The 0% free zone rate: how to qualify as a Qualifying Free Zone Person

UAE corporate tax is charged at 0% on taxable income up to AED 375,000 and 9% above that. A company in a free zone can pay 0% on its qualifying income, without that limit, if it is a Qualifying Free Zone Person (QFZP). The regime is often misunderstood: a free zone licence alone does not give the 0% rate. This guide summarises the rules, drawing on the Federal Tax Authority (FTA) and PwC's Worldwide Tax Summaries.

The conditions

The FTA's Corporate Tax Guide on Free Zone Persons, issued on 26 May 2024, sets out the conditions a Free Zone Person must meet. As summarised by PwC, a QFZP must meet all of them:

• It is a juridical person registered in a free zone, including a branch.
• It maintains adequate substance in a free zone.
• It derives qualifying income.
• It has not elected to be subject to the standard corporate tax regime.
• It complies with all transfer pricing rules and documentation requirements.
• Its non-qualifying revenue does not exceed the de minimis requirements.
• It prepares audited IFRS financial statements.

Adequate substance

The core income-generating activities must be carried out in a free zone, with adequate assets, qualified employees and operating expenditure. PwC notes that these activities may be outsourced if they are adequately supervised.

What counts as qualifying income

• Income from transactions with other Free Zone Persons, except income from excluded activities.
• Income from transactions with persons outside the free zones, but only from qualifying activities that are not excluded activities.
• Income from owning or exploiting qualifying intellectual property.
• Any other income, provided the de minimis requirements are met.

Qualifying activities

PwC lists the qualifying activities as:

• manufacturing of goods or materials
• processing of goods or materials
• trading of qualifying commodities
• holding of shares and other securities for investment purposes
• ownership, management and operation of 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 its own account
• financing and leasing of aircraft
• logistics services
• distribution of goods or materials in or from a Designated Zone
• activities ancillary to any of the above.

General consulting, marketing or software services supplied to mainland customers are not on this list. Income from those services can only reach the 0% rate when it comes from other Free Zone Persons, or falls within the de minimis allowance.

Excluded activities

• Transactions with natural persons, with exceptions for certain shipping, aircraft, and fund, wealth and investment management activities.
• Regulated banking, finance, leasing and insurance activities.
• Owning or exploiting immovable property, except transactions with Free Zone Persons involving commercial property in a free zone.

The de minimis test

Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower. Certain revenue is left out of both sides of the calculation, including revenue from certain free zone property, from intellectual property, and revenue attributable to a domestic or foreign permanent establishment.

Mainland branches

A place of business outside the free zone in the UAE, such as a mainland branch, is a domestic permanent establishment. Its profits are taxed at 9% as if it were a separate person. PwC notes that this does not disqualify the QFZP's 0% treatment on its qualifying income and is not counted in the de minimis test.

If a condition is missed

A Free Zone Person that fails any condition is taxed at 9% on its full income for the current year and the next four years, and may test its QFZP status again in the sixth year. Planning before the first tax period starts is therefore worth more than correcting the position later.

What to do

• Map every expected revenue stream against the qualifying activities and the excluded activities before you choose a free zone.
• Model non-qualifying revenue against the 5% or AED 5 million limit each year.
• Put real substance in the free zone: people, premises and decision-making.
• Prepare transfer pricing documentation for related-party transactions and arrange an annual audit of IFRS financial statements.
• Consider a mainland branch for activities that would otherwise break the de minimis limit.

Our corporate tax, transfer pricing and audit support services cover QFZP reviews, documentation and year-end readiness. See also our guide to choosing a free zone or mainland company.

Sources

• Federal Tax Authority: FTA issues Corporate Tax Guide on Free Zone Persons (26 May 2024)
• PwC Worldwide Tax Summaries: United Arab Emirates, tax credits and incentives (last reviewed 9 September 2026)
• Gulf News: De minimis requirements, what UAE free zone companies should know

This page gives general information as at the date shown and is not advice for your specific situation. Rules in other countries are summarised for orientation; your home-country position should be confirmed before you act.