Ministerial Decision No. 229 of 2025, issued on 28 August 2025 and effective retroactively from 1 June 2023, replaces the earlier Ministerial Decision No. 265 of 2023. It redefines the full scope of Qualifying Activities and Excluded Activities that determine whether a Qualifying Free Zone Person retains the 0% preferential Corporate Tax rate on qualifying income. Every free zone business in the UAE operating under the Corporate Tax framework must treat this decision as foundational compliance reading.
Why This Decision Matters More Than Most Free Zone Tax Updates
The UAE Corporate Tax law (Federal Decree-Law No. 47 of 2022) introduced the concept of Qualifying Free Zone Persons — entities that can benefit from a 0% tax rate on qualifying income and a 9% rate on non-qualifying income. However, this benefit is not automatic. It depends on strict conditions including the nature of activities carried out, the proportion of revenue earned from those activities, and the maintenance of adequate substance. Ministerial Decision No. 229 of 2025 governs the classification that sits at the heart of that determination.
The decision provides a definitive list of activities that qualify, a definitive list of activities that are excluded, and detailed definitional guidance on each activity. It also introduces specific conditions around commodity trading, the 51% distribution/logistics revenue threshold, and the minimum 12-month securities holding period — all of which can alter a business's qualifying status depending on its revenue mix.
The Complete List of Qualifying Activities Under Article 2(1)
Article 2(1) identifies fourteen categories of Qualifying Activities:
- Manufacturing of goods or materials: includes production, improvement, or assembly of products from raw materials or components.
- Processing of goods or materials: includes preparation, treatment, transformation, or conversion into another form for commercial or industrial use.
- Trading of Qualifying Commodities: physical trading plus associated financial derivatives hedging, plus structured commodity financing — subject to the 51% revenue cap on distribution/logistics/warehousing/inventory management.
- Holding of shares and other securities for investment purposes: shares and financial instruments held for investment, provided they are held for an uninterrupted minimum of 12 months.
- Ownership, management and operation of Ships: international transportation of passengers, goods, or livestock; towing; dredging; bareboat charters — excluding local transport, leisure, and floating hospitality.
- Reinsurance services: regulated under Federal Decree-Law No. 48 of 2023.
- Fund management services: portfolio management, risk management, discretionary and non-discretionary services under Competent Authority oversight.
- Wealth and investment management services: discretionary and non-discretionary investment management and advisory under Competent Authority oversight.
- Headquarter services to Related Parties: senior management, administrative, procurement, business planning, risk management, coordination, and support services to related parties.
- Treasury and financing services to Related Parties or for own account: cash and liquidity management, financing, debt management, centralised payment and collection.
- Financing and leasing of Aircraft: financing, leasing, securitisation, right-to-use arrangements, and related advisory and agency services for aircraft, engines, or rotable components.
- Distribution of goods or materials in or from a Designated Zone: buying and selling of tangible movable items — with specific conditions on import routing and customer type.
- Logistics services: storage and transportation of goods without taking title, including cargo handling, warehousing, customs brokerage, freight forwarding, and packing.
- Ancillary activities: activities necessary for or making a minor contribution to the above qualifying activities, closely related enough to be inseparable.
The Excluded Activities Under Article 2(2)
Even if an activity might superficially resemble a qualifying one, the decision carves out six categories of Excluded Activities whose income is non-qualifying and taxed at 9%:
- Transactions with natural persons — except for ships, fund management, wealth management, and aircraft financing/leasing.
- Banking activities — regulated financial activities under Federal Decree-Law No. 14 of 2018.
- Insurance activities — except reinsurance services and headquarter services.
- Finance and leasing activities — except commodity trading, ship operations, treasury/financing services, and aircraft financing/leasing.
- Ownership or exploitation of immovable property — except commercial property in a Free Zone transacted with a Free Zone Person.
- Ancillary activities to excluded activities.
The Commodity Trading Rules: When 51% Changes Everything
One of the most operationally significant provisions in the decision is the restriction on commodity trading. A free zone business can claim commodity trading as a qualifying activity — but not if 51% or more of its total revenue in a given tax period comes from distribution, warehousing, logistics, or inventory management functions. This provision targets businesses that are, in substance, distribution or logistics operations attempting to reclassify revenue under the commodity trading label. Businesses whose revenue straddles these categories need to monitor their revenue mix continuously and maintain documentary support for the classification applied each year.
The De Minimis Threshold and Its Practical Meaning
Article 3 of the decision sets the de minimis threshold at 5% of total revenue or AED 5,000,000 — whichever is lower. A Qualifying Free Zone Person whose non-qualifying revenue stays within this threshold retains its qualifying status for that tax period. Businesses need to track qualifying and non-qualifying revenue streams separately and on a periodic basis, not just at year-end, to monitor whether they are approaching the threshold.
What Happens When a Business Loses Qualifying Status
Article 5 is unambiguous: a Qualifying Free Zone Person that fails to meet any of the required conditions at any point during a tax period loses its qualifying status from the beginning of that tax period and for the following four tax periods. This is not a one-year penalty — it is a five-year consequence. The financial cost of a single year of non-compliance can extend across five tax periods. This alone underscores why proactive compliance monitoring, proper revenue classification, and maintaining audited financial statements are not optional.
Audited Financial Statements: A Mandatory Condition
Article 5(1)(b) explicitly requires that a Qualifying Free Zone Person prepares audited financial statements in accordance with Ministerial Decision No. 84 of 2025. This is not merely a best-practice recommendation — it is a qualifying condition. A free zone entity that fails to prepare audited statements loses its qualifying status under the same five-period consequence rule. The audit and assurance obligation is therefore directly tied to the free zone tax benefit.
Frequently Asked Questions
What is the main purpose of Ministerial Decision No. 229 of 2025?
It defines which activities conducted by a Qualifying Free Zone Person are considered Qualifying Activities generating income taxed at 0%, and which are Excluded Activities generating non-qualifying income taxed at 9%. It replaces Ministerial Decision No. 265 of 2023 and applies retroactively from 1 June 2023.
From what date is Ministerial Decision No. 229 of 2025 effective?
It was issued on 28 August 2025 and is effective retroactively from 1 June 2023, which is the date the UAE Corporate Tax law came into force.
Can a logistics company in a free zone claim commodity trading as a qualifying activity?
Only if distribution, warehousing, logistics, and inventory management functions together constitute less than 51% of total revenue in the relevant tax period. Above that threshold, commodity trading cannot be claimed as a qualifying activity.
How long must shares be held to qualify under the securities holding category?
Shares and other securities must be held for an uninterrupted period of at least 12 months to be considered held for investment purposes under the qualifying activity definition.
What is the consequence of exceeding the de minimis threshold?
The excess non-qualifying revenue is taxed at 9%. If other qualifying conditions are also breached, the entity loses its qualifying status for the current and following four tax periods.
Is preparing audited financial statements a legal requirement for free zone qualifying status?
Yes. Article 5(1)(b) of the decision makes it an explicit qualifying condition that the entity prepares audited financial statements in accordance with Ministerial Decision No. 84 of 2025.
Last Reviewed: May 2025 | Abdelhamid & Co. — Certified Public Accountants & Auditors, Sharjah, UAE