TRW & Co · UAE tax
Qualifying Free Zone Person: 0% Corporate Tax Rules
A qualifying free zone person pays 0% UAE corporate tax on qualifying income and 9% on the rest, but only if it meets every condition each year: real substance in the zone, qualifying activities, non-qualifying revenue within the lower of 5% or AED 5 million, arm's length pricing, audited accounts and no election out. Failure costs five tax periods.
Key pointThe de minimis test uses the lower of 5% of revenue or AED 5 million, so the bigger the free zone business, the smaller its proportional headroom; one mainland services contract can cost five years of 0% treatment.
At a glance
Zero and nine percent
A qualifying free zone person pays 0% on qualifying income and 9% on taxable income that is not qualifying income.
Six cumulative conditions
Adequate substance, qualifying income, de minimis compliance, arm's length pricing, audited financial statements and no election into the standard regime must all be met.
De minimis limit
Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million in the tax period.
2025 activity rules
Ministerial Decisions No. 229 and No. 230 of 2025 replaced the 2023 activity list, widening commodities trading and treasury services.
Five-period lockout
Failing any condition removes qualifying status for the tax period of failure and the following four tax periods.
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What is a qualifying free zone person? The short answer
A qualifying free zone person is a company or branch registered in a UAE free zone that meets every condition in the Corporate Tax Law and its implementing decisions, and so pays 0% corporate tax on its qualifying income and 9% on everything else. The status is not granted by a licence or an application. It is a test the business must pass, and evidence, for each tax period.
The conditions are cumulative: adequate substance in the free zone, earning qualifying income from qualifying activities, staying within strict de minimis limits on other revenue, not electing into the standard regime, pricing related-party dealings at arm's length and preparing audited financial statements. Failing any one of them removes the 0% rate for that tax period and the following four.
The rules were updated in August 2025, when the Ministry of Finance issued Ministerial Decisions No. 229 and No. 230 of 2025, replacing the 2023 decision on qualifying and excluded activities and widening the commodities and treasury categories.
The legal framework
The concept comes from Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, which provides for a 0% rate on qualifying income of a qualifying free zone person and 9% on taxable income that is not qualifying income. The detail sits in three places:
- Cabinet Decision No. 100 of 2023, which defines qualifying income and sets the de minimis requirement.
- Ministerial Decisions No. 229 and No. 230 of 2025, which list qualifying activities and excluded activities and, for commodities, recognised price reporting agencies. They replaced Ministerial Decision No. 265 of 2023.
- Ministerial Decision No. 84 of 2025 on audited financial statements, together with the transfer pricing rules.
The Federal Tax Authority's Corporate Tax Guide on Free Zone Persons explains how the FTA applies the tests, with worked examples. The Ministry of Finance's announcement of the 2025 decisions is reported by the official news agency WAM, and the policy overview is on the Ministry of Finance corporate tax page.
The regime applies to all free zones, including the financial free zones. A DIFC or ADGM entity is a free zone person, although regulated financial businesses face particular limits because banking and most insurance are excluded activities.
The conditions for qualifying free zone person status
Adequate substance
Core income-generating activities must be performed in the free zone, with adequate assets, qualified full-time staff and operating expenditure. Outsourcing within the free zone is possible if the entity supervises the provider.
Qualifying income
The entity must derive qualifying income, broadly from qualifying activities with free zone persons and non-free zone persons, and from qualifying intellectual property.
No election out
It must not have elected to be taxed under the standard regime. An election binds for that tax period and the next four.
Arm's length pricing
Related-party and connected-person transactions must comply with the transfer pricing rules, including documentation where thresholds are met.
De minimis limits
Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million.
Audited accounts
The entity must prepare and keep audited financial statements, whatever its size.
Qualifying and excluded activities
Qualifying income depends on what the entity does and who it does it with. The table summarises the main categories under the current decisions.
| Qualifying activities (examples) | Excluded activities (examples) |
|---|---|
| Manufacturing and processing of goods or materials | Most transactions with natural persons, except specified shipping, aircraft and fund or wealth management activities |
| Trading in qualifying commodities, now including a wider range of metals, minerals, energy, agricultural and environmental commodities with a recognised quoted price | Regulated banking activities |
| Holding shares and other securities for investment | Regulated insurance activities, other than reinsurance |
| Ownership, management and operation of ships; aircraft financing and leasing | Regulated finance and leasing activities |
| Reinsurance; fund management; wealth and investment management | Ownership or exploitation of immovable property, other than qualifying commercial property in a free zone dealt with free zone persons |
| Headquarter services and treasury and financing services to related parties | Ownership or exploitation of intellectual property that is not qualifying IP |
| Distribution of goods in or from a Designated Zone; logistics services | Ancillary activities to the excluded activities above |
The 2025 decisions removed the old "raw form" restriction for commodities, linked eligibility to a price quoted by a recognised exchange or price reporting agency, recognised related structured trade finance and hedging, and broadened treasury services to include activity for the entity's own account. Commentators also note a new guardrail for traders whose income is mainly from warehousing or distribution services.
