Setting up in a UAE free zone does not automatically mean your company pays 0% Corporate Tax.
A free zone company can benefit from the 0% rate on its Qualifying Income only if it meets the conditions to be treated as a Qualifying Free Zone Person, commonly shortened to QFZP. Income that does not qualify can be subject to Corporate Tax at 9%. (FTA UAE)
This distinction matters because QFZP status is not simply determined when a company is incorporated. It depends on how the company operates, where its income comes from, the activities it performs, its level of substance in the UAE, its transfer pricing compliance and its financial reporting.
A business that wants to preserve the 0% rate therefore needs to manage its tax position throughout the year, not only when the Corporate Tax return is due.
Quick Answer: How Can a Free Zone Company Keep the 0% Corporate Tax Rate?
To remain a Qualifying Free Zone Person, a free zone business must satisfy the conditions in Article 18 of Federal Decree-Law No. 47 of 2022, including maintaining adequate substance in the UAE, deriving Qualifying Income, complying with transfer pricing requirements and not electing to be taxed under the standard Corporate Tax regime. Additional requirements include meeting the de minimis test and preparing audited financial statements. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
The 0% rate applies to Qualifying Income, rather than automatically applying to every dirham earned by a free zone business. (FTA UAE)
What Is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a Free Zone Person that meets the specific conditions established under the UAE Corporate Tax Law and its implementing decisions.
Article 18 of Federal Decree-Law No. 47 of 2022 sets out the core requirements. A QFZP must maintain adequate substance in the UAE, derive Qualifying Income, avoid making an election to enter the normal Corporate Tax regime, comply with the arm’s length principle and relevant transfer pricing documentation requirements, and satisfy any additional conditions prescribed by the Minister. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
This means that having a free zone trade licence and office address alone is not enough.
The company’s actual activities, customers, transactions, employees, expenditure, assets and financial records can all affect whether the conditions continue to be met.
What Corporate Tax Rate Does a Qualifying Free Zone Person Pay?
The UAE applies two relevant Corporate Tax rates to a QFZP.
| Type of income | Corporate Tax treatment |
|---|---|
| Qualifying Income | 0% |
| Taxable Income that is not Qualifying Income | 9% |
The Federal Tax Authority confirms that the preferential free zone regime applies the 0% Corporate Tax rate specifically to Qualifying Income. (FTA UAE)
An important difference from the normal Corporate Tax regime is that a QFZP does not simply apply the ordinary AED 375,000 0% threshold to its non-qualifying taxable income. The FTA’s Corporate Tax guidance explains that non-qualifying Taxable Income of a QFZP is subject to the general 9% rate rather than receiving the normal AED 375,000 threshold treatment. (FTA UAE)
What Conditions Must a QFZP Continue to Meet?
Keeping QFZP status requires more than checking the type of business licence your company holds.
Maintain Adequate Substance in the UAE
A Qualifying Free Zone Person must conduct its core income-generating activities in a Free Zone and maintain adequate substance in the UAE.
What counts as adequate depends on the nature and scale of the business. The FTA explains that relevant factors can include qualified full-time employees, operating expenditure and physical assets, considered in relation to the company’s activities and income. (FTA UAE)
For example, a company generating significant income from an activity while having little operational capability to perform that activity in the UAE may need to examine whether its substance is appropriate.
Substance should therefore reflect what the company actually does rather than being treated as a paperwork exercise.
Derive Qualifying Income
The company must earn income that falls within the definition of Qualifying Income.
Cabinet Decision No. 100 of 2023 provides several categories. These include certain income from transactions with other Free Zone Persons, income from Non-Free Zone Persons where the income relates to specified Qualifying Activities, certain income from Qualifying Intellectual Property and other income that satisfies the de minimis conditions. (FTA UAE)
For transactions with another Free Zone Person, the rules also consider whether that customer is the beneficial recipient of the relevant goods or services.
The identity of the customer alone is therefore not always sufficient to determine the tax outcome.
Stay Within the De Minimis Limit
A QFZP is allowed a limited amount of non-qualifying revenue without immediately losing its status.
The de minimis requirement is satisfied when non-qualifying revenue does not exceed the lower of:
5% of total revenue or AED 5 million during the relevant Tax Period. (FTA UAE)
Consider a company with AED 20 million in relevant total revenue.
Five percent is AED 1 million. Because AED 1 million is lower than AED 5 million, the company’s applicable de minimis ceiling would generally be AED 1 million.
If relevant non-qualifying revenue exceeds that threshold, the consequences can be significantly greater than simply paying 9% on the excess amount.
Prepare Audited Financial Statements
A Qualifying Free Zone Person must prepare audited financial statements for Corporate Tax purposes.
