Yes, but only if the company is a Qualifying Free Zone Person and the income qualifies. A QFZP pays 0% on qualifying income, which can include some non-qualifying revenue as long as it stays within the de minimis limit. Certain income, like some property and IP income or income from a permanent establishment, is taxed at 9%. You also need real substance, audited accounts and a filed return every year.
This is probably the most repeated myth in UAE business setup, that a free zone licence comes with tax-free status attached, no questions asked. It doesn’t, and it never really did. What free zone companies get is a genuine path to 0%. But it’s a test you have to pass, and keep passing, not a default setting.
What Are the Qualifying Free Zone Person Conditions That Decide Your 0% Rate?
Everything hangs on one status, the Qualifying Free Zone Person, or QFZP. That’s what unlocks 0%, not the free zone licence on its own.
The list of conditions is longer than the “big three” people usually mention. A QFZP has to:
- Maintain adequate substance in the free zone
- Earn qualifying income
- Stay within the de minimis limit on non-qualifying revenue
- Not elect into the standard corporate tax regime
- Follow arm’s length pricing on related-party transactions, with transfer pricing documentation where the thresholds apply
- Keep audited financial statements, regardless of revenue, under Ministerial Decision No. 84 of 2025
All of them. Every tax period. It isn’t a one-off check at incorporation. A company that qualified last year isn’t automatically safe this year if its income mix, paperwork or operations have changed.
What Counts as Qualifying Income?
This is where most of the confusion sits. Qualifying income isn’t just “income earned in the free zone”, and it definitely isn’t decided by where your customer happens to be.
An overseas customer doesn’t make income qualifying by itself. For transactions with someone who isn’t a Free Zone Person, the activity generally has to be one of the specifically listed Qualifying Activities, wherever that customer is based. Transactions with another Free Zone Person work differently. That Free Zone Person generally needs to be the beneficial recipient of the goods or services, and some excluded activities still don’t count, even between two free zone companies. Customer location is one input. It’s not the deciding factor.
What Does the De Minimis Limit Actually Allow?
The de minimis rule is a tolerance for a small amount of non-qualifying revenue. It’s also where the biggest misunderstanding sits.
The limit is specific. Non-qualifying revenue in a tax period must not exceed the lower of AED 5 million or 5% of total revenue, calculated with certain prescribed exclusions, under Ministerial Decision No. 229 of 2025.
Here’s the part people get wrong. Staying within the limit doesn’t just protect your status. Income from that non-qualifying revenue can itself be treated as qualifying income and taxed at 0%, as long as the conditions are met. It isn’t automatically split off and taxed at 9%.
A few income streams play by different rules, though. Say the company has a branch abroad that counts as a permanent establishment. Or it rents out property, or earns royalties from IP that doesn’t pass the test. That income can land at 9%, and the company still keeps its QFZP status for everything else. Cabinet Decision No. 100 of 2023 sets out the detail. So before you check anything against the AED 5 million or 5% ceiling, classify your revenue properly. Tallying up “everything that isn’t obviously qualifying” won’t give you the right answer.
What Happens If a Company Loses QFZP Status?
Two things. The rate changes, and the effect lasts a long time.
On the rate, losing QFZP status doesn’t mean 9% on every dirham of income. The company moves into the ordinary corporate tax regime, the same one every other UAE business uses. In that regime, your first AED 375,000 of taxable profit still pays nothing. Only the slice above it gets taxed at 9%, and the normal reliefs still apply. You lose the 0% on what would have been qualifying income, which can be a big change, but it isn’t “9% of everything”.
The duration is what really hurts. Disqualification applies from the start of the tax period where the condition failed, and for the following four tax periods as well. That’s five periods in the ordinary regime before QFZP status can apply again. Crossing the de minimis limit by a small margin triggers the same thing.
What Does Substance Actually Require From You?
More than a registered address and a flexi-desk.
The core income-generating activities behind your qualifying income generally need to take place in the relevant free zone or designated zone. They also need to be backed by adequate assets, a suitable number of qualified employees and operating expenditure that matches the scale of the activity. A company that exists on paper in the free zone while the real work happens elsewhere won’t pass.
There’s some flexibility. Certain activities can be outsourced to a third party in the free zone, as long as the company supervises that work properly. That’s useful for businesses that rely on outside service providers. The supervision has to be real and provable, though, not nominal.
“The part that catches people off guard isn’t usually the 9% rate itself, it’s how many separate conditions actually feed into staying qualified, and how long a single misstep costs you once it happens. Founders expect a gradual penalty for a mixed year, and instead they get a multi-period lockout that applies well beyond the year something actually went wrong. That’s exactly why this needs an actual annual review, not a one-time setup decision you file away and forget.”
— Kartik Sangar, Partner & Group CFO
Do You Still Need to File a Corporate Tax Return at 0%?
Yes. This is another place where “free zone equals tax-free” causes real trouble. Paying 0% on qualifying income doesn’t remove registration, filing or record-keeping. It only changes the rate.
Every free zone company within UAE corporate tax needs to register with the Federal Tax Authority and file a return for each tax period. That includes audited financial statements whatever the revenue, transfer pricing documentation where the thresholds apply, and records showing substance, income classification and de minimis compliance. Skipping any of this because the bill is expected to be zero isn’t a shortcut. If the FTA later reviews your status and finds nothing to back up a QFZP claim, that claim falls apart.
About the Author
Kartik Sangar is the Partner & Group CFO who writes about tax, accounting and compliance for UAE founders at Smart Zone.
