

• Any transaction with natural persons, except for ships, fund management, wealth and investment management, and aircraft financing and leasing.
• Banking activities.
• Insurance activities, other than reinsurance and captive insurance provided as a headquarter service.
• Regulated finance and leasing activities, other than commodity trading finance, ship leasing, treasury and aircraft financing.
• Ownership or exploitation of immovable property, other than free zone commercial property let to another Free Zone Person.
• Activities ancillary to any of the above.

Designated Zone distribution has extra conditions. The activity must be carried out in or from a Designated Zone (a zone designated for VAT that is also a free zone for corporate tax), goods entering the UAE must be imported through that zone, and the customer must resell them or process or alter them for sale, or be a public benefit entity. Selling to a mainland company that uses the goods itself is not qualifying distribution. Commodity trading also has a limit: it does not qualify for a company that earns 51% or more of its revenue from distribution, warehousing, logistics or inventory management.

Notice what is missing from the list: general consulting, marketing, IT, recruitment and most professional services. Sold to free zone clients that are the beneficial recipient, they can earn Qualifying Income. Sold to mainland or overseas clients, they produce non-qualifying revenue.

Mainland, natural-person and property income

These income streams fall outside the usual 0% route and are generally taxed at 9%, subject to applicable exemptions. They are removed from both sides of the de minimis calculation, so they cannot make you fail the test:

• Domestic permanent establishment income: income attributable to a branch, office or other place of business in the UAE outside the free zone. It is calculated as if the branch were a separate related party (CD 100/2023 Art 5).
• Foreign permanent establishment income: the same starting treatment for a branch abroad, although the foreign establishment exemption under Article 24 may apply.
• Free zone property income: income from commercial property let to a non-free-zone person, and from any residential or accommodation property, whoever the tenant is (Art 6).
• Non-qualifying IP income: income from trademarks and other marketing intangibles, and income above the qualifying IP formula (Art 7(2)).

Mainland customers are not a problem in themselves. A sale to a mainland company earns Qualifying Income if the activity is a Qualifying Activity, such as manufacturing, logistics or Designated Zone distribution to a reseller. It produces non-qualifying revenue if the activity is not on the list, such as consulting or selling goods to end users.

Natural persons are more restrictive. Any transaction with an individual is an Excluded Activity, unless it falls within the four carve-outs above. A free zone e-commerce company selling to consumers, in the UAE or abroad, earns non-qualifying revenue on every sale.

The de minimis test, worked through

Article 3 of MD 229 sets the test: non-qualifying revenue in a tax period must not exceed 5% of total revenue or AED 5,000,000, whichever is lower. Once total revenue passes AED 100 million, the AED 5 million cap is the lower figure.

Under Article 4 of CD 100/2023, non-qualifying revenue is revenue from Excluded Activities, from non-qualifying activities with non-free-zone persons, and from free zone customers that are not the beneficial recipient. The specified property, permanent establishment and non-qualifying IP revenue described above is removed from both figures before you divide. The test is on revenue, not profit, so a low-margin sales line can push you over even if it earns almost nothing.

Take a trading company in a Designated Zone with AED 40 million of revenue for the year ending 31 December 2025:

Assuming all other conditions are met, the company passes. Income from the AED 1.7 million non-qualifying revenue falls within Qualifying Income and is taxed at 0%; the rent remains taxable at 9%. The gap to the current threshold is AED 185,000. An additional AED 200,000 consulting contract would lift non-qualifying revenue to AED 1.9 million, above the revised AED 1.895 million threshold.

Now scale it up. A company with AED 150 million of revenue for the test and AED 6 million of non-qualifying revenue is at only 4%, yet it fails: 5% would be AED 7.5 million, so the lower AED 5 million cap applies.

Failing the test: the five-period lockout

Under Article 5(2) of MD 229, a company that fails any QFZP condition at any time in a tax period stops being a QFZP from the beginning of that tax period and for the following four tax periods. That is five tax periods in total, normally five years. Failing in the year ending 31 December 2026 means standard taxation for 2026 to 2030.

During the lockout, all of the company's taxable income is taxed at the standard rates: 0% up to AED 375,000 and 9% above. Suppose the company in the example has taxable income of AED 6 million a year, of which AED 400,000 is property income:

Failure is not only about de minimis. Missing audited accounts, thin substance or related-party pricing that is not at arm's length each break a condition and trigger the same lockout. Electing under Article 19 to be taxed at the standard rates also ends QFZP status, from the start of the tax period in which you elect or the following one.

Audited accounts and record duties

Audited financial statements are a condition of QFZP status, not paperwork to catch up on later. For tax periods starting on or after 1 January 2025, Ministerial Decision No. 84 of 2025 requires them for every QFZP regardless of revenue, as well as for any business with revenue above AED 50 million. For earlier periods from 1 June 2023, MD 82 of 2023 applied the same QFZP requirement.

• Accounting standards: IFRS, or IFRS for SMEs if revenue is AED 50 million or less (MD 114 of 2023).
• Retention: keep corporate tax records for 7 years after the end of the tax period (Corporate Tax Law Art 56).
• Revenue coding: code every sale in the ledger by customer type (free zone, mainland, overseas, individual) and by activity, so the de minimis figure can be produced and evidenced. Our month-end close checklist shows how to build this into the monthly routine.
• Substance evidence: keep leases, headcount and payroll records, and board minutes showing where core activities and decisions happen.
• Free zone filings: many free zone authorities also require audited statements for licence renewal. DMCC, for example, requires them to be uploaded within 6 months of the financial year end.

Keep classification evidence available for the audit and tax review. Getting the split right during the year gives you an evidenced de minimis figure for the return.

A year-end QFZP check

1. 1Map every revenue streamList each type of income and classify it: Qualifying Activity or not, Free Zone Person or not, beneficial recipient or not, individual or business.
2. 2Strip out income taxed at 9%Remove the specified property revenue, permanent establishment revenue and non-qualifying IP revenue described above from both sides of the calculation.
3. 3Run the de minimis test every quarterMeasure non-qualifying revenue against both the 5% and AED 5 million limits each quarter, so you can change course before the period closes.
4. 4Check substance and transfer pricingConfirm that staff, premises and decision-making are in the free zone, and that related-party charges are at arm's length and documented.
5. 5Book the audit earlyAppoint an auditor accepted by your free zone and agree a timetable that finishes well before the corporate tax return deadline, 9 months after the year end.
6. 6File the returnReport Qualifying Income and taxable income separately in the corporate tax return, backed by the audited statements and your revenue classification.

If your headroom is tight, treat it like a budget and manage it through the year. HOF Partners can prepare audit-ready accounts and work through the classification with you as part of our corporate tax services.