A free zone licence does not give you a 0% tax rate. The status that does is called Qualifying Free Zone Person, and it is earned and tested every tax period. I see foreign founders treat it as a feature of the licence, like a visa quota, and plan their whole structure around it. The law treats it the other way round: it is a conditional benefit that can disappear retroactively to the first day of the year, and stay gone for five years.
This article is for foreign founders and owners of UAE free zone companies, and for investors who hold one. It explains the conditions, the point at which the status breaks, what that costs in real numbers, and how the position differs from Small Business Relief. My aim is a decision you can make with your tax adviser, not a promise that the 0% rate is yours.
How this article was built. I opened and read these primary sources on 12 October 2026: the Corporate Tax Law (Federal Decree-Law No. 47 of 2022, consolidated January 2026), Cabinet Decision No. 100 of 2023, Ministerial Decision No. 229 of 2025, the FTA’s Free Zone Persons Corporate Tax Guide (CTGFZP1, May 2024) and FTA Decision No. 6 of 2026. The guide is non-binding and predates the 2025 and 2026 decisions, so where they differ I follow the decisions. This is general information, not tax or legal advice.
Table of Contents
- The Short Answer
- Which Rules Apply Now
- The Five Tests a Qualifying Free Zone Person Must Pass
- What Counts as Qualifying Income
- What Happens When a Qualifying Free Zone Person Fails a Test
- Qualifying Free Zone Person vs Small Business Relief
- A Four-Question Decision Guide
- What to Do Before Your Next Return
- FAQ
The Short Answer on the Qualifying Free Zone Person Status
A free zone company is a Qualifying Free Zone Person when it passes all of these in the same tax period: it keeps adequate substance in the free zone, earns Qualifying Income, stays within the de minimis limit on other revenue, has not elected to be taxed normally, and meets the transfer pricing and audit requirements. If it passes, it pays 0% on Qualifying Income and 9% on the rest. If it fails one test at any time in the period, it is taxed under the standard rules from the start of that period, and it cannot return to the regime for the next four periods.
My view. The 0% rate suits companies that do real, qualifying work inside a free zone: manufacturing, logistics, group headquarter services, share holding, regulated fund management. It is a poor basis for a service business whose customers are mainly outside the free zones. For that business the better plan is usually to expect to be an ordinary taxpayer and use the standard reliefs. I explain why below.
Which Rules Apply to a Qualifying Free Zone Person Now
Many articles, and some briefing notes, still point to older instruments. The current stack is this:
- Corporate Tax Law, Articles 18 and 19. These define the status and the election to be taxed normally. Article 18 says that failing a condition at any particular time in a tax period ends the status from the beginning of that period.
- Cabinet Decision No. 100 of 2023. This is the Qualifying Income decision. Its Article 10 repeals Cabinet Decision No. 55 of 2023, so a brief that cites No. 55 is out of date.
- Ministerial Decision No. 229 of 2025. This lists Qualifying Activities and Excluded Activities and sets the de minimis test. It repeals Ministerial Decision No. 265 of 2023, as the Ministry of Finance announced on 3 September 2025. The main change is wider commodity trading, which now covers industrial chemicals, by-products and environmental commodities.
- FTA Decision No. 6 of 2026. This adds a compliance step for distribution companies in Designated Zones. I cover it in the income map below.
The Five Tests a Qualifying Free Zone Person Must Pass
1. You must be a Free Zone Person
A Free Zone Person is a juridical person registered in a free zone, including a branch of a foreign company or of a UAE company. The FTA guide notes that the 0% rate applies only to the free zone business. If your head office is in the free zone and you also operate on the mainland, that mainland activity is a Domestic Permanent Establishment, and its income is taxed at 9% whatever the free zone says.
2. You must keep adequate substance in the free zone
The guide requires a Free Zone Person to perform its core income-generating activities in the free zone, with adequate assets, qualified full-time employees and operating expenditure there. It may outsource those activities to another person in a free zone if it supervises them adequately. Neither the law nor the guide sets a number of staff or a minimum budget, so “adequate” is a judgement you must be able to defend with contracts, payroll and premises.
Analysis: this is where foreign founders most often fall short. A flexi-desk, a licence and a founder working from another country is a thin base for a claim that core activities happen in the zone. I looked at the same question for tax residency in running a UAE company from abroad. The two tests are different, but the evidence you build for one helps the other.
3. You must earn Qualifying Income
Qualifying Income comes from four places: transactions with other free zone persons that are the beneficial recipient (unless the activity is excluded), transactions in Qualifying Activities that are not excluded, qualifying intellectual property, and other income inside the de minimis limit. The next section turns this into a practical map.
4. Your non-qualifying revenue must stay within the de minimis limit
Ministerial Decision No. 229 of 2025 sets the limit: non-qualifying revenue in the tax period must not exceed the lower of AED 5,000,000 or 5% of total revenue. Note that the test is on revenue, not profit, and that the 5% limb bites first for any company with revenue under AED 100 million. Revenue attributable to a permanent establishment, and certain property and intellectual property income, is left out of both sides of the calculation.
| Total revenue in the tax period | Maximum non-qualifying revenue (my arithmetic) |
|---|---|
| AED 2,000,000 | AED 100,000 |
| AED 10,000,000 | AED 500,000 |
| AED 50,000,000 | AED 2,500,000 |
| AED 100,000,000 | AED 5,000,000 |
| AED 200,000,000 | AED 5,000,000 |
The small company is squeezed hardest. At AED 2 million of revenue, only AED 100,000 of non-qualifying revenue is allowed. A single mainland customer can break the test.
5. You must not have elected out, and you must stay compliant
The company must not have elected under Article 19 to be taxed normally. It must also comply with the arm’s length principle and transfer pricing documentation, and it must prepare audited financial statements. The guide states that the audit duty applies regardless of revenue, and Ministerial Decision No. 229 of 2025 repeats it in Article 5. A Qualifying Free Zone Person should also register for Corporate Tax: see the UAE corporate tax registration deadline for the timeline.
What Counts as Qualifying Income for a Qualifying Free Zone Person
Ministerial Decision No. 229 of 2025 lists the Qualifying Activities: manufacturing, processing, trading of qualifying commodities, holding shares and securities for investment, ownership and operation of ships, reinsurance, fund management, wealth and investment management, headquarter services to related parties, treasury and financing for related parties or own account, aircraft financing and leasing, distribution in or from a Designated Zone, logistics services, and activities ancillary to these. Excluded Activities include transactions with natural persons (with limited exceptions), banking, insurance, finance and leasing, and owning or exploiting immovable property (with a narrow exception for commercial property in a free zone let to a free zone person).
| Type of income | How it is treated |
|---|---|
| Consulting, marketing, software or design for customers outside the free zones | Not on the Qualifying Activities list. That revenue is non-qualifying and must fit inside the de minimis limit. For most service firms it will not. |
| The same services supplied to other free zone companies that use them | Can be Qualifying Income if the customer is the beneficial recipient and the activity is not excluded. Check each contract. |
| Manufacturing or processing goods in the zone | A Qualifying Activity, but substance matters: real production, staff and costs in the free zone. |
| Holding company with shares kept at least 12 months | Holding shares for investment is a Qualifying Activity, and the decision treats shares as held for investment after an uninterrupted 12