The UAE’s corporate tax regime offers a highly attractive 0% rate for Qualifying Free Zone Persons (QFZP). However, maintaining this status requires a deep understanding of the regulatory boundaries. Not all revenue generated within a Free Zone is treated equally. To prevent tax base erosion and ensure fair competition, the Ministry of Finance has designated specific operations as Excluded Activities.
Income derived from these activities does not benefit from the 0% incentive and is instead subject to the standard 9% UAE corporate tax rate.
What are Excluded Activities?
Excluded Activities are specific business functions that, by law, are disqualified from the preferential tax treatment. If a Free Zone company engages in these, the resulting income is carved out of the “Qualifying Income” pool.
1. Transactions with Natural Persons
As a general rule, the QFZP status is designed for B2B (Business-to-Business) operations. Revenue generated from transactions with natural persons (individuals) is considered an Excluded Activity. While there are limited exceptions—such as certain retail or residential services specifically permitted under supplemental decrees—most consumer-facing revenue will trigger the 9% tax rate.
2. Regulated Financial Services: Banking and Insurance
The UAE authorities have excluded core financial sectors to align with international regulatory standards. This includes:
-
Banking Activities: Traditional lending, deposit-taking, and related financial intermediation.
-
Insurance Business: Direct insurance underwriting is excluded. However, it is important to note that reinsurance is often treated differently and may qualify if other conditions are met.
3. Real Estate: Ownership and Use of Immovable Property
Real estate income is a complex area of the UAE tax law. Income from the ownership or use of immovable property is generally excluded from the 0% rate, with one significant exception:
-
The Exception: Income derived from commercial property located within a Free Zone is qualifying, provided the transaction is conducted with another Free Zone Person.
-
Conversely, income from residential property or transactions involving mainland real estate is taxed at 9%.
4. General Financing and Leasing
While the UAE encourages the maritime and aviation sectors, general financing is restricted. Financing or leasing activities are deemed “Excluded” unless they are specifically related to aircraft or ships. This means equipment leasing or general corporate lending will likely fall under the 9% tax bracket.
The “De-Minimis” Rule: The Threshold of Risk
Engaging in Excluded Activities does not automatically disqualify a company from its QFZP status, provided the income stays within the de-minimis threshold.
According to the Corporate Tax General Guide (CTGFZP1 §3.4), the de-minimis limit is calculated as the lower of:
-
5% of total revenue generated by the Free Zone Person in that tax period.
-
AED 5,000,000.
What happens if you exceed the threshold?
Exceeding this limit has severe consequences. As clarified in the official Bulletin (§6), if your non-qualifying income (including income from Excluded Activities) surpasses the de-minimis threshold, the entity loses its QFZP status entirely.
The penalty is not just for the current year; the company will be taxed at the standard 9% rate for the current tax period and the following four tax periods. This “five-year lockout” emphasizes the need for strict internal accounting and tax planning.
Conclusion: Strategic Compliance for 2025
For Free Zone entities, 2025 is a critical year for tax optimization. To safeguard your 0% tax status, businesses must:
-
Segment revenue streams to identify Excluded Activities early.
-
Monitor the 5% / AED 5M threshold on a quarterly basis.
-
Review all contracts with natural persons and real estate holdings.
By understanding the nuances of Excluded Activities, UAE businesses can leverage the benefits of the Free Zone environment while remaining fully compliant with the evolving legal landscape.