Why the counterparty matters
Income from a qualifying activity with a non-free zone person is generally qualifying income, unless the activity is excluded. Income from transactions with another free zone person is qualifying only if that person is the beneficial recipient of the supply. Distribution of goods to mainland customers qualifies only if the goods move in or from a Designated Zone and the customer resells, processes or alters them. Services to mainland clients that are not on the qualifying list are non-qualifying, and count against the de minimis limit.
Intellectual property and real estate income
Two categories need separate treatment. Income from qualifying intellectual property, broadly patents and copyrighted software developed through the entity's own research and development, can be qualifying income in proportion to the qualifying expenditure, using a nexus-style ratio. Income from trade marks and other marketing intangibles is not qualifying, and exploiting non-qualifying IP is an excluded activity.
Real estate is narrower still. Only income from commercial property located in a free zone and let to, or sold to, free zone persons can be qualifying income. Income from residential property, or from commercial property dealings with mainland persons, is taxed at 9%. The FTA guide allows mixed-use buildings to be split, preferring direct allocation and otherwise using a reasonable basis such as floor space.
The de minimis test
A qualifying free zone person may earn some non-qualifying revenue, but only within a narrow limit: it must not exceed 5% of total revenue or AED 5 million, whichever is lower. The test is run on revenue, not profit, and for each tax period.
Some items are left out of both sides of the calculation, including revenue attributable to a domestic or foreign permanent establishment and certain income from immovable property in a free zone. Those items are taxed at 9% where relevant but do not cause the entity to fail the test. Everything else that is not qualifying income, such as consultancy fees from mainland clients or retail sales to individuals, counts in full.
For an entity with revenue of AED 150 million, 5% would be AED 7.5 million, but the AED 5 million ceiling applies because it is lower. Larger free zone businesses therefore have proportionately less room for non-qualifying revenue, and a single mainland contract can tip the balance.
Running the annual qualifying test step by step
- Map every revenue stream. List each activity, customer type and location, and the contract that governs it.
- Classify the activity. Check each stream against the qualifying and excluded activity lists in the 2025 decisions.
- Classify the counterparty. Identify free zone persons, beneficial recipients, mainland businesses, foreign customers and individuals.
- Compute the de minimis ratio. Apply the 5% or AED 5 million limit after removing the excluded items.
- Evidence substance. Record staff, premises, assets and expenditure in the free zone for each core income-generating activity.
- Check transfer pricing and audit. Prepare transfer pricing documentation and disclosure schedules where required, and complete the statutory audit.
- File and allocate. File the return, applying 0% to qualifying income and 9% to taxable non-qualifying income, with the analysis kept on file for audit.
An illustrative scenario
Illustrative only; the business and figures are hypothetical. A trading company in a Dubai free zone that is also a Designated Zone imports industrial components, stores them in a designated zone warehouse and sells them to manufacturers across the GCC and to UAE mainland distributors who resell them. Its revenue is about AED 60 million.
Sales to foreign customers and to mainland distributors who resell the goods are likely to be qualifying income, as distribution in or from a Designated Zone. The company then wins a contract to supply and install equipment for a mainland hotel. The installation fees, around AED 4 million, are services to a non-free zone person that are not on the qualifying list.
That AED 4 million is under the AED 5 million cap, but it is more than 5% of AED 60 million, which is AED 3 million. The lower limit applies, so the company would fail the de minimis test and lose its status for that year and four more. On advice, it moves the installation contract into a separate mainland subsidiary, priced at arm's length, so that the free zone company remains a qualifying free zone person and the installation income is taxed at 9% in the subsidiary.
Risks and common mistakes
Treating a free zone licence as the test
A licence permits activities; it does not decide the tax result. Many free zone licences cover consultancy, marketing or general trading that are not qualifying activities. A company can be fully compliant with its free zone authority and still fail the corporate tax test. Read the licence alongside the 2025 activity lists and the FTA guide, and document why each income stream qualifies.
Selling to individuals
Transactions with natural persons are generally excluded activities, with limited exceptions for certain shipping, aircraft and fund or wealth management activities. A free zone e-commerce business selling to consumers, or a services company billing individuals, may therefore generate non-qualifying revenue that quickly exceeds the de minimis limit. Businesses in this position often need a separate entity for consumer sales.
Thin substance and outsourcing
Core income-generating activities must happen in the free zone. A company whose decisions, staff and operations are actually on the mainland or abroad, with only a flexi-desk in the zone, is exposed. Outsourcing is permitted if the provider is in the free zone and the entity adequately supervises it. Keep board minutes, employment records and premises evidence that match the activity claimed.
The five-period lockout
Failing a condition, or electing into the standard regime, removes the regime for the year of failure and the next four tax periods. In practice that can mean five years at 9% on all taxable income. The FTA guide treats newly established entities with no revenue as not failing for that reason alone, but a growing business must monitor its ratios throughout the year, not only at the year end.
