Updated: August 2026
This article was originally published in April 2023 and has been updated to reflect subsequent developments in the UAE Free Zone Corporate Tax regime, including changes to the Qualifying Free Zone Person (QFZP) framework and Small Business Relief.
By Alia Noor, FCMA, CGMA, MBA
UAE Registered Tax Agent | Associate Partner – Taxation & Compliance Advisory
Ahmad Alagbari Chartered Accountants
Free Zone Person vs Qualifying Free Zone Person
Establishing a business in a UAE Free Zone does not automatically entitle the business to the 0% Corporate Tax rate. A Free Zone Person must satisfy the conditions prescribed under the UAE Corporate Tax regime to become a Qualifying Free Zone Person (QFZP).
This distinction is important when choosing a Free Zone and structuring a business. The tax outcome depends not simply on where the company is incorporated, but also on what activities it carries out, who it transacts with, where those activities are performed and whether the QFZP conditions continue to be satisfied.
Conditions to Become a Qualifying Free Zone Person
Under Article 18 of the UAE Corporate Tax Law, a Free Zone Person must satisfy prescribed conditions to qualify as a QFZP. These include:
- Maintaining adequate substance in the UAE;
- Deriving Qualifying Income;
- Not electing to be subject to Corporate Tax under the standard regime;
- Complying with the arm's length principle and Transfer Pricing documentation requirements;
- Preparing and maintaining audited financial statements in accordance with the applicable requirements; and
- Meeting any other conditions prescribed by the Minister.
A Free Zone Person must continue to satisfy the relevant conditions throughout the applicable Tax Period to maintain its QFZP status.
What Is Qualifying Income?
When this article was originally published in April 2023, the detailed rules determining Qualifying Income had not yet been issued. The UAE has since introduced a detailed framework governing which income of a Qualifying Free Zone Person may benefit from the 0% Corporate Tax rate.
Broadly, Qualifying Income can arise from:
- Transactions with other Free Zone Persons, subject to the applicable conditions and Excluded Activities;
- Income from specified Qualifying Activities;
- Income from the ownership or exploitation of Qualifying Intellectual Property, subject to specific conditions; and
- Other income where the de minimis requirements are satisfied.
Whether income qualifies for the 0% rate depends on several factors, including the activity performed, the counterparty, where the activity is undertaken, and whether the relevant Free Zone is a Designated Zone where required.
This is why being incorporated in a Free Zone, by itself, does not mean that all of the company's income is taxed at 0%.
How Does the 0% Free Zone Corporate Tax Regime Work?
A Qualifying Free Zone Person does not automatically receive a 0% Corporate Tax rate on all of its income. The tax treatment depends on whether the income constitutes Qualifying Income under the Free Zone Corporate Tax regime.
A QFZP is generally subject to:
- 0% Corporate Tax on Qualifying Income; and
- 9% Corporate Tax on Taxable Income that is not Qualifying Income, subject to the applicable provisions of the Corporate Tax Law.
Accordingly, businesses should not view the Free Zone regime simply as a location-based tax incentive. The nature of the business model and the underlying transactions are critical.
Qualifying Activities Matter
The nature of the business activity is critical. The UAE Free Zone Corporate Tax regime identifies specific Qualifying Activities that may generate Qualifying Income where the relevant conditions are satisfied.
These include, among others, activities relating to manufacturing, processing, holding of shares and other securities, certain financing and treasury activities, headquarters services, distribution of goods or materials in or from a Designated Zone, and logistics services, subject to the detailed conditions prescribed under the applicable legislation.
Businesses should therefore assess their actual activities and revenue streams, rather than assuming that the activity appearing on their Free Zone licence automatically determines the Corporate Tax outcome.
Excluded Activities Must Also Be Considered
Certain activities are specifically treated as Excluded Activities. Income from an Excluded Activity will generally not constitute Qualifying Income, subject to the limited exceptions provided under the legislation.
This is particularly important where a Free Zone business conducts multiple activities or deals with different categories of customers.
Businesses should therefore assess what they actually do, rather than relying only on the fact that they hold a Free Zone licence.
Free Zone vs Designated Zone
A Free Zone and a Designated Zone are not interchangeable concepts.
A Designated Zone is a specific Free Zone area that has been recognised for particular tax purposes. This distinction can be especially important for businesses engaged in the distribution of goods or materials, where the location and nature of the activity can directly affect whether the income qualifies for the 0% Corporate Tax rate.
Accordingly, an investor establishing a trading or distribution business should not ask only:
“Is this a Free Zone?”
The investor may also need to ask:
“Is this a Designated Zone, and does my proposed activity satisfy the conditions applicable to that activity?”
