The UAE’s corporate tax regime is built on a “reward for compliance” model. For Free Zone businesses, the ultimate reward is the 0% corporate tax rate. However, this is not a default right. To unlock this incentive, an entity must be recognized as a Qualifying Free Zone Person (QFZP).
Under the combined framework of Cabinet Decision No. 100 of 2023 and the updated Ministerial Decision No. 229 of 2025, the requirements for QFZP status have become more refined. Businesses must now meet several rigorous conditions simultaneously. A single slip-up doesn’t just result in a fine; it triggers a multi-year tax penalty.
The Pillars of QFZP Compliance
To maintain the 0% rate, your Free Zone entity must satisfy these six core requirements:
1. Adequate Economic Substance
“Paper companies” are a thing of the past. A QFZP must demonstrate a real physical and economic presence within its Free Zone. This includes:
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Maintaining an adequate number of qualified full-time employees.
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Incurring an adequate level of operating expenditure.
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Utilizing adequate physical assets (offices/facilities) located in the zone.
2. Generating Qualifying Income
Income must be derived from “Qualifying Activities” (such as manufacturing, ship management, or the newly expanded commodity trading rules under MD 229/2025) and must not stem from “Excluded Activities” (like transactions with natural persons).
3. Audited Financial Statements
Regardless of turnover, a QFZP must maintain audited financial statements. This is a non-negotiable transparency requirement that ensures the Federal Tax Authority (FTA) can verify the segregation of qualifying and non-qualifying income.
4. Transfer Pricing and Arm’s Length Principle
All transactions with related parties or intra-group entities must comply with Transfer Pricing regulations. Pricing must reflect the “Arm’s Length Principle”—meaning the terms must be identical to what they would be between two independent, unrelated companies.
5. No Election to the Standard Regime
The entity must not have voluntarily opted to be taxed under the standard 9% corporate tax regime. Once you opt out of the QFZP status, returning to the 0% rate is subject to strict limitations.
The “De-Minimis” Rule: Your Safety Net and Its Limits
The law recognizes that businesses may occasionally earn small amounts of non-qualifying income. The De-minimis rule allows you to retain your 0% status if your non-qualifying revenue does not exceed:
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5% of your total revenue, or
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AED 5,000,000 (whichever is lower).
If you stay within this limit, only the non-qualifying portion is taxed at 9%. However, if you exceed this threshold, the consequences are catastrophic.
The “Five-Year Lockout”: The Cost of Non-Compliance
The UAE tax regime follows a “zero tolerance” policy regarding QFZP conditions. There is no partial compliance.
If any of the above conditions are violated (e.g., failing an audit, lacking substance, or breaching the de-minimis threshold), the entity immediately loses its QFZP status. This results in:
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Immediate Taxation: All income for the current tax period is taxed at the standard 9% rate.
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The Cooling-off Period: The entity is disqualified from the 0% rate for the subsequent four tax periods.
This means one year of non-compliance leads to five years of mandatory 9% taxation
Navigating the QFZP regime in 2025 requires more than just a Free Zone license; it requires a robust tax governance framework. From ensuring adequate substance to monitoring the de-minimis limit every month, the burden of proof lies with the taxpayer.
