Guide · updated August 2026

Free zone corporate tax: the 0% rate has conditions

By Hamza Maghrabi · Last updated 21 August 2026

"Free zone" no longer means "tax free" by default. Since June 2023, a free zone company keeps 0% only as a Qualifying Free Zone Person (QFZP) — and only on qualifying income. Everything else is taxed at 9%, and the AED 375,000 threshold doesn't apply to QFZPs at all.

The QFZP conditions

Adequate substance in the free zone — real people, premises and spending proportional to the activity.
Qualifying income — see below.
Audited financial statements — mandatory, whatever your size.
Transfer pricing compliance — arm's-length dealing with related parties, documented.
No election to be taxed under the standard regime.

Fail any condition and you lose QFZP status for that year and the next four — the most expensive checkbox in the UAE.

What counts as qualifying income

Transactions with other free zone persons (where they're the beneficial recipient).
Qualifying activities even with mainland clients: manufacturing, goods processing, fund/wealth management, headquarters and treasury services, aircraft/ship financing and leasing, logistics, distribution from a designated zone, and related activities.
Income from excluded activities is never qualifying: dealings with individuals (with narrow exceptions), banking, insurance, most mainland real estate income.

The de minimis rule

A little non-qualifying revenue is tolerated: the lower of AED 5,000,000 or 5% of total revenue. Stay under it and your qualifying status survives; breach it and the entire year's income is taxed at 9%.

Most common SME mistake: a free zone consultancy invoicing mainland companies for services assumes it's "qualifying" — professional consultancy to mainland clients generally is not a qualifying activity. Check before you rely on 0%.

Practical checklist

Map each revenue stream: free-zone client vs mainland, activity by activity.
Estimate the split with the corporate tax calculator (Free Zone toggle).
Book the audit early — unaudited accounts alone disqualify you.
If most income is non-qualifying, compare regimes: standard 0%/9% with the AED 375K band can beat a failed QFZP position.

General information, not tax advice — free zone analysis is exactly where a licensed agent earns their fee.

The lists that decide it

Qualifying and excluded activities

Whether a free zone company keeps 0% comes down to two lists. An activity on the qualifying list can produce qualifying income. An activity on the excluded list cannot, regardless of who the counterparty is or how much substance sits behind it.

Qualifying activities

Goods	Manufacturing and processing of goods or materials. Trading of qualifying commodities. Distribution of goods from a designated zone.
Financial and holding	Holding of shares and other securities for investment. Regulated fund management, wealth management and investment management services. Treasury and financing services to related parties.
Transport and assets	Ownership, management and operation of ships. Financing and leasing of aircraft, including engines and components.
Services	Headquarter services to related parties. Logistics services. Activities ancillary to any of the above.

Excluded activities

Income from these is never qualifying, even between two free zone persons.

Transactions with natural persons	Sales to individuals, with narrow exceptions for certain regulated activities.
Regulated financial services	Banking, insurance and most finance and leasing activity, unless it falls within a specific carve-out.
Immovable property	Ownership or exploitation of property, other than commercial property located in a free zone where the transaction is with another free zone person.
Intangible assets	Ownership or exploitation of intellectual property and other intangibles.

How the two interact with de minimis

A company does not lose everything the moment it earns some non-qualifying income. The de minimis rule allows non-qualifying revenue up to the lower of 5% of total revenue or AED 5,000,000. Stay inside that and QFZP status survives, with the non-qualifying portion taxed at 9%. Cross it and the status goes for that tax period and the following four.

Excluded activity income counts toward the de minimis calculation. This is the detail that catches companies which assume a small property or licensing income line is harmless.

Reading your own position

Work through it in this order. Identify what the company actually does, not what the licence permits. Split revenue by counterparty: free zone person, foreign person, mainland business, individual. Check each stream against the two lists. Then total the non-qualifying share and compare it to the de minimis limit.

If the answer is close either way, the audited accounts requirement and the five-year consequence of failure make this a question worth putting in front of a licensed tax agent before the year end. The QFZP checker gives the fast version, and the zone comparison covers how individual zones differ in practice.

Common questions

What are the qualifying activities for a QFZP?

Manufacturing and processing, trading of qualifying commodities, distribution from a designated zone, holding of shares and securities, regulated fund and investment management, treasury and financing to related parties, ship ownership and operation, aircraft financing and leasing, headquarter services to related parties, logistics services, and activities ancillary to these.

What activities are excluded from qualifying income?

Transactions with natural persons apart from narrow exceptions, regulated banking and insurance, most finance and leasing, ownership or exploitation of immovable property other than free zone commercial property transacted with free zone persons, and ownership or exploitation of intangible assets.

Does a small amount of non-qualifying income destroy QFZP status?

No, provided it stays within the de minimis limit of the lower of 5% of total revenue or AED 5,000,000. Within that limit the status survives and the non-qualifying portion is taxed at 9%.

Does excluded activity income count toward de minimis?

Yes. Income from excluded activities counts toward the non-qualifying revenue total used in the de minimis test.