To align with international tax standards, the UAE corporate tax law established the Qualifying Free Zone Person (QFZP) concept to maintain Free Zone incentives. For investors and businesses, understanding QFZP status is crucial because it determines if profits are taxed at 0% or 9% and outlines specific compliance requirements to ensure continued eligibility.
What Does A Qualifying Free Zone Person in the UAE Mean?
A QFZP is a Free Zone company eligible for a 0% corporate tax on qualifying income if it has substantive operations in the Free Zone, maintains audited accounts, complies with transfer pricing requirements, and operates within approved business activities. Non-qualifying income is taxed at 9%.
The QFZP has to satisfy the requirements stated in Article 18 of the Corporate Tax Law as well as the revisions of MD 229 of 2025 which relate to audited accounts, de minimis threshold, and lists of qualifying and excluded activities.
Legal Framework and Where the Rules Come From:
- Corporate Tax Law (Federal Decree-Law No. 47 of 2022): It introduced QFZP status.
- Cabinet Decision No. 100 of 2023: Defines terms for Qualifying Income, property regulations, and PE attribution.
- Ministerial Decree 229/2025: Qualifying and Excluded Activities: Repeals the MD 265/2023 retroactively on 1 June 2023.
- Ministerial Decree No. 230 of 2025 establishes accepted price reporting agencies of the commodity traders.
- Ministerial Decision No. 84 of 2025: Requires audited financial statements of all QFZPs for the tax period beginning on or before 1 January 2025.
- Federal Tax Authority Guidance: This has a lot of FAQs and rules of practical application.
Eligibility Checklist: Day one QFZP Status
Reasonable Substance in the Free Zone
Businesses must demonstrate substantial Free Zone operations through employees, facilities, and expenses.
Requirement of Audited Financial Statements
Tax periods beginning 1 January 2025, all QFZPs will have to prepare audited financial statements, irrespective of their revenue. These validate the division of qualifying and non-qualifying income.
Arm’s Length Pricing and Transfer Pricing Documentation
Dealing with related parties should be done at market value, and it should be backed up by transfer pricing documentation.
Electing to be In or Out of the Regime
Free Zone company has the option of paying 9% corporate tax on all income, which is conditional on a lockout duration of five years in case the company opts to leave the QFZP regime.
Corporate Tax Rates: What Does 0% vs 9% Tax Mean?
- Defining Qualifying Income
The qualifying income is exempt from Free Zone-to-Free Zone transactions, approved qualifying activities, and qualifying intellectual property. Non-Free Zone persons can only be considered as income, provided the activity is listed on the official Qualifying Activities list.
- Non-Qualifying Income Streams and 9% Rate.
Taxation on income related to excluded activities is at 9 percent, which includes banking, traditional insurance, sales to natural persons (with a few limited exceptions), and the majority of real estate not within the Free Zones.
- Small-Profit Threshold
QFZPs are not in a position to take advantage of the AED 375,000 exemption that businesses in the mainland enjoy. Their zero percent tax is only on qualifying income.
Qualifying Activities/Exposed Activities
Qualifying Activities
- Production or transportation of material and products.
- Exchange of qualified commodities (gold, minerals, energy, agricultural commodities, industrial chemicals, environmental commodities, and related by-products).
- Hedging derivatives and structured commodity financing: As long as the revenue is not 51 percent or more of the logistics or warehousing functions, they are made available.
- Investing in holding shares and securities (minimum period 12 months).
- Ship ownership, ship management, and ship operation.
- Reinsurance services.
- Wealth management and fund management are under the management of financial regulators.
- Headquarters functions for concerned parties.
- Treasury and financing services to related parties, or on the own account of the company.
- Financing and leasing of aircraft.
- Goods distribution within or outside a Designated Zone (with distribution conditions).
- Logistics services.
Excluded Activities
- Deals with natural persons, other than involving ships, fund management, wealth management, aircraft financing, and leases.
- Banking activities.
- Insurance (other than insurance), other than reinsurance.
- Finance and leasing (except with parties relating to money or aircraft financing).
- Blood offence: This occurs when someone owns or exploits immovable property other than Free Zone commercial property that is leased to Free Zone Persons.
- Ancillary activities that are related to excluded activities.
Qualifying Activities/Exposed Activities
Retaining QFZP Status & UAE Market Operations
The Free Zone companies having a branch in the mainland are taxed 9 percent on profits. The 0-percent tax rate is only applicable to the income of Free Zone operations.
When Free Zone to Mainland Transactions may yet be Qualifying
Some of their activities such as logistics, manufacturing, and leasing of aircrafts can be exported to mainland customers at zero rate of tax as long as they have been listed on the list of Qualifying Activities. Two criteria have to be met in the case of distribution activities that is, goods have to come into the UAE via the Designated Zone, and supplies have to reach the resellers, processors, or other entities of general benefit, but not final consumers.
Real Estate Income Rules
Only the commercial property that is leased to Free Zone Persons in a Free Zone is able to enjoy the 0% tax rate. There is a tax of 9 percent imposed on leasing to mainland tenants or individuals.
De Minimis Threshold and loss of status
The de-minimis level provides that the QFZPs obtain the majority of revenue due to the truly qualifying activities. The non-qualifying income should not be more than 5 percent of the total revenue or 5 million AED per tax period (Ministerial Decision No. 229 of 2025). When a QFZP surpasses this limit, it would not be considered as a preferred one and would be taxed at 9 percent for that year and the four subsequent tax years, which would lock the company out of the regime up to a maximum of five years.
QFZP vs Non-QFZP vs Mainland
Regarding tax treatment, QFZPs have a tax rate of 0% on qualifying income and a tax rate of 9% on non-qualifying income, with no capability of forming tax groups. Non-QFZPs are subject to a flat tax of 9 percent on all earnings, though they can be in tax groups. Income tax is also levied at 9 percent on incomes above AED 375,000, and formation of tax groups can be done by the mainland companies.
Self-Assessment Program: Are You a QFZP?
Not all Free Zone businesses are eligible for the 0 percent tax. Companies have to undertake a five-part self-assessment system on the basis of pertinent laws. Key tests include:
- Location Test: Only those companies that are registered in a UAE Free Zone pass.
- Activity Test: The business activities should be in correspondence with the list of qualifying activities.
- Substance Test: This is a requirement where the companies have to prove that they are actually operating in the Free Zone.
- Compliance Test: It is important that there is continuous adherence to the financial and documentation requirements.
- Revenue Mix Test: A revenue that is non-qualifying should not exceed 5% of all revenue or AED 5 million to be able to maintain the status of the QFZP. Violation of this threshold leads to the loss of status for the current and the following four tax periods.
Get in touch with the RichMan Associate
The status of QFZP holds a lot of significance because of its tax benefits, but it has vast compliance requirements to comply with. In order to understand ” What Is A Qualifying Free Zone Person means, and to organize your business to enjoy the 0% rate or just require assistance, contact Richman Associate .
Our tax experts have been assisting business clients from different industrial sectors. Their industry knowledge and overall experience helps businesses new to the dynamic business landscape of UAE. Hence, with expert help, you would be able to evaluate your case as experts provide the right guidance to help you understand Free Zone licensing and corporate tax requirements.
