Free Zone Person under UAE Corporate Tax Law

Summary: The UAE Corporate Tax regime provides special treatment to businesses operating in Free Zones, under which a Qualifying Free Zone Person (QFZP) can benefit from a 0% Corporate Tax rate on Qualifying Income if prescribed conditions are satisfied. Free Zone status alone does not automatically result in 0% taxation, and income that does not qualify is generally subject to Corporate Tax at 9%. QFZP conditions include adequate UAE substance, Qualifying Income, compliance with the arm’s-length principle and Transfer Pricing requirements, audited financial statements, and the de minimis requirement. The current Qualifying and Excluded Activity framework is governed by Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025, which replaced MD No. 265 of 2023 with retrospective effect from 1 June 2023. The article explains Qualifying Activities, Excluded Activities, the 5% or AED 5 million de minimis threshold, substance and outsourcing, Qualifying Intellectual Property and the nexus approach, election into the general Corporate Tax regime, consequences of losing QFZP status, and compliance requirements. It also outlines practical steps for Free Zone businesses to document customer classification, revenue streams, activities, substance, related-party transactions, Transfer Pricing, audited financial statements, expense allocation, and IP nexus calculations.

1. Introduction

The UAE Corporate Tax regime provides a special tax treatment for businesses operating in Free Zones. A Qualifying Free Zone Person (QFZP) can benefit from a 0% Corporate Tax rate on Qualifying Income, provided all prescribed conditions are satisfied.

However, Free Zone status by itself does not automatically result in 0% taxation. Income that does not qualify for the Free Zone regime is generally subject to Corporate Tax at 9%. All Free Zone Persons that are within the scope of Corporate Tax must register and comply with the applicable filing and record-keeping requirements.

«Important current update: Ministerial Decision No. 229 of 2025 replaced MD No. 265 of 2023 and applies retrospectively from 1 June 2023. Therefore, the current list of Qualifying Activities and Excluded Activities should be considered while analysing a QFZP.»

2. Relevant Definitions

A. Free Zone

A Free Zone is a geographically defined area in the UAE specified by the relevant Cabinet decision for Corporate Tax purposes.

A Designated Zone for Corporate Tax purposes is generally a Designated Zone under the UAE VAT legislation that is also included as a Free Zone under the Corporate Tax regime.

B. Free Zone Person

A Free Zone Person is a juridical person incorporated, established or otherwise registered in a Free Zone.

It may include:

• A company incorporated in a Free Zone;
• A branch of a foreign company registered in a Free Zone; and
• Certain government-controlled entities established in a Free Zone.

A natural person cannot be a Free Zone Person for this purpose.

C. Qualifying Free Zone Person

A Free Zone Person becomes a QFZP only when the prescribed conditions are satisfied.

The principal conditions include:

1. Maintaining adequate substance in the UAE;

2. Deriving Qualifying Income;

3. Not electing to be subject to the general Corporate Tax regime;

4. Complying with the arm’s-length principle;

5. Maintaining appropriate Transfer Pricing documentation;

6. Preparing audited financial statements; and

7. Satisfying the de minimis requirement for non-qualifying Revenue.

3. Corporate Tax Rate Applicable to a Qualifying Free Zone Person

The basic principle is:

Type of Income	Corporate Tax Rate
Qualifying Income of QFZP	0%
Non-Qualifying Income / Taxable Income	9%

The 0% rate is therefore not a blanket exemption for all income of a Free Zone company.

A QFZP must separately identify its Qualifying Income and other income for Corporate Tax purposes. The FTA specifically requires Free Zone Persons to determine the income falling within the 0% regime and the income taxable at 9%.

Example

A Free Zone company earns:

• Qualifying Income: AED 8 million
• Non-Qualifying Income: AED 1 million

Subject to all conditions being satisfied:

• AED 8 million → 0% Corporate Tax
• AED 1 million → generally taxable at 9%

Thus, Free Zone ≠ automatic zero tax on total profits.

4. What is Qualifying Income?

Under Cabinet Decision No. 100 of 2023, Qualifying Income broadly includes:

1. Transactions with another Free Zone Person

Income from transactions with another Free Zone Person can be Qualifying Income, provided the income does not arise from an Excluded Activity.

Importantly, the Free Zone customer should generally be the Beneficial Recipient of the relevant goods or services.

2. Transactions with Non-Free Zone Persons

Income from transactions with Non-Free Zone Persons can qualify only where the income is derived from a Qualifying Activity and is not from an Excluded Activity.

This distinction is extremely important.

3. Qualifying Intellectual Property

Income from the ownership or exploitation of Qualifying Intellectual Property can qualify subject to the prescribed nexus approach.

4. Other Income

Certain other income may qualify where the QFZP satisfies the de minimis requirement.

5. What are Qualifying Activities?

The current framework is governed by Cabinet Decision No. 100 of 2023 together with Ministerial Decision No. 229 of 2025.