The FTA’s Free Zone Persons guide makes clear that this applies to QFZPs regardless of the amount of revenue they earn. (FTA UAE)
Ministerial Decision No. 229 of 2025 also confirms audited financial statements as one of the additional conditions for QFZP status, with the audit requirement linked to Ministerial Decision No. 84 of 2025. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
This makes accurate bookkeeping important well before the annual audit begins.
Transactions, contracts, invoices, expenses and related-party dealings should be recorded correctly throughout the financial year.
Follow Transfer Pricing Rules
QFZPs are also subject to the UAE’s transfer pricing framework.
Transactions with Related Parties must comply with the arm’s length principle, meaning that pricing should broadly reflect terms that independent parties would have agreed under comparable circumstances.
Relevant transfer pricing documentation must also be maintained where the applicable requirements are met. (FTA UAE)
For a founder who owns several businesses, or a UAE company dealing regularly with a parent, subsidiary or another related entity, this is particularly important.
What Income Can Qualify for the 0% Rate?
The answer depends on both the type of transaction and the activity producing the income.
Income from transactions with another Free Zone Person can generally fall within Qualifying Income, provided the income is not generated from an Excluded Activity and the relevant conditions are satisfied.
Income earned from customers outside the free zone can also qualify, but typically only where it arises from a recognised Qualifying Activity and is not an Excluded Activity. (FTA UAE)
Ministerial Decision No. 229 of 2025 currently governs Qualifying Activities and Excluded Activities. It replaced Ministerial Decision No. 265 of 2023 and introduced further clarification to areas including qualifying commodity trading and treasury and financing activities. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
This is why businesses should not assume that “international income” or “free zone income” automatically qualifies for 0%.
The underlying activity and counterparty relationship matter.
What Are Some Examples of Qualifying Activities?
Depending on the detailed conditions, the Free Zone Corporate Tax framework recognises activities in areas such as manufacturing and processing, holding shares and other securities for investment purposes, ship ownership and operation, reinsurance, regulated fund management, regulated wealth and investment management, headquarters services, treasury and financing activities, aircraft financing and leasing, logistics and certain distribution activities.
The rules also address qualifying commodity trading. Ministerial Decision No. 229 of 2025 expanded and clarified this area to cover specified metals, minerals, industrial chemicals, energy and agricultural commodities, associated by-products and environmental commodities where the required quoted-price conditions are satisfied. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
Whether income actually qualifies depends on the precise facts and requirements applicable to the activity.
A business should therefore assess the transaction itself rather than relying only on the activity name shown on its licence.
What Income Can Create Problems for QFZP Status?
Certain activities are treated as Excluded Activities under the Free Zone Corporate Tax rules.
The framework covers exclusions involving areas such as certain transactions with natural persons, some financial and insurance activities, certain intellectual property income and particular immovable-property transactions, subject to defined exceptions. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
Income from an activity that is not a Qualifying Activity can also become non-qualifying where the customer is a Non-Free Zone Person.
This makes revenue classification essential.
For example, a company may conduct several activities under one licence. One revenue stream may meet the Qualifying Income conditions while another may not. Accounting records should make it possible to identify those streams separately.
What Happens If You Exceed the De Minimis Threshold?
This is one of the most important risks to understand.
If a Free Zone Person fails to meet the qualifying conditions, the consequences are not necessarily limited to the transaction that caused the failure.
Ministerial Decision No. 229 of 2025 provides that where a QFZP fails to satisfy the required conditions during a Tax Period, it ceases to be a QFZP from the beginning of that Tax Period and for the following four Tax Periods. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
In practical terms, this can mean losing access to the Free Zone Corporate Tax regime for a five-Tax-Period window including the year of failure.
That makes the de minimis calculation something businesses should monitor during the financial year, rather than discovering the result after year-end.
Does Every Free Zone Company Need to Register for Corporate Tax?
Yes, being established in a free zone does not remove the Corporate Tax registration obligation simply because the company expects to benefit from the 0% QFZP rate.
The Federal Tax Authority has specifically highlighted that Free Zone Persons must register for Corporate Tax even where they qualify for the Free Zone Corporate Tax regime. (FTA UAE)
Corporate Tax registration and QFZP eligibility are separate issues.
A company can be registered for Corporate Tax while legitimately applying the 0% rate to its Qualifying Income.
Is the QFZP Framework Still Changing?
Businesses should monitor regulatory developments because the framework continues to receive clarifications and implementing decisions.
Ministerial Decision No. 229 of 2025 replaced the previous decision governing Qualifying and Excluded Activities and introduced updated rules relating to matters including commodity trading and treasury activities. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
More recently, the Federal Tax Authority issued FTA Decision No. 6 of 2026 on Determining the Additional Procedures for the Compliance of QFZP, published on 14 July 2026. (FTA UAE)
This reinforces an important practical point: businesses relying on QFZP status should review their Corporate Tax position against the current legislation and FTA procedures each year rather than relying indefinitely on an assessment made when Corporate Tax was first introduced.
