The Starting Point: Free Zone Companies Are Subject to Corporate Tax
A common misconception among free zone business owners is that their company is exempt from Corporate Tax. It is not. Under Federal Decree-Law No. 47 of 2022, all juridical persons incorporated in UAE free zones are taxable persons subject to Corporate Tax from the first financial year beginning on or after 1 June 2023. The free zone location does not create an exemption from Corporate Tax in the way it creates an exemption from customs duties or certain licensing fees.
What the free zone framework provides is the possibility of a 0% Corporate Tax rate on qualifying income for companies that meet the specific conditions to be classified as a Qualifying Free Zone Person (QFZP). These are two separate things: universal Corporate Tax applicability on one hand, and a 0% rate on qualifying income for companies meeting specific conditions on the other. A free zone company that does not meet the QFZP conditions is taxed at the standard rates (0% on income up to AED 375,000, 9% above that) just like a mainland company.
What a Qualifying Free Zone Person Is
A Qualifying Free Zone Person is a free zone juridical entity that satisfies all of the conditions set out in Article 18 of Federal Decree-Law No. 47 of 2022 and the associated Ministerial Decisions. Meeting these conditions allows the company to apply a 0% Corporate Tax rate to its qualifying income. Non-qualifying income remains subject to the standard 9% rate even for a QFZP.
The 5 cumulative conditions that must all be satisfied simultaneously are:
Condition 1: Adequate Substance in the UAE
The QFZP must maintain adequate substance in the UAE. This means the company must have a genuine operational presence: qualified employees carrying out core income-generating activities, adequate premises, and operational expenditure proportionate to the level of activity being conducted. A shell company or brass-plate entity with minimal presence cannot satisfy this condition.
The substance requirement is assessed per activity. A QFZP conducting trading, manufacturing, and holding activities needs to demonstrate substance across each relevant function. Economic Substance Regulations filings, where applicable to the specific activity, are a related but separate obligation.
Condition 2: Qualifying Income
The 0% rate applies only to qualifying income. Income that does not qualify is taxed at 9%. Qualifying income includes:
- Income from transactions with other free zone persons, provided the transaction involves qualifying activities
- Income from transactions with non-free-zone persons (mainland UAE persons and foreign persons) that relate to qualifying activities listed in the Cabinet Decisions
- Any other income specifically defined as qualifying income in the Corporate Tax Law or associated decisions
Income from the following is generally not qualifying income:
- Transactions with mainland UAE persons (other than those that fall within defined qualifying categories)
- Intellectual property income, unless the specific IP conditions for qualifying IP income are met
- Income from immovable property in the UAE
- Income from finance and leasing activities conducted with mainland persons
This distinction between qualifying and non-qualifying income requires active management. A QFZP cannot simply assume all income is qualifying. Each revenue stream must be assessed and classified correctly in the Corporate Tax return.
Condition 3: De Minimis Requirement
A QFZP can have some non-qualifying income without losing its QFZP status, provided that non-qualifying revenue does not exceed the lower of:
- AED 5,000,000, or
- 5% of the QFZP’s total revenue in the tax period
Where non-qualifying revenue exceeds both of these limits, the company loses QFZP status for that tax period. All income for that period is then taxed at the standard 9% rate (above AED 375,000), and the company is disqualified from QFZP status for that and the following 4 tax periods (5 periods in total).
Tracking non-qualifying income throughout the year, not just at year-end, is essential. A company that discovers it has exceeded the de minimis threshold after the fact cannot retroactively restructure the transactions that caused the breach.
Condition 4: Audited Financial Statements
Under Ministerial Decision No. 84 of 2025, effective for tax periods commencing on or after 1 January 2025, all Qualifying Free Zone Persons must maintain audited financial statements. This audit requirement applies regardless of the QFZP’s annual revenue level. A QFZP with AED 1 million in revenue requires an audit just as much as one with AED 500 million.
The auditor must be registered with the Ministry of Economy as a licensed audit firm, and for companies in specific free zones, must also appear on that free zone’s approved auditor list. The audit is a mandatory prerequisite for claiming the 0% rate; a QFZP that does not produce audited financial statements cannot access the rate regardless of whether it meets all other conditions.
Condition 5: Compliance with Transfer Pricing Rules
A QFZP must comply with the transfer pricing provisions in the Corporate Tax Law. Transactions between the QFZP and related parties or connected persons must be conducted at arm’s length, and the QFZP must maintain appropriate transfer pricing documentation where the value of related-party transactions exceeds the relevant thresholds set in the Ministerial Decisions. Failure to comply with transfer pricing rules is a condition breach that can affect QFZP status.
