A UAE free zone company does not receive a blanket 0% Corporate Tax rate. The company must satisfy the conditions for a Qualifying Free Zone Person (QFZP) in every relevant Tax Period. A QFZP applies 0% only to Qualifying Income; income placed outside that category by the legislation can be taxed at 9%.
If the company fails a QFZP condition, it is treated as an ordinary Taxable Person from the start of that Tax Period and for the next four Tax Periods. The ordinary rates then apply: 0% on Taxable Income up to AED 375,000 and 9% on the portion above AED 375,000, unless another specific rule changes the result.
This distinction matters because a trade licence, a free zone address and an invoice marked “free zone” do not determine the tax rate. The answer comes from the legal person, the activity, the counterparty, the place where the work is performed, and the income stream.
The legal framework in plain English
Federal Decree-Law No. 47 of 2022, as amended, is binding legislation. Article 18 sets the QFZP conditions and Article 3 provides the applicable rates. Cabinet Decision No. 100 of 2023 defines the principal categories of Qualifying Income and the de minimis mechanism.
Ministerial Decision No. 229 of 2025 is the current binding list and explanation of Qualifying Activities and Excluded Activities. It repealed Ministerial Decision No. 265 of 2023. The FTA Free Zone Persons Guide remains useful authority guidance for the framework and examples, but it predates Decision 229 and must not be used as the current activity list.
First test: is the company a Qualifying Free Zone Person?
Article 18 requires all QFZP conditions to be met. The company must:
- be a Free Zone Person;
- maintain adequate substance in the UAE;
- derive Qualifying Income;
- not elect to be subject to the ordinary Corporate Tax rules;
- comply with the arm’s-length principle and transfer-pricing documentation requirements; and
- prepare and maintain audited financial statements as required for a QFZP.
These are continuing conditions, not a one-off application. Employees, assets, operating expenditure and core income-generating activities should be proportionate to the activities carried on. Contracts, invoices and the accounts should show who performed the work, where it was performed and which entity assumed the commercial risks.
Second test: classify each income stream
Do not apply one rate to the company’s turnover without first separating the income. Cabinet Decision No. 100 identifies four principal routes to Qualifying Income:
- Transactions with another Free Zone Person, where that customer is the Beneficial Recipient and the income is not from an Excluded Activity.
- Transactions with a Non-Free Zone Person, but only where the income comes from a Qualifying Activity that is not an Excluded Activity.
- Qualifying Intellectual Property income, calculated under the prescribed nexus formula rather than by labelling all royalties as qualifying.
- Other income, where the QFZP satisfies the de minimis requirements.
The fourth route is often misunderstood. The de minimis test is not a statement that every activity becomes a Qualifying Activity. It is a statutory route that can make “other income” Qualifying Income while the threshold is met. Specific streams carved out by the Cabinet Decision—such as income attributable to a Domestic or Foreign Permanent Establishment and specified immovable-property income—follow their own treatment and are not rescued by that calculation.
The de minimis calculation
The requirement is met when non-qualifying Revenue does not exceed the lower of:
- 5% of the QFZP’s total Revenue for the Tax Period; or
- AED 5 million.
Non-qualifying Revenue for this test generally covers Revenue from Excluded Activities, non-Qualifying Activities with Non-Free Zone Persons, and transactions with a Free Zone Person that is not the Beneficial Recipient. The calculation excludes the categories specified in Cabinet Decision No. 100, including Revenue attributable to Domestic and Foreign Permanent Establishments and certain immovable-property and intellectual-property Revenue.
This is a Revenue test, not a profit test. The company should retain a schedule that starts from the general ledger, maps every material income stream to the legal category, identifies exclusions from the numerator and denominator, and then calculates both limbs of the threshold.
Qualifying Activities under the current decision
Ministerial Decision No. 229 of 2025 includes activities such as manufacturing and processing, holding shares and other securities for investment purposes, ownership and operation of ships, specified regulated fund and wealth-management services, headquarters services to Related Parties, treasury and financing services in the prescribed cases, aircraft financing and leasing, distribution from a Designated Zone subject to its conditions, logistics services, and trading of Qualifying Commodities.
The list is technical. For example, “distribution” is not a general label for every sale of goods, and a Designated Zone for VAT purposes does not automatically settle the Corporate Tax analysis. Decision 229 also sets detailed conditions for commodity trading, treasury services, headquarters services, shipping and other activities. The actual contract and operating model must fit the relevant provision.
Excluded Activities include specified transactions with natural persons, certain regulated financial activities, ownership or exploitation of non-qualifying intellectual property, and specified immovable-property transactions. Exceptions within those categories must be read carefully; they are not blanket permissions.
