Corporate Tax

Free Zone Corporate Tax & the QFZP 0% Rate

2025-11-10 · 5 min read · By Aureus Worldwide

The 0% corporate tax rate is one of the biggest draws of UAE free zones, but it is conditional, not automatic. A free zone company only enjoys 0% on its qualifying income if it meets the Qualifying Free Zone Person (QFZP) conditions, including real substance and the right kind of income. Misunderstanding this can mean an unexpected 9% bill. This guide explains how free zone corporate tax actually works and what it takes to qualify.

The starting point: registration applies to everyone

Even free zone companies expecting 0% must register for corporate tax and file returns. Registration is administrative and separate from the rate that applies, see our guide to registering for UAE corporate tax. The QFZP regime then determines whether your income is taxed at 0% or the standard rates.

What is a Qualifying Free Zone Person?

A QFZP is a free zone entity that meets all of the following broad conditions:

• Earns qualifying income as defined by the corporate tax rules
• Maintains adequate substance in the UAE, including core income-generating activities, people and assets
• Complies with transfer pricing rules and documentation
• Does not elect to be subject to the standard corporate tax regime
• Meets any other conditions set by the FTA, including financial statement requirements

Meeting these allows 0% on qualifying income; the standard rates apply to non-qualifying income.

The two rates side by side

The standard regime taxes income at 0% up to AED 375,000 and 9% above it. The QFZP benefit is specifically the 0% on qualifying income, regardless of amount, when conditions are met.

Qualifying vs non-qualifying income

Broadly, qualifying income tends to include transactions with other free zone persons and certain qualifying activities, while income from excluded activities or from mainland customers may be non-qualifying. The precise definitions are detailed and have been refined over time, so this is an area to confirm carefully with the FTA and an adviser rather than assume.

The de minimis test

The rules include a de minimis allowance for non-qualifying revenue. If your non-qualifying revenue stays within the permitted threshold (set as a small percentage of total revenue or a capped amount, whichever applies), you can retain QFZP status. Exceed it, and you risk losing the 0% benefit. Because the figures are defined by the FTA and may change, confirm the current de minimis limits before relying on them.

Substance is non-negotiable

The 0% rate rewards genuine economic activity in the free zone. That means:

• People actually performing core activities in the UAE
• Premises appropriate to the business
• Decision-making and expenditure taking place locally

A letterbox company will not qualify. Substance also intersects with ESR reporting obligations, which many free zone entities must meet.

Transfer pricing applies too

A point that surprises many free zone owners is that the QFZP regime requires compliance with transfer pricing rules. Transactions with related parties, other group companies, owners or connected businesses, must be priced on an arm's-length basis, as if between independent parties, and supported by appropriate documentation. This prevents profit from being artificially shifted into the 0% bracket. If your free zone company transacts with related entities, build transfer pricing into your planning from the start, because it is a condition of keeping the 0% benefit, not an optional extra.

Keeping the records the regime demands

The QFZP regime is evidence-based. To claim and defend 0%, you generally need:

• Audited financial statements, as required under the rules
• Clear records separating qualifying and non-qualifying income
• Documentation supporting your substance in the free zone
• Transfer pricing documentation for related-party transactions
• Evidence that non-qualifying revenue stays within the de minimis limit

Maintaining these throughout the year, rather than assembling them at filing time, is what makes the difference between a clean 0% position and an exposed one.

Should you elect out?

Some free zone companies are better off electing into the standard regime, for instance, if most income is non-qualifying or if compliance with QFZP conditions is impractical. Under the standard regime, the first AED 375,000 of taxable income is taxed at 0% and the excess at 9%, which can be perfectly acceptable for a smaller business that does not generate much qualifying income. This is a strategic decision that depends on your income mix, structure and the cost of meeting the QFZP conditions. Before choosing your structure at all, compare the routes in our free zone vs mainland guide.

A note on changing rules

The free zone corporate tax regime has been clarified and refined since its introduction, particularly around qualifying activities and the de minimis thresholds. That makes it one area where you should not rely on older guidance or assumptions. Always confirm the current definitions, thresholds and conditions with the FTA or a qualified adviser before making decisions, and revisit your position periodically as the rules mature.

How Aureus Worldwide helps

Aureus Worldwide assesses whether your free zone company meets the QFZP conditions, helps you separate qualifying from non-qualifying income, and keeps the substance, accounting and corporate tax records that the regime demands. We handle registration, computation and filing, and we always direct you to confirm changeable specifics, including the de minimis limits, with the FTA. To get your free zone tax position right, contact us.

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