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The Rate Structure for Free Zone Companies
| Scenario | Tax Rate |
|---|---|
| QFZP: qualifying income | 0% |
| QFZP: non-qualifying income (within de minimis) | Treated as qualifying income: 0% |
| QFZP: non-qualifying income exceeding de minimis | QFZP status lost: 9% on all income above AED 375,000 |
| QFZP: income from mainland branch | 9% on mainland-generated taxable income |
| Free zone company not meeting QFZP conditions | Standard rates: 0% up to AED 375,000; 9% above |
| Free zone company electing standard CT rates | Standard rates apply for 5 consecutive tax periods |
Mainland Branches of Free Zone Companies
A QFZP that operates a mainland branch is taxed at the standard 9% rate on taxable income attributable to the mainland branch. The 0% rate applies only to the free zone entity’s qualifying income from free zone and international activities, not to income generated through mainland operations.
Where a QFZP has a mainland branch, it must maintain separate accounting records for the free zone and mainland activities to correctly attribute income and expenses between the two. Without this separation, the income cannot be accurately classified and the correct rates cannot be applied.
Electing Standard Corporate Tax Rates
A QFZP can voluntarily elect to be subject to the standard Corporate Tax rates (0% and 9%) rather than the QFZP regime. Once made, this election applies for a minimum of 5 consecutive tax periods and cannot be revoked during that time. A company might elect the standard rates where its business model means most of its income is non-qualifying and it prefers the simplicity of the standard regime over the complexity of managing QFZP conditions.
What Disqualifies a Company From QFZP Status
QFZP status is not a once-and-done determination. It must be satisfied in every tax period. The conditions most commonly breached include:
- Substance failure: reducing headcount, relocating key functions outside the UAE, or moving to a virtual office without maintaining genuine operational substance
- De minimis breach: non-qualifying revenue exceeding AED 5 million or 5% of total revenue due to increased mainland transactions or new income streams not assessed for qualifying status
- Audit not completed: failure to produce audited financial statements for the tax period, regardless of revenue level, disqualifies the QFZP claim for that period
- Transfer pricing non-compliance: related-party transactions not at arm’s length or without adequate documentation
Disqualification in any tax period results in the standard 9% rate applying to all income above AED 375,000 for that period plus 4 subsequent periods. The financial consequence of a single year’s breach is therefore not limited to that year alone.
Registration and Filing Obligations for Free Zone Companies
All free zone companies, regardless of whether they qualify as QFZPs, must:
- Register for Corporate Tax through EmaraTax within 3 months of incorporation
- File an annual Corporate Tax return within 9 months of the end of the tax period
- Maintain accounting records for 7 years from the end of the relevant tax period
- Prepare IFRS financial statements as the basis for the Corporate Tax return
- Pay any Corporate Tax due within 9 months of the financial year end
A QFZP additionally needs to maintain and retain the documentation supporting each condition: substance evidence, qualifying income classification, de minimis calculation, audited financial statements, and transfer pricing documentation.
Frequently Asked Questions (FAQs)
Are UAE free zone companies exempt from Corporate Tax?
No. All free zone companies are taxable persons subject to Corporate Tax under Federal Decree-Law No. 47 of 2022. What free zone companies may access is a 0% rate on qualifying income, provided they meet all the conditions to be a Qualifying Free Zone Person. Companies that do not meet these conditions are taxed at standard rates.
What is a Qualifying Free Zone Person?
A QFZP is a free zone juridical entity that satisfies all 5 conditions in Article 18 of the Corporate Tax Law: adequate UAE substance, qualifying income generation, de minimis compliance (non-qualifying revenue below AED 5 million and 5% of total revenue), audited financial statements, and transfer pricing compliance. All conditions must be met in every tax period.
What is the de minimis rule for QFZP status?
Non-qualifying revenue must not exceed the lower of AED 5,000,000 or 5% of total revenue in the tax period. Where both thresholds are exceeded, the company loses QFZP status for that period and the following 4 periods, with standard Corporate Tax rates applying throughout.
Does a QFZP need to have its financial statements audited?
Yes. Under Ministerial Decision No. 84 of 2025, effective from 1 January 2025, all QFZPs must maintain audited financial statements regardless of annual revenue. The audit is a mandatory condition for claiming the 0% rate, not an optional compliance step.
What happens if a free zone company loses QFZP status?
All income above AED 375,000 is taxed at 9% for the period of disqualification and the following 4 tax periods. Income classification, substance, and audit requirements must all be re-established before QFZP status can be reclaimed after that 5-period exclusion.
Can a QFZP transact with mainland UAE customers?
Yes, but income from most mainland transactions is not qualifying income. Exceeding the de minimis threshold through non-qualifying mainland transactions can trigger loss of QFZP status. A QFZP with significant mainland business should carefully assess the qualifying status of each transaction and monitor its non-qualifying revenue position throughout the year.
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co. supports free zone companies across the UAE with QFZP eligibility assessment, qualifying income classification, de minimis monitoring, transfer pricing documentation, Corporate Tax return preparation, and the mandatory audited financial statements required under Ministerial Decision No. 84 of 2025. As an approved auditor across more than 20 UAE free zones, our team provides both the audit and the underlying accounting services within a single coordinated engagement.
Contact Farahat & Co. today to discuss your free zone Corporate Tax and QFZP compliance requirements.