Mainland activity and Permanent Establishments
A mainland customer does not automatically destroy QFZP status. Income from a Qualifying Activity with a Non-Free Zone Person can be Qualifying Income if the statutory conditions are met.
A mainland branch or other place of business can, however, constitute a Domestic Permanent Establishment. Income attributable to that establishment is taxed at 9% under the special rule. It is excluded from the de minimis numerator and denominator; excluding it from the ratio does not make it 0%-rated income.
The attribution should follow the arm’s-length principle. Separate management accounts, payroll, contracts, assets and transfer-pricing support are needed to show which profits belong to the free zone head office and which belong to the Domestic Permanent Establishment.
What happens when QFZP status is lost?
Failure to meet a condition causes the Free Zone Person to cease being a QFZP from the beginning of the relevant Tax Period. It remains outside the regime for that period and the following four Tax Periods.
During that period the entity is treated as an ordinary Taxable Person. The general rates apply to its Taxable Income: 0% up to AED 375,000 and 9% on the portion above AED 375,000. It is therefore inaccurate to say that loss of QFZP status automatically puts the entire Taxable Income at 9% from the first dirham.
This is different from income that is taxed at 9% while the company remains a QFZP, such as properly attributed Domestic Permanent Establishment income. Rate, status and income classification should be shown as three separate steps in the tax computation.
Worked classification example
Assume a QFZP has AED 20 million of Revenue potentially within the de minimis calculation and AED 800,000 of non-qualifying Revenue from transactions covered by that test. Five per cent of total Revenue is AED 1 million, and the fixed cap is AED 5 million, so the lower threshold is AED 1 million. On those limited facts, AED 800,000 is below the threshold and the de minimis requirement is met.
Now assume the company also has AED 500,000 of Revenue attributable to a Domestic Permanent Establishment. That amount is excluded from the de minimis calculation and the attributable Taxable Income is subject to 9%. The exclusion from the ratio does not convert the branch profit into Qualifying Income.
The example is only a calculation framework. The company still has to satisfy every other Article 18 condition and classify each transaction correctly.
Evidence to keep for each Tax Period
- the trade licence, constitutional documents and confirmation that the entity is established in a Free Zone;
- a Revenue map by customer, counterparty status, activity and income category;
- evidence that Free Zone counterparties are Beneficial Recipients;
- contracts, invoices, delivery records and operational evidence for each Qualifying Activity;
- the de minimis calculation with documented exclusions;
- Domestic and Foreign Permanent Establishment attribution schedules;
- employee, asset and operating-expenditure evidence supporting adequate substance;
- transfer-pricing policies, agreements and required disclosure, master file or local file;
- audited financial statements; and
- the Corporate Tax Return and reconciliation from accounting income to Taxable Income.
Ministerial Decision No. 84 of 2025 requires a QFZP to prepare and maintain audited financial statements. This requirement is not removed because the company’s Revenue is below AED 50 million.
Frequently asked questions
Does a free zone licence guarantee 0% Corporate Tax?
No. The entity must meet every QFZP condition, and 0% applies only to Qualifying Income.
Is all mainland Revenue taxed at 9%?
No. Income from a Qualifying Activity with a Non-Free Zone Person can qualify. Income attributable to a Domestic Permanent Establishment follows the separate 9% rule.
Does income inside the de minimis threshold always stay taxable at 9%?
No. Cabinet Decision No. 100 includes “other income” as Qualifying Income when the de minimis requirements are met. Specific carved-out income streams still follow their own treatment.
What rate applies after QFZP status is lost?
The ordinary rates apply: 0% on Taxable Income up to AED 375,000 and 9% on the portion above AED 375,000, subject to the legislation applicable to the Tax Period.
Must every QFZP have audited financial statements?
Yes. Ministerial Decision No. 84 of 2025 requires audited financial statements for a QFZP.
Official sources checked on 5 October 2026
- Federal Decree-Law No. 47 of 2022, as amended, especially Articles 3 and 18. Binding legislation.
- Cabinet Decision No. 100 of 2023, especially Articles 3, 4 and 8. Binding implementing decision.
- Ministerial Decision No. 229 of 2025. Current binding activity decision.
- Ministerial Decision No. 84 of 2025. Binding audit requirement.
- FTA Corporate Tax Guide CTGFZP1. Authority guidance; its activity list predates Decision 229.
Review the entity, income and evidence together
A defensible QFZP position connects the legal entity, activity, counterparty, operating substance, accounts and Tax Period. The MP Elites team can review the income map, de minimis calculation, Permanent Establishment exposure and evidence before the Corporate Tax Return is filed.
Explore our UAE Corporate Tax services or book a strategic consultation with the MP Elites team.
This article provides general information only and is not legal, tax or accounting advice. Apply the legislation and official guidance current for the relevant entity, transaction and Tax Period.