The principal Qualifying Activities include:

1. Manufacturing of goods or materials

2. Processing of goods or materials

3. Trading of Qualifying Commodities

4. Holding of shares and other securities for investment purposes

5. Ownership, management and operation of Ships

6. Reinsurance services

7. Fund management services

8. Wealth and investment management services

9. Headquarter services to Related Parties

10. Treasury and financing services to Related Parties or for own account

11. Financing and leasing of Aircraft

12. Distribution of goods or materials in or from a Designated Zone

13. Logistics services

14. Activities ancillary to the above Qualifying Activities.

Important 2025 change – Qualifying Commodity Trading

MD 229 of 2025 expanded and clarified the concept of Qualifying Commodities. The scope now includes, among other things, industrial chemicals, associated by-products and environmental commodities, subject to the prescribed conditions.

6. What are Excluded Activities?

Income from Excluded Activities does not qualify for the 0% rate.

Under the current MD 229 of 2025, major Excluded Activities include:

A. Transactions with Natural Persons

Transactions with natural persons are generally excluded, subject to specific exceptions for certain Qualifying Activities such as:

• Ownership, management and operation of Ships;
• Fund management;
• Wealth and investment management; and
• Financing and leasing of Aircraft.

B. Banking Activities

Banking activities are Excluded Activities.

C. Insurance Activities

Insurance activities are generally excluded, subject to prescribed exceptions, including qualifying reinsurance and certain specified activities.

D. Finance and Leasing Activities

Finance and leasing activities are generally excluded, except for specifically permitted activities such as:

• Treasury and financing services to Related Parties;
• Ownership, management and operation of Ships;
• Financing and leasing of Aircraft; and
• Certain qualifying commodity trading-related financing activities.

E. Immovable Property

Ownership or exploitation of immovable property is generally excluded.

An important exception exists for Commercial Property located in a Free Zone, where the relevant transaction is conducted with another Free Zone Person.

F. Ancillary Activities

Activities ancillary to an Excluded Activity are also treated as Excluded Activities.

7. What is the De Minimis Rule?

The de minimis rule permits a QFZP to earn a limited amount of non-qualifying Revenue without losing its QFZP status.

The condition is satisfied where non-qualifying Revenue does not exceed the lower of:

• 5% of total Revenue, or
• AED 5 million.

Example

Total Revenue = AED 80 million

5% of Revenue = AED 4 million

AED 5 million threshold = AED 5 million

Therefore, the permitted non-qualifying Revenue is:

Lower of AED 4 million and AED 5 million = AED 4 million

If non-qualifying Revenue is AED 4.5 million, the de minimis threshold is exceeded and the entity would not qualify for the QFZP regime for that Tax Period.

Practical significance

The de minimis rule is a status test, not merely a tax-rate test.

Exceeding the threshold can result in the entity losing its QFZP status and consequently losing the 0% regime.

8. What is Income Other Than Qualifying Income?

Income other than Qualifying Income may arise from:

• Excluded Activities;
• Transactions with Non-Free Zone Persons that do not constitute Qualifying Activities;
• Income attributable to a Domestic Permanent Establishment;
• Income attributable to a Foreign Permanent Establishment;
• Certain income from immovable property; and
• Other income that does not qualify under the applicable rules.

Such income is generally subject to the 9% Corporate Tax rate, subject to the detailed provisions of the Corporate Tax Law.

Key point

A QFZP should maintain a proper allocation of:

Revenue → Qualifying / Non-Qualifying

and

Expenses → attributable to Qualifying / Non-Qualifying activities

The FTA’s Tax Return Guide specifically recognises the need to allocate expenses between the two components when determining Qualifying Income and other taxable income.

9. Adequate Substance and Outsourcing

Maintaining adequate substance is one of the fundamental conditions for QFZP status.

A Free Zone Person must perform its Core Income-Generating Activities (CIGA) in the relevant Free Zone.

The entity should have adequate:

• Employees;
• Assets;
• Operating expenditure; and
• Actual business operations

having regard to the nature and scale of the business.

Outsourcing

Certain CIGA may be outsourced, but the outsourcing must satisfy the prescribed conditions.

Generally, activities outsourced to another person in a Free Zone can be treated as being performed by the QFZP where the QFZP maintains adequate supervision over the outsourced activity.

Example

A Free Zone company claims to undertake manufacturing but:

• has no employees;
• has minimal assets;
• has no meaningful operations in the Free Zone; and
• performs its core activities outside the Free Zone.

Merely possessing a Free Zone licence would not establish adequate substance.

The substance must reflect the actual business model.

10. Special Consideration – Intellectual Property

The UAE Free Zone regime contains special rules for Qualifying Intellectual Property (QIP).

The 0% rate does not automatically apply to all income from intellectual property.

Qualifying Income from QIP is determined using the nexus approach, which broadly links the amount of qualifying IP income to the qualifying R&D expenditure incurred in developing the IP.

