An in-depth explanation of the eligibility requirements for Qualifying Free Zone Persons under the UAE Corporate Tax Law, including qualifying income, substance, de minimis thresholds, transfer pricing, and compliance obligations—with a focus on eligibility conditions, qualifying income, and compliance risks.
Introduction
This article provides an overview of the UAE’s zero percent corporate tax regime for Qualifying Free Zone Persons, examines eligibility conditions under the UAE Corporate Tax Law, the role of economic substance and qualifying income, de minimis thresholds for non-qualifying revenue, transfer pricing and compliance requirements, and the consequences of opting into or falling within the standard corporate tax framework.
Free Zones and Corporate Tax: The Basic Framework
In the UAE, there are special economic areas known as Free Zones, Free Trade Zones, or Free Zone Authorities. Each Free Zone is governed by its own rules and offers business incentives such as 100 percent foreign ownership, exemptions from taxes and customs duties, and full profit repatriation.
A juridical person, meaning legal entities such as companies, that is incorporated, established, or registered in a Free Zone is called a Free Zone Person. A Person that is not a juridical person, such as a natural person or an Unincorporated Partnership, cannot be a Free Zone Person. However, A Free Zone Person is merely a status that arises from being incorporated or registered in a Free Zone and does not, by itself, provide any corporate tax benefits.
Under the UAE Corporate Tax regime, a Free Zone Person is eligible for preferential tax treatment only if it qualifies as a Qualifying Free Zone Person (QZFP). A Free Zone Person qualifies as a QFZP unless the person either fails to meet one of the conditions to be a QFZP or makes an election to be subject to the standard Corporate Tax rules and rates.
What is Zero Percent Corporate Tax Rate?
Under the UAE Corporate Tax regime, certain Free Zone Persons can benefit from a special concession in the form of a preferential corporate tax rate of zero percent. The zero percent rate applies only to Qualifying Income earned by a Free Zone Person that meets the statutory requirements to be treated as a QFZP. This tax benefit is not automatic.
A Free Zone Person becomes eligible for the 0 percent rate only if it strictly complies with the conditions set out in Article 18 of the UAE Corporate Tax Law, read together with the applicable Cabinet Decisions and Ministerial Decisions, further explained in the Corporate Tax Guide on Free Zone Persons issued by the Federal Tax Authority.
The conditions mentioned below are therefore essential prerequisites for a Free Zone Person to access and retain the 0% tax rate, and failure to satisfy any one of them results in the loss of QFZP status and exposure to the standard corporate tax regime.
Conditions for QZFP
The Free Zone Person must maintain adequate substance in a Free Zone.
A Free Zone Person must have real and sufficient business presence in the Free Zone, that is, it must have genuine business substance in its Free Zone. The QFZP must carry out its core income-generating activities in the Free Zone (or Designated Zone, for distribution activities) and have adequate on-site resources (assets, number of qualified full-time employees, and operating expenditures) to conduct those activities. A Free Zone Person may outsource some of its core activities, but it must continue to closely supervise and control the outsourced work.
The Free Zone Person must derive Qualifying Income
A Free Zone Person’s income needs to come mainly from what is called “Qualifying Income.” This generally means earnings from certain approved business activities, such as making or processing goods, trading in commodities, holding shares or investments, owning or operating ships, providing reinsurance services, managing funds or wealth, offering treasury or headquarters services to related companies, financing or leasing aircraft, distributing goods from a designated area, providing logistics services, and some related support activities. It can also include fees from deals with other Free Zone Persons, as long as the other Free Zone Persons are the “Beneficial Recipient” of the transaction and it does not involve any restricted activities. Similarly, income from owning or using certain types of intellectual property (like patents or copyrights) can qualify, but only if it meets rules around spending on research and development.
