Key takeaways
- Free zone companies sit inside UAE corporate tax, and the 0% rate applies only to a Qualifying Free Zone Person that meets every QFZP condition.
- Non-qualifying income above 5% of revenue or AED 5 million, whichever is lower, puts all income for the period under the standard rates and ends QFZP status for five periods.
- QFZP status needs annual audited IFRS statements, and you must still register and file a corporate tax return.
Why an address is not enough
Many founders assume a free zone address means 0% tax, but free zone companies sit inside the corporate tax regime.
The 0% rate belongs to a Qualifying Free Zone Person (QFZP) earning Qualifying Income, a status earned against six conditions and held period by period. Companies that never checked often meet the question for the first time when the FTA asks it.
The two possible tax bills
In any period, income either sits at 0% as qualifying QFZP income or falls under the standard rates, and the conditions decide which.
Available only when all six conditions are met at once and the income qualifies on its facts. The status is elected on the corporate tax return, period by period, and stands or falls on the substance behind it.
The standard rate on income above AED 375,000. A free zone company that does not qualify pays it like a mainland company, and some are in this position without realising it.
The six QFZP conditions, all at once
Meeting five of the six earns nothing, and the standard rates apply.
Adequate substance in the UAE
Core income-generating work done in the UAE by real people. A company incorporated in a zone but run from abroad fails this test.
Qualifying income only
Mainland income is mostly non-qualifying, and the definition is narrower than many founders assume, as the 2025 clarification on qualifying income for free zone companies shows.
The de minimis limit
If non-qualifying income passes 5% of total revenue or AED 5 million, whichever is lower, all income that period falls under the standard rates. Even modest mainland income can cross it.
Audited financial statements
Management accounts do not count. Without an audit for the period, there is no QFZP status for that period.
Transfer pricing compliance
Related-party dealings must be at arm's length and documented, which is real work for a group. Income moved into the free zone company without the substance to earn it is also open to the UAE corporate tax GAAR.
No election for the standard rate
A free zone company that elects to be taxed at the standard rates is no longer a QFZP, whatever its income looks like.
And then you file
QFZP waives nothing. Registration, the return and the records all remain, and the return is where QFZP status is declared each period.
What counts as qualifying income
The zone you pick among UAE free zones and the structure you choose at setup shape how much income lands in the qualifying column. We treat free zone formation and tax position as one decision.
- Transactions with other free zone persons
- Income from a qualifying activity, whoever the customer is
- Certain investment and intellectual property income, under their own conditions
- Consultancy, marketing and most IT income, whoever the customer is
- Excluded activities, including banking to UAE residents
- Anything that breaches the de minimis limit for the period
We place your income against your actual contracts.
Get this wrong and the FTA decides what you owe.
An incorrect reading can cost far more than the rate. It exposes you to an assessment and penalties on the under-declaration, for every period affected.
A breach can also cost QFZP status for that tax period and the following four, so one bad year puts 0% out of reach for five.
Settling the structure, the income, the audit and the election before a return is filed costs less than defending them afterwards. It is the test our corporate tax consultants in Dubai run first.
