The UAE introduced a 9% corporate tax in June 2023, but Free Zone companies were promised a continuation of the 0% rate — provided their income meets a definition the Ministry of Finance carefully labelled qualifying income. Two years on, this is the single most-misunderstood line in UAE tax. Here is what it actually means, and how to keep the rate.
The framework, in one paragraph
A Free Zone Person who is a Qualifying Free Zone Person (QFZP) pays 0% corporate tax on qualifying income, and 9% on everything else. Lose QFZP status — for any reason, in any year — and the entire entity pays 9% on all income, with no return to 0% for five years. The status is binary and unforgiving.
What makes you a Qualifying Free Zone Person?
- Maintain adequate substance in the UAE — real staff, real assets, real expenditure tied to the qualifying activities.
- Earn qualifying income (defined below).
- Stay below the de minimis threshold for non-qualifying revenue.
- Apply arm's-length pricing on related-party transactions and keep transfer pricing documentation.
- Prepare audited financial statements in line with IFRS.
- Not have elected to be subject to the standard 9% regime.
What counts as qualifying income?
Three buckets:
- Income from transactions with other Free Zone Persons — provided the buyer is the beneficial recipient and the activity is a qualifying activity.
- Income from "qualifying activities" conducted with anyone (including mainland or foreign clients).
- Any other income, provided it stays within the de minimis threshold.
Qualifying activities — the actual list
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of qualifying commodities (metals, minerals, energy, agricultural commodities) on a Recognised Commodities Exchange Market
- Holding of shares and other securities for investment
- Ownership, management and operation of ships
- Reinsurance services regulated by competent authority
- Fund management services regulated by competent authority
- Wealth and investment management services regulated by competent authority
- Headquarter services to related parties
- Treasury and financing services to related parties
- Financing and leasing of aircraft
- Logistics services
- Distribution of goods or materials in or from a Designated Zone
Excluded activities — the trap
Even within a Free Zone, the following income is never qualifying — it always pays 9% (and if it exceeds de minimis, it disqualifies the whole entity):
- Transactions with natural persons (B2C in most cases)
- Banking, insurance, finance, and leasing not within the qualifying list
- Income from immovable property in the UAE that isn't commercial property leased to another Free Zone Person
- Income from intellectual property other than qualifying IP income
The de minimis threshold
You can earn some non-qualifying income without losing QFZP status, provided it stays below the lower of:
- 5% of total revenue, or
- AED 5,000,000
What this means in practice
| Scenario | Tax outcome |
|---|---|
| FZ trading company sells AED 50M to other FZ companies | 0% on the lot |
| FZ company sells AED 50M to mainland customers, but activity is "manufacturing" (qualifying) | 0% — qualifying activity |
| FZ company sells AED 50M to mainland customers in non-qualifying activity | 9% on the AED 50M, 0% on rest only if de minimis maintained |
| Same as above, but mainland sales = 10% of total revenue | De minimis breached → 9% on everything |
What you should do today
- Tag every customer in your accounting system as Free Zone, mainland, or foreign.
- Tag every revenue line as qualifying or non-qualifying.
- Run a quarterly de minimis check.
- Keep your audited statements ready — without them, you're not a QFZP.
- If you're close to the threshold, restructure: move the non-qualifying business to a separate mainland entity rather than risk the FZ rate.
The 0% rate is a privilege the UAE has gone to unusual lengths to keep. The companies that lose it almost always lose it through accounting hygiene, not through deliberate non-compliance.