How Can a Business Protect Its 0% QFZP Position?
The safest approach is to treat QFZP compliance as an ongoing financial and operational process.
Before entering a new revenue stream, the company should understand who the customer is, whether the customer is a Free Zone Person, what activity creates the income and whether that activity is qualifying or excluded.
Accounting systems should distinguish different types of revenue clearly enough to monitor the de minimis threshold.
Related-party transactions should be documented and priced appropriately.
The business should also maintain sufficient evidence of its UAE operations, including employees, expenditure, premises, assets, contracts and other substance-related information where relevant.
Finally, audited financial statements should not be treated as a last-minute year-end requirement. Clean books and supporting documents throughout the year make both the audit and Corporate Tax return considerably easier to manage.
Example: When Could the 0% Rate Apply?
Imagine a free zone company that earns revenue from providing a qualifying service to another Free Zone Person that is the beneficial recipient of the service.
If the income is not connected to an Excluded Activity and the company meets the remaining QFZP conditions, the income may fall within Qualifying Income and therefore qualify for the 0% Corporate Tax rate.
Now imagine the same company begins generating a significant second revenue stream from transactions that do not meet the Qualifying Income rules.
That income needs to be classified correctly and its effect on the de minimis threshold monitored. If the company’s non-qualifying revenue exceeds the permitted level, QFZP status itself could be affected.
This is why two businesses with the same free zone licence can potentially have very different Corporate Tax outcomes.
How Shams Free Zone and FZ Plus Can Help
Choosing the right free zone structure is only the beginning. Once your company starts operating, bookkeeping, Corporate Tax registration, financial reporting and ongoing compliance become equally important.
For Shams Free Zone businesses, FZ Plus can help simplify the administrative side of running a company by supporting essential compliance requirements and helping business owners maintain clearer records as their operations grow.
For companies intending to rely on Qualifying Free Zone Person status, professional tax advice may also be appropriate, particularly where there are multiple revenue streams, mainland customers, overseas operations, related-party transactions, intellectual property, property income or activities close to the de minimis threshold.
The objective should not simply be to obtain a 0% rate. It should be to establish and document why your company is entitled to apply that rate.
FAQs
Does every Shams Free Zone company automatically qualify for 0% Corporate Tax?
No. A Shams Free Zone company is a Free Zone Person for Corporate Tax purposes, but it must satisfy the QFZP conditions for its Qualifying Income to benefit from the 0% Corporate Tax rate.
What is the de minimis limit for a Qualifying Free Zone Person?
Non-qualifying revenue must generally not exceed the lower of 5% of relevant total revenue or AED 5 million for the Tax Period. Specific revenue categories are excluded when performing the calculation, so businesses should calculate the threshold carefully. (FTA UAE)
Does a QFZP need audited financial statements?
Yes. QFZPs are required to prepare audited financial statements for Corporate Tax purposes regardless of their revenue level. (FTA UAE)
Does a Qualifying Free Zone Person pay 0% tax on all income?
Not necessarily. The 0% Corporate Tax rate applies to Qualifying Income. Taxable Income that does not meet the Qualifying Income requirements is generally subject to 9%. (FTA UAE)
Can a free zone company sell to mainland UAE customers and remain a QFZP?
Potentially, but the nature of the activity becomes important. Income from a Non-Free Zone Person generally needs to arise from a recognised Qualifying Activity and satisfy the other relevant conditions to be treated as Qualifying Income. Businesses should assess their exact transactions rather than assuming that all mainland revenue receives the same treatment. (FTA UAE)
What happens if a company loses QFZP status?
Under the current rules, failing a QFZP condition can cause the company to cease being a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the following four Tax Periods. (┘И╪▓╪з╪▒╪й ╪з┘Д┘Е╪з┘Д┘К╪й – ╪з┘Д╪е┘Е╪з╪▒╪з╪к ╪з┘Д╪╣╪▒╪и┘К╪й ╪з┘Д┘Е╪к╪н╪п╪й)
Do free zone companies still need Corporate Tax registration if they expect to pay 0%?
Yes. Free Zone Persons remain within the UAE Corporate Tax framework and must comply with their registration and filing obligations where applicable. QFZP status determines tax treatment of qualifying income, not whether the Corporate Tax system applies to the company. (FTA UAE)
Is QFZP status the same as being VAT exempt?
No. Corporate Tax and VAT are separate tax regimes. Qualifying for the 0% Corporate Tax rate as a QFZP does not determine a company’s VAT registration or VAT treatment.
Should businesses review their QFZP status every year?
Yes. Revenue sources, customers, business activities, substance and regulations can change. Companies relying on the 0% Free Zone Corporate Tax regime should reassess their eligibility for each Tax Period and keep evidence supporting that position.