On the other hand, income from restricted activities does not count as Qualifying Income. These include most deals with individuals (with a few exceptions), regular banking, standard insurance (not including reinsurance), general finance and leasing (except in specific cases), owning real estate (except for commercial property inside a Free Zone), and any support services tied to these restricted activities. Also, income attributable to a Domestic or Foreign Permanent Establishment of the Free Zone Person is not Qualifying Income. The Free Zone Person has to make sure almost all its earnings come from these qualifying sources. If there is some non-qualifying income (from restricted activities or deals that do not meet the rules), it is subject to a de minimis test, that is, the Free Zone Person’s non-Qualifying Income must not exceed the lower of AED 5 million or 5% of its total revenue in the tax period.
The Free Zone Person must not have elected to be subject to the standard Corporate Tax rules and rates
The Free Zone Person must not opt into the regular corporate tax regime. Article 18(c) explicitly requires that the person “has not elected to be subject to Corporate Tax under Article 19”. If a Free Zone Person voluntarily elects to be taxed at the standard rates (9 percent), it immediately foregoes the 0 percent special treatment and ceases to be a QFZP. (Article 19 only applies if the Free Zone Person is already a Qualifying Free Zone Person intending to opt out, a Free Zone Person cannot elect into or out of QFZP status unless it first met the other conditions.)
The Free Zone Person must comply with the arm’s length principle
A QFZP must follow the arm’s-length principle when dealing with related parties. This means that any transactions or arrangements between them should be priced and handled as if they were between unrelated parties. The Free Zone parent must “earn and record operating profits or losses at arm’s length” relative to any related Domestic or Foreign Permanent Establishment. In transfer pricing terms, a QFZP must attribute to its Free Zone business an appropriate share of profit commensurate with its functions, assets, and risks. Any intercompany pricing must meet internationally accepted transfer-pricing methods so that the Free Zone branch is properly compensated (and taxed at 0 percent) for its real economic activity.
The Free Zone Person must maintain Transfer Pricing documentation
Closely tied to the arm’s-length rule, a QFZP must prepare and maintain full transfer-pricing documentation (Master File, Local File, Disclosure Form) if its related-party transactions meet the thresholds. The documentation must demonstrate that all related-party transactions (and any profit allocations to its permanent establishments) satisfy the arm’s-length standard. The FTA explicitly states that a QFZP must keep books and records showing how profits attributed to its Free Zone business reflect the arm’s-length outcome of its transactions and activities. Failure to have adequate transfer-pricing records or to justify pricing could jeopardize QFZP status under the law.
The non-qualifying Revenue must meet the de minimis requirements
A QFZP’s non-Qualifying Income must stay within the de minimis limits. The de minimis test is met if non-qualifying revenue does not exceed AED 5 million or 5% of total revenue, whichever is lower. The non-qualifying revenue includes income from excluded activities, from transactions with non-Free-Zone parties, or from related-party services where the Free Zone Person is not the beneficial recipient. Any amounts excluded for de minimis calculations (such as foreign/DOM-PE income) do not count toward the threshold. Meeting this test is mandatory, if a QFZP’s non-qualifying income exceeds the limit, it fails the conditions and loses its special status from that period onward.
The Free Zone Person must maintain audited Financial Statements
A QFZP must prepare and maintain audited financial statements. Besides the Article 18 conditions, a QFZP must (b) “prepare audited financial statements in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements”. This means that all QFZP must file audited accounts (even if revenue is below the usual AED 50 million threshold).
The UAE’s 0 percent corporate tax regime for QFZP is a valuable benefit, but it is not automatic. Simply being set up in a Free Zone is not enough. Businesses must show that they have real operations in the Free Zone, earn income mainly from approved activities, follow transfer pricing rules, keep proper records, and prepare audited financial statements. These conditions ensure that the tax benefit is available only to companies carrying out genuine economic activity. For businesses, this regime offers a clear opportunity to reduce tax costs, but only if they consistently meet all the legal and compliance requirements. Failure to do so results in losing the 0 percent rate and being taxed under the regular corporate tax system.
