Qualifying Free Zone Person: How Free Zone Companies Keep the 0% Rate
The conditions a free zone company must meet to pay 0% corporate tax, what counts as qualifying income and what happens if you fail a test.
By Countify's ACCA/FCCA chartered certified accountants
A free zone licence is not a 0% rate
Free zone companies are subject to UAE corporate tax like any other company. They pay 0% only on qualifying income, and only if they are a Qualifying Free Zone Person (QFZP) for the whole tax period. Other income is taxed at 9%.
The conditions
- Maintain adequate substance in the free zone: assets, qualified staff and operating expenses in line with the activity.
- Derive qualifying income.
- Meet the de minimis test: non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower.
- Not elect to be taxed under the standard corporate tax rules.
- Comply with transfer pricing rules and documentation.
- Prepare audited financial statements.
What counts as qualifying income
Broadly, qualifying income is income from transactions with other free zone persons, and income from specified qualifying activities carried on with anyone, such as manufacturing, trading qualifying commodities, logistics, shipping, fund and wealth management and headquarter services. Certain income from qualifying intellectual property can also qualify.
Income from transactions with individuals is generally excluded, which catches many consultancies, agencies and e-commerce businesses that sell to consumers.
The cost of failing a condition
If a company fails any condition at any time, it stops being a QFZP and is taxed at the standard rates for that tax period and the following four tax periods. That makes an annual QFZP review essential rather than optional.
Sometimes the standard regime is better
Small free zone companies that sell mainly to mainland customers or individuals may find that most of their income is non-qualifying. For them, the standard rules, possibly with Small Business Relief (which QFZPs cannot use), can be simpler and cheaper. We compare both before you file.
How Countify can help
We review your activities and income streams against the QFZP rules, prepare audit-ready accounts and file your corporate tax return on the right basis.
This guide is general information and reflects the rules at the time of writing. UAE tax rules change, so check the latest FTA guidance or speak to us before acting.
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