Interaction with other regimes
A qualifying free zone person cannot claim small business relief and cannot be a member of a tax group. Members of multinational groups with consolidated revenue of at least EUR 750 million should also consider the 15% domestic minimum top-up tax that applies from 2025, which can reduce or remove the benefit of the 0% rate. See our article on the domestic minimum top-up tax.
Building an audit-ready file
Because qualifying status is self-assessed, the FTA tests it after the event, often several years later. The business needs a contemporaneous file for each tax period that a reviewer could follow without speaking to the people who prepared it.
That file usually contains the revenue map and de minimis calculation, the activity classification with references to the relevant decision, evidence of counterparties' free zone status and beneficial recipient position where relevant, a substance memorandum covering staff, premises and decision-making, transfer pricing documentation and disclosure schedules, and the audited financial statements. Where the position depends on a judgement call, such as whether a service is ancillary to a qualifying activity, record the reasoning and any FTA guidance relied on.
Where the analysis is uncertain, a business can consider asking the FTA for a clarification before filing. Our article on FTA audits, penalties and disputes explains how challenges are run if the FTA disagrees.
Cross-border structuring
Free zone entities are often used as regional hubs for groups based in the UK, India, Bangladesh, Singapore and China. Headquarter services and treasury services to related parties can be qualifying activities, but only with genuine substance in the zone and arm's length pricing. Home-country rules, such as controlled foreign company regimes, permanent establishment risk and treaty access through a tax residency certificate, should be considered alongside UAE status. Our guides on transfer pricing and whether a free zone company can do business onshore cover related questions.
What to do next
- Map revenue by activity and counterparty for the current tax period, not just the last one.
- Re-test existing positions against Ministerial Decisions No. 229 and No. 230 of 2025.
- Calculate the de minimis ratio using the lower of 5% and AED 5 million.
- Document substance in the free zone and supervise any outsourced providers.
- Prepare audited accounts and transfer pricing documentation.
- Consider separating non-qualifying business into a mainland entity before it threatens status.
TRW & Co advises on structuring and the legal analysis behind qualifying free zone person positions and coordinates with registered tax agents for filings. See our corporate tax practice, free zone company formation and UAE corporate tax explained, or contact us in Dubai.
Frequently asked questions
01What is a qualifying free zone person in the UAE?
It is a free zone company or branch that meets all the conditions in the Corporate Tax Law and its implementing decisions, and so pays 0% corporate tax on qualifying income and 9% on other taxable income. The conditions include adequate substance in the free zone, earning qualifying income, staying within the de minimis limit, arm's length pricing, audited accounts and not electing for the standard regime. The status is tested for each tax period.
02Do I need to apply to become a qualifying free zone person?
No. There is no separate application or certificate. A free zone person that meets the conditions is treated as qualifying, and it reflects that position in its corporate tax return. The burden is on the business to show it meets each test if the FTA audits. It must still register for corporate tax, file returns and keep audited financial statements.
03What is the de minimis rule for free zone companies?
Non-qualifying revenue in a tax period must not exceed 5% of total revenue or AED 5 million, whichever is lower. Revenue attributable to permanent establishments and certain free zone immovable property income is excluded from the calculation. If the limit is breached, the entity loses qualifying status for that period and the next four, and all its taxable income is taxed at 9%.
04Can a free zone company sell to mainland customers and keep 0% tax?
Sometimes. Income from qualifying activities with mainland businesses, such as manufacturing or distribution of goods from a Designated Zone to customers who resell them, can be qualifying income. Services that are not on the qualifying list, and most sales to individuals, are non-qualifying and count against the de minimis limit. Each mainland revenue stream needs to be tested before the contract is signed.
05What changed with Ministerial Decisions 229 and 230 of 2025?
Issued by the Ministry of Finance in August 2025, they replaced Ministerial Decision No. 265 of 2023 on qualifying and excluded activities. The main changes widened qualifying commodities trading, linking eligibility to a recognised quoted price rather than a raw form test, recognised related trade finance and hedging, and broadened treasury services. Decision No. 230 lists recognised price reporting agencies.
06Can a qualifying free zone person claim small business relief or join a tax group?
No. Small business relief is not available to a qualifying free zone person, and such an entity cannot be a member of a tax group. A business that wants either benefit would need to give up qualifying status, which is a five-period commitment, so the choice should be modelled carefully before electing. The comparison depends on the size of qualifying income and the group's plans.
Sources and official materials
- FTA: Corporate Tax Guide on Free Zone Persons — FTA guidance on qualifying status and the tests
- WAM: MoF issues two ministerial decisions on qualifying activities — Announcement of Ministerial Decisions No. 229 and No. 230 of 2025
- Ministry of Finance: Corporate Tax — Free zone treatment within the corporate tax regime
- Federal Tax Authority: Legislation — Cabinet Decision No. 100 of 2023 and related decisions
- UAE Government Portal: Corporate tax — Scope of the regime and free zone incentives
General information only, current as at 27 October 2026. It is not legal advice and does not create a lawyer–client relationship. UAE law differs between the onshore jurisdiction, the DIFC, ADGM and the free zones, and changes frequently; check current official sources and take advice on the facts of your matter.