The De Minimis Requirement
A QFZP may earn a limited amount of non-qualifying Revenue without automatically losing its QFZP status, provided its non-qualifying Revenue does not exceed the lower of:
- AED 5 million; or
- 5% of its total Revenue
for the relevant Tax Period.
If the de minimis requirement is breached, the consequences can be significantly broader than simply applying 9% Corporate Tax to the excess income.
The Free Zone Person can cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the following four Tax Periods. During this period, it will be subject to the standard Corporate Tax regime rather than benefiting from the QFZP 0% regime.
This makes the de minimis test particularly important: breaching the threshold can affect the Free Zone Person's tax position for five Tax Periods, not merely the non-qualifying income that caused the breach.
Can a Qualifying Free Zone Person (QFZP) Claim Tax Reliefs or Transfer Tax Losses?
Article 26 – Transfers within a Qualifying Group
Article 26 of the UAE Corporate Tax Law provides relief for transfers of assets or liabilities between members of the same Qualifying Group, subject to prescribed conditions.
However, a Qualifying Free Zone Person cannot be a member of a Qualifying Group for the purposes of this relief. Accordingly, a QFZP cannot claim the Article 26 relief while it maintains its QFZP status.
Article 27 – Business Restructuring Relief
Article 27 of the UAE Corporate Tax Law provides Business Restructuring Relief for certain transfers of a business or an independent part of a business, subject to prescribed conditions.
However, Business Restructuring Relief is not available where the transferor or transferee is a Qualifying Free Zone Person.
Therefore, businesses considering the QFZP regime should also consider how this restriction may affect future mergers, reorganisations or business transfers.
Articles 37–40 – Tax Losses and Tax Group Formation
A Qualifying Free Zone Person cannot be a member of a Tax Group under the UAE Corporate Tax regime. Similarly, the tax loss transfer provisions do not permit the transfer of Tax Losses where either Taxable Person is a Qualifying Free Zone Person.
This can be an important structuring consideration for groups operating through both Free Zone and mainland entities.
While the 0% rate on Qualifying Income may provide a significant tax advantage, maintaining QFZP status can restrict the ability to utilise certain group reliefs and Tax Losses elsewhere in the group.
A Free Zone Person that elects to be subject to the standard Corporate Tax regime is no longer treated as a QFZP for the relevant period and may potentially access the ordinary Tax Group and Tax Loss provisions, provided all applicable conditions are independently satisfied.
Therefore, the decision should not be based on the 0% rate alone. Businesses should compare the potential Free Zone tax benefit with their wider group structure, expected losses, intercompany transactions and future restructuring plans.
Small Business Relief Extended to 31 December 2029
Under Article 21 of the UAE Corporate Tax Law, eligible Resident Persons may elect for Small Business Relief where their Revenue does not exceed AED 3 million for the relevant Tax Period and all previous relevant Tax Periods, subject to the prescribed conditions.
The relief was originally governed by Ministerial Decision No. 73 of 2023. In July 2026, Ministerial Decision No. 131 of 2026 amended the applicable period, extending the AED 3 million Revenue threshold to subsequent Tax Periods ending on or before 31 December 2029.
A Qualifying Free Zone Person (QFZP) is not eligible to elect for Small Business Relief.
For smaller Free Zone businesses, this is an important structuring consideration. The decision to maintain QFZP status should therefore not be driven by the 0% Corporate Tax rate alone; the availability of Small Business Relief and the business's expected Revenue, activities and compliance requirements should also be considered.
Is the 0% Free Zone Corporate Tax Regime Always the Better Choice?
Not necessarily. The 0% Corporate Tax rate can be highly attractive, but the decision should be based on the business model rather than the headline tax rate.
Before establishing or restructuring a UAE Free Zone business, investors should consider the nature of the activities, location of operations, customer and counterparty profile, Qualifying and Excluded Activities, Designated Zone requirements, de minimis threshold, substance, Transfer Pricing obligations and the availability of group reliefs.
For existing Free Zone businesses, the assessment should not be a one-time exercise. QFZP conditions must continue to be monitored as the business, transactions and Revenue streams evolve.
Ultimately, the question is not simply:
“Can my Free Zone company get 0%?”
The more important question is:
“Does my business model qualify for 0% — and can it continue to satisfy the conditions required to retain it?”
Disclaimer: This article is intended for general informational and educational purposes only and does not constitute tax, legal or professional advice. The application of the UAE Corporate Tax rules depends on the specific facts and circumstances of each business. Businesses should refer to the applicable legislation, Cabinet and Ministerial Decisions, Federal Tax Authority guidance and seek appropriate professional advice before making tax or structuring decisions.
Tags: UAE Corporate Tax, UAE Free Zones, Qualifying Free Zone Person, QFZP, Qualifying Income, 0% Corporate Tax, Designated Zone, Free Zone Corporate Tax, Small Business Relief, UAE Tax, Transfer Pricing
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