UAE free zone entities pay 0 % corporate tax on qualifying income if they achieve Qualifying Free Zone Person (QFZP) status under Ministerial Decision No. 229 of 2025. QFZP status requires meeting six strict conditions — substance, qualifying activities, audited financials, transfer pricing compliance, de minimis caps, and no election to the standard regime. Failing any single condition triggers 9 % taxation on all income for the current year and four subsequent years. Last updated: May 2026.
For the standard 9 % rate, see UAE Corporate Tax: how the 9 % rate works in 2026. For the mainland-vs-free-zone decision, see UAE mainland vs free zone: which is right for your business in 2026?.
What are the six QFZP conditions?
A free zone entity qualifies as a QFZP only if it meets all six conditions simultaneously. Failing any single condition disqualifies the entity.
| # | Condition | Requirement |
|---|---|---|
| 1 | Incorporation | Must be incorporated in a UAE Designated Free Zone |
| 2 | Substance | Adequate employees, office, and operating expenses proportional to activity |
| 3 | Qualifying Activities | Income derived from activities listed in MD 229/2025 |
| 4 | No standard-regime election | Must not elect to be taxed under the normal 9 % framework |
| 5 | Transfer pricing compliance | Arm’s length pricing + documentation for related-party transactions |
| 6 | Audited financials | Annual IFRS-compliant audited statements, mandatory per MD 84/2025 |
What are qualifying activities?
Ministerial Decision No. 229 of 2025 — which expressly repeals the earlier MD 265 of 2023 — defines qualifying activities. The confirmed categories include:
- Manufacturing and processing of goods
- Trading of qualifying commodities (expanded by MD 230 of 2026 to include processed metals, industrial chemicals, and carbon credits)
- Holding of shares and other securities
- Fund management and wealth management for qualifying investors
- Ship management and aircraft leasing
- Headquarter services to related parties
- Reinsurance, captive insurance
- Treasury and financing activities for group entities
Activities that generally do not qualify include: direct B2C sales to UAE mainland consumers, retail banking, retail insurance, domestic real-estate brokerage, and digital services that are not ancillary to a qualifying activity.
What is the De Minimis Rule?
A QFZP can earn limited non-qualifying income without losing its status. The threshold is the lower of 5 % of total revenue or AED 5 million. Exceeding either trigger costs QFZP status for five years.
According to the FTA’s Corporate Tax Guide CTGFZP1, a free zone company with AED 80 million in total revenue and AED 4 million in non-qualifying revenue passes the test — 5 % of AED 80 million is AED 4 million, and AED 4 million is below the AED 5 million cap. The same company with AED 6 million in non-qualifying revenue would fail — the AED 5 million absolute cap binds regardless of the percentage.
What happens if QFZP status is lost?
If a free zone entity fails any single QFZP condition, it loses its qualifying status for the current tax period and the next four periods — a five-year lockout. During the lockout, all income (including previously qualifying income) is taxed at 9 %. The entity can re-test for QFZP eligibility from year six.
According to Kayrouz & Associates’ 2026 compliance analysis, the five-year lockout is the most punitive consequence in the UAE corporate tax framework. A single year of non-compliance — whether from substance shortfall, missed audit filing, or de minimis breach — costs five years of the 0 % rate.
Financial records must be maintained for a minimum of seven years from the end of the relevant tax period for all QFZPs.
How does a mainland branch affect QFZP status?
A free zone entity can operate a mainland branch or subsidiary without losing QFZP status. The mainland branch is treated as a domestic Permanent Establishment and its income is taxed at 9 %, but this income does not count toward the de minimis threshold and does not disqualify the free zone parent.
This dual structure — free zone parent for qualifying income at 0 %, mainland subsidiary for UAE customer-facing operations at 9 % — is the standard approach for businesses that need both tax efficiency and market access. For the dual-structure mechanics, see UAE mainland vs free zone: which is right for your business in 2026?.
Can QFZPs use Small Business Relief?
No. QFZPs cannot elect Small Business Relief (SBR) under Ministerial Decision No. 73 of 2023. SBR is available only to standard UAE resident taxpayers with revenue below AED 3 million. Free zone entities that want zero tax liability must qualify under the QFZP regime, which requires audited financials, substance, and activity compliance — a higher compliance bar than SBR’s simple revenue threshold.
Frequently asked questions
Which free zones qualify as Designated Free Zones?
DMCC, JAFZA, DIFC, ADGM, IFZA, RAKEZ, Meydan, KIZAD, Hamriyah, Dubai South, SHAMS, and SPC are among the confirmed Designated Free Zones. The list is governed by Cabinet decision and reviewed periodically. Each free zone authority can confirm current Designated Zone status.
How much do audited financials cost?
Audited financial statements prepared under IFRS typically cost AED 5,000 to AED 15,000 annually for small to mid-sized free zone entities. This cost should be factored against the tax savings of the 0 % rate.
Is the 0 % QFZP rate permanent?
The QFZP regime has no published sunset date. However, the conditions and qualifying activities are subject to periodic review by the Ministry of Finance, and the de minimis thresholds and substance requirements can be tightened through future Ministerial Decisions.
Sources and further reading
- Ministerial Decision No. 229 of 2025 — Qualifying Activities and income definitions (repeals MD 265/2023)
- Ministerial Decision No. 230 of 2026 — Expanded qualifying commodity trading categories
- Ministerial Decision No. 84 of 2025 — Mandatory audited financials for QFZPs
- Ministerial Decision No. 73 of 2023 — Small Business Relief exclusion for QFZPs
- FTA Corporate Tax Guide CTGFZP1 — Free Zone Persons compliance (tax.gov.ae)
- Cabinet Decision No. 129 of 2025 — Revised penalty framework