UAE Corporate Tax for Free Zone Companies — QFZP Rules & Qualifying Income
Free Zone companies in the UAE are not automatically exempt from Corporate Tax. Under Federal Decree-Law No. 47 of 2022, a Free Zone entity can benefit from a 0% Corporate Tax rate on qualifying income only if it meets the strict conditions to be recognised as a Qualifying Free Zone Person (QFZP). Non-qualifying income remains subject to the standard 9% rate. Abdelhamid & Co. Certified Public Accountants & Auditors LLC SP — UAE Ministry of Economy Licence LC0106-01, FTA Tax Agent TAN: 30003958 — assists Free Zone businesses across Sharjah, Dubai, and Abu Dhabi in assessing and maintaining their QFZP status.
Key Facts — Free Zone Corporate Tax at a Glance
- QFZP rate: 0% on qualifying income
- Non-qualifying income rate: 9%
- Key law: Federal Decree-Law No. 47 of 2022, Article 18
- Key decision: Ministerial Decision No. 265 of 2023 (qualifying activities & income)
- Substance requirement: Adequate substance in the Free Zone is mandatory
- De minimis threshold: Non-qualifying revenue ≤ 5% of total revenue or AED 5,000,000
What Is a Qualifying Free Zone Person (QFZP)?
A QFZP is a juridical person that is incorporated, established, or registered in a UAE Free Zone and satisfies all of the following conditions under Article 18 of the Corporate Tax Law:
- Maintains adequate substance in the Free Zone
- Derives only qualifying income (or non-qualifying income within the de minimis threshold)
- Has not made an election to be treated as a Resident Person subject to the standard rate
- Complies with transfer pricing rules and maintains adequate documentation
- Prepares audited financial statements
Failure to meet any single condition results in the entity losing QFZP status for the entire tax period and being taxed at 9% on all taxable income.
What Is Qualifying Income for Free Zone Companies?
Under Ministerial Decision No. 265 of 2023, qualifying income includes:
- Income from transactions with other Free Zone Persons (subject to excluded activity rules)
- Income from qualifying activities carried out with non-Free Zone persons and non-UAE persons
- Any other income that meets the conditions set by the Minister
Qualifying activities include manufacturing, processing, holding of shares and securities, financing and treasury, distribution in or from a Designated Zone, shipping, fund management, wealth and investment management, headquarter services to related parties, and others listed in the Ministerial Decision.
Excluded Activities — What Breaks QFZP Status?
Income from excluded activities is always non-qualifying, regardless of who the counterparty is. Excluded activities include:
- Transactions with natural persons (with limited exceptions)
- Banking, insurance, or finance activities subject to regulatory oversight — unless qualifying
- Owning or exploiting immovable property (with limited exceptions for commercial property within a Free Zone)
- Intellectual property income (under transitional rules)
A Free Zone company generating excluded activity income must carefully segregate it and ensure it remains within the de minimis threshold (the lower of 5% of total revenue or AED 5,000,000).
Adequate Substance Requirement
A QFZP must maintain adequate substance in its Free Zone, meaning it must have sufficient employees, assets, and operational expenditure in the Free Zone commensurate with the nature and level of its qualifying activities. Outsourcing to related or third parties within the UAE Free Zone is permitted for substance purposes, but the QFZP must retain oversight and control.
The De Minimis Rule
A Free Zone entity may still qualify as a QFZP even if it earns some non-qualifying income, provided that income does not exceed the de minimis threshold: the lower of 5% of total revenue or AED 5,000,000 in the tax period. Once exceeded, the entity loses QFZP status for the full period and all income becomes subject to 9% CT.
How Abdelhamid & Co. Assists Free Zone Companies
- QFZP eligibility assessment and qualifying income mapping
- Substance analysis and documentation support
- Income segregation between qualifying and non-qualifying streams
- Transfer pricing compliance for intra-group transactions
- Corporate Tax registration and annual return filing
- Audit of financial statements as required for QFZP compliance
Frequently Asked Questions
Does a UAE Free Zone company automatically pay 0% Corporate Tax?
No. A Free Zone company must qualify as a QFZP under Article 18 of the Corporate Tax Law and Ministerial Decision No. 265 of 2023. Eligibility requires meeting substance, qualifying income, transfer pricing, and financial statement conditions. Without QFZP status, the standard 9% rate applies.
What happens if a Free Zone company earns income from mainland UAE clients?
Income from mainland UAE (non-Free Zone) persons may still be qualifying if derived from a qualifying activity. However, income from excluded activities with any party — including mainland UAE clients — is always non-qualifying. If non-qualifying income exceeds the de minimis threshold, QFZP status is lost for the entire period.
Does a QFZP still need to register for Corporate Tax?
Yes. All Free Zone entities — including QFZPs — must register for Corporate Tax with the FTA via EmaraTax and file an annual Corporate Tax return, even where the applicable rate is 0%.
Can a Free Zone holding company benefit from the 0% rate on dividends?
Yes, if holding shares and receiving dividends qualifies as a qualifying activity under Ministerial Decision No. 265 of 2023 and the holding company otherwise meets all QFZP conditions. The participation exemption under Article 23 may also apply independently to exempt qualifying dividend income.
What is the consequence of losing QFZP status?
If a Free Zone entity fails to meet QFZP conditions in a tax period, all its taxable income for that period is subject to the standard 9% Corporate Tax rate. The entity cannot apply the 0% rate on any portion of income for that period. It may requalify in a subsequent period if conditions are met again.
Must a QFZP have audited financial statements?
Yes. Maintaining audited financial statements is a mandatory condition for QFZP status under the Corporate Tax Law. Entities that do not currently undergo statutory audit will need to arrange one as part of their Corporate Tax compliance.
Last reviewed: May 2026