The most expensive checkbox in UAE tax
Is your free zone company really at 0%?
"Free zone" doesn't mean tax-free anymore. Six questions test the Qualifying Free Zone Person conditions — fail one and you're at 9%, for five years.
1 · Is the company registered in a UAE free zone?
2 · Do you prepare audited financial statements? Mandatory whatever your size — unaudited accounts alone disqualify you.
3 · Does the company have real substance in the zone? Staff, premises and operating spend proportional to the activity — not just a flexi-desk.
4 · Is your main income from qualifying activities or other free-zone businesses? Manufacturing, logistics, fund management, HQ services, designated-zone distribution — or free-zone clients. Consultancy to mainland clients generally is NOT qualifying.
5 · Is non-qualifying revenue under the de minimis line? The lower of AED 5,000,000 or 5% of total revenue.
6 · Have you elected to be taxed under the standard regime?
The conditions in full
What being a Qualifying Free Zone Person requires
Free zone companies did not lose their tax advantage when corporate tax arrived, but the advantage stopped being automatic. The 0% rate now belongs to a Qualifying Free Zone Person, and only on qualifying income. Everything else is taxed at 9%, and the AED 375,000 zero band that ordinary mainland businesses get is not available to a QFZP at all.
That last point is worth sitting with. A free zone company that fails the QFZP test is often worse off than a mainland company with identical profit, because it loses the band as well as the 0% rate.
The conditions, all of which must hold
| Adequate substance | Real activity in the zone. Staff, premises and operating expenditure proportionate to what the company does, with core income-generating activities performed in the zone rather than outsourced away from it. |
|---|---|
| Qualifying income | Income of a type the rules recognise, broadly transactions with other free zone persons and specified qualifying activities. Sales to mainland UAE customers and to individuals are generally not qualifying. |
| De minimis | Non-qualifying revenue must stay under the lower of 5% of total revenue or AED 5,000,000. Cross that and QFZP status goes. |
| Audited accounts | Audited financial statements are required. This is not optional and not waived for small companies. |
| Transfer pricing | Arm's length pricing and proper documentation for related-party transactions. |
| No election out | You must not have elected to be subject to the standard corporate tax regime. |
The penalty for failing is longer than one year
Failing any condition costs QFZP status for that tax period and the following four. A single bad year therefore reaches five, which is why the de minimis threshold deserves monitoring during the year rather than discovery at audit. If you are close to 5%, know where you are each quarter.
Designated zones are a VAT concept, not a tax one
A designated zone is a VAT classification affecting the treatment of goods moving in and out. It is not the same thing as qualifying for 0% corporate tax, and a company can be in a designated zone and still fail the QFZP conditions. The two regimes are assessed separately, and confusing them is one of the more common mistakes in free zone planning.
What to do with the result above
Treat the checker as a triage tool. It can tell you that you clearly fail a condition, which is useful and cheap to know. It cannot tell you that you qualify, because qualifying income analysis depends on your actual contracts and counterparties. If the check suggests you are close to the line, or if a material share of your revenue comes from mainland customers, that is the point to involve a licensed tax agent before the year end rather than after it.
The free zone corporate tax guide covers the qualifying activity list, and the zone comparison covers how individual zones differ.
Common questions
Do free zone companies pay corporate tax in the UAE?
They pay 0% on qualifying income only if they meet all the Qualifying Free Zone Person conditions. Non-qualifying income is taxed at 9%, and the AED 375,000 zero band is not available to a QFZP.
What is the de minimis threshold for a QFZP?
Non-qualifying revenue must stay below the lower of 5% of total revenue or AED 5,000,000. Exceeding it causes loss of QFZP status.
What happens if I fail a QFZP condition?
You lose Qualifying Free Zone Person status for that tax period and the following four tax periods, so a single failure has a five year effect.
Are audited financial statements required for free zone companies?
Audited financial statements are a condition of QFZP status. There is no small company exemption from this requirement.
Is a designated zone the same as a qualifying free zone?
No. Designated zone is a VAT classification about the movement of goods. QFZP is a corporate tax status. A company can be in a designated zone and still fail the QFZP conditions.
General information about UAE rules, not tax or legal advice. Verify anything that affects a decision with the relevant authority or a licensed adviser. About · Contact · Terms · Privacy