Basic formula

Qualifying IP Income =

(Qualifying Expenditure + permitted uplift expenditure) ÷ Overall Expenditure × Overall IP Income

The uplift is generally 30% of Qualifying Expenditure, subject to the prescribed limitation that the uplifted expenditure cannot exceed Overall Expenditure.

Qualifying Expenditure

Generally includes expenditure incurred for R&D activities directly connected with:

• Creation;
• Invention; or
• Significant development

of the Qualifying IP.

The rules also contain specific requirements concerning outsourced R&D and Related Parties.

Practical point

A company should maintain detailed records showing:

• Ownership of IP;
• R&D expenditure;
• Nature of R&D activities;
• Location of R&D;
• Outsourcing arrangements;
• Related-party expenditure; and
• Income attributable to the IP.

This is necessary to substantiate the nexus calculation.

11. Election to be Subject to Regular Corporate Tax

A QFZP can elect to be subject to the general Corporate Tax rates instead of applying the special QFZP regime.

The election is effective from either:

• The beginning of the Tax Period in which the election is made; or
• The beginning of the following Tax Period,

and generally applies for that Tax Period and the following four Tax Periods.

Therefore, the decision to opt out of the QFZP regime should not be taken casually.

Why might an entity consider the election?

For example, where the entity:

• has substantial non-qualifying income;
• wants to access provisions that are restricted for QFZPs;
• wants greater flexibility in structuring its business; or
• expects the QFZP regime to be commercially disadvantageous.

The election should be evaluated through a multi-year tax computation, rather than merely comparing 0% and 9% for one year.

12. Consequence of Losing QFZP Status

If a Free Zone Person fails to satisfy the conditions for QFZP status, it can lose the benefit of the 0% regime.

The failure can result in the entity being subject to the general Corporate Tax rates for the prescribed period.

The FTA guidance notes that where a QFZP fails to meet the conditions during a Tax Period, it ceases to qualify for the 0% rate from the beginning of that Tax Period and is generally subject to the general rates for five Tax Periods starting with that Tax Period.

This makes annual monitoring of QFZP conditions critical.

13. Compliance Requirements

A Free Zone Person should pay particular attention to:

Corporate Tax Registration

All taxable Free Zone Persons are required to register for Corporate Tax.

Corporate Tax Return

A Free Zone Person must file its Corporate Tax Return and pay any Corporate Tax due within the prescribed period, generally 9 months from the end of the relevant Tax Period.

Audited Financial Statements

A QFZP is required to prepare and maintain audited financial statements, subject to the applicable legislation. The FTA bulletin specifically highlights this requirement for QFZPs.

Transfer Pricing

The arm’s-length principle applies to relevant Related Party transactions, together with applicable Transfer Pricing documentation requirements.

Record Keeping

Relevant records and documents should generally be retained for 7 years after the end of the relevant Tax Period.

14. Practical Business Impact

For a Free Zone business owner, the most important point is:

A Free Zone licence alone does not guarantee 0% Corporate Tax.

Before claiming the 0% rate, the business should analyse:

1. Where is the entity incorporated?

2. Where are its actual operations conducted?

3. Who are its customers – Free Zone, Mainland, foreign or individuals?

4. What activities generate the income?

5. Are those activities Qualifying Activities?

6. Is any income from an Excluded Activity?

7. Is the de minimis threshold satisfied?

8. Is adequate substance maintained?

9. Are Related Party transactions at arm’s length?

10. Are audited financial statements and TP documentation maintained?

11. Is any income attributable to a Domestic or Foreign PE?

12. For IP income, is the nexus calculation properly supported?

15. Precaution / Action Steps

A Free Zone company intending to claim the 0% rate should maintain a QFZP compliance file containing:

• Free Zone licence and business activities;
• Organisation chart;
• Employee details and payroll;
• Office lease and evidence of actual operations;
• Asset register;
• Revenue-wise customer classification;
• Free Zone / Non-Free Zone customer analysis;
• Activity-wise revenue mapping;
• Qualifying and Excluded Activity analysis;
• De minimis computation;
• Related Party transaction details;
• Transfer Pricing documentation;
• Audited financial statements;
• Expense allocation methodology;
• IP nexus calculation, wherever applicable; and
• Evidence supporting Core Income-Generating Activities.

The classification should be reviewed before filing the Corporate Tax Return, not after the tax position has already been taken.

16. Key Takeaway

The UAE Free Zone Corporate Tax regime is a conditional 0% regime—not a blanket tax exemption.

A business must continuously satisfy the QFZP conditions relating to:

Substance + Qualifying Income + Qualifying Activities + De Minimis + Transfer Pricing + Audited Financial Statements + Compliance.

The most important practical exercise is to map each revenue stream to the customer, activity and applicable QFZP rule before applying the 0% Corporate Tax rate.

The current Qualifying/Excluded Activity framework should be checked against Ministerial Decision No. 229 of 2025, which replaced the earlier activity decision with retrospective effect from 1 June 2023.