Qualifying Free Zone Person (QFZP) Tax Rules

The UAE's free zone tax regime is one of the most misunderstood parts of the new Corporate Tax (CT) law. The headline pitch of "0% tax in the free zone" is true, but only for free zone companies that meet the strict definition of a Qualifying Free Zone Person (QFZP) and only on the slice of their income classified as Qualifying Income. Everything else is taxed at the standard 9% rate, with no AED 375,000 0% band.

This guide walks through the QFZP conditions, the difference between qualifying and non-qualifying income, the de minimis rule, and what happens if you fail to maintain QFZP status.

What is a Qualifying Free Zone Person?

A QFZP is a free zone juridical person (typically a free zone LLC or branch) that meets all of the conditions set out in Article 18 of the CT Law and Cabinet Decision No. 100 of 2023. If those conditions are satisfied, the entity benefits from the 0% rate on Qualifying Income for the relevant tax period.

Crucially, every free zone company starts out being treated as a regular taxpayer at 9%. QFZP status is an opt-out from the standard regime that the company has to actively claim, and re-claim each year, by meeting the conditions and reporting them correctly.

The QFZP conditions

A free zone company is a Qualifying Free Zone Person only if all of the following are satisfied during the relevant tax period:

1. Maintains adequate substance in the UAE. The entity must conduct its "core income-generating activities" in a free zone, with adequate assets, qualified employees and operating expenditure. A nameplate company won't qualify.
2. Derives Qualifying Income (see the next section).
3. Has not elected to be taxed at standard rates (free zone companies can voluntarily opt out of the QFZP regime).
4. Complies with the arm's length / transfer pricing rules and maintains transfer pricing documentation.
5. Meets the de minimis requirement for non-qualifying revenue (see below).
6. Prepares audited financial statements.

Failing any one of these conditions in a tax period means the entity is taxed at standard rates (9%) for that period, AND becomes ineligible for QFZP status for the following four tax periods. This is one of the harshest cliffs in the entire CT law.

Qualifying Income vs Non-Qualifying Income

Qualifying Income is the slice of a QFZP's income that is taxed at 0%. It includes:

• Income from transactions with other Free Zone Persons (provided they are the "beneficial recipient").
• Income from Qualifying Activities with non-Free Zone persons. The list of Qualifying Activities is defined by Ministerial Decision and includes things like manufacturing, processing, holding shares and securities, fund management for unrelated parties, treasury services to related parties, logistics, regulated reinsurance, and certain distribution activities from a designated zone.
• Other income that is ancillary to the above and meets the de minimis rule.

Non-Qualifying Income is everything else. For example, income from Excluded Activities (banking, insurance, finance and leasing with non-Free-Zone persons, ownership or exploitation of intellectual property other than as part of a qualifying activity, and certain dealings in immovable property outside the free zone). Non-Qualifying Income is taxed at 9%, with no AED 375,000 0% band. There is no further tapering.

The de minimis rule

A QFZP is allowed to earn a small amount of non-qualifying revenue without losing QFZP status, provided it stays under the de minimis threshold. The non-qualifying revenue must be the lower of:

• 5% of the entity's total revenue, or
• AED 5,000,000.

Breach the de minimis threshold by even a small amount and the entity loses QFZP status for the whole period, and every dirham of its income (qualifying or not) becomes taxable at 9% with no 375k band. This is why QFZP planning often comes down to careful tracking of non-qualifying revenue throughout the year.

Worked example

DIFC Trading FZ-LLC has total revenue of AED 10,000,000 in 2025, split as follows:

• AED 8,400,000 from sales of imported goods to other Free Zone Persons (Qualifying).
• AED 1,400,000 from sales to UAE mainland customers via a designated zone (Qualifying, distribution).
• AED 200,000 of consulting fees billed to UAE mainland clients (Non-Qualifying).

Non-qualifying revenue = AED 200,000 = 2% of total. That's under both 5% and AED 5M, so de minimis is satisfied and the entity remains a QFZP. Tax payable:

• Qualifying Income (AED 9,800,000) × 0% = AED 0
• Non-Qualifying Income (AED 200,000) × 9% = AED 18,000
• Total = AED 18,000

Note the absence of the AED 375,000 0% band. For QFZPs, the 9% applies to the very first dirham of non-qualifying income.

Losing QFZP status

Beyond the de minimis cliff, the most common ways to lose QFZP status are:

• Engaging in an Excluded Activity (e.g. unregulated lending to mainland businesses).
• Failing the substance test (outsourcing core activities outside the free zone, or having no UAE employees.
• Failing to keep audited financial statements or transfer pricing documentation.

Losing QFZP status results in 9% standard taxation for the affected period AND the next four periods. That is a five-year cooling-off period that makes recovery slow.

QFZP vs Small Business Relief

A free zone company can be either a QFZP (0% on Qualifying Income) OR elect SBR (0% on all income up to AED 3M revenue), but not both in the same period. For most small free zone consultancies, SBR is simpler. For larger or growth-stage businesses, QFZP is more valuable. The free calculator can help you compare the two scenarios for your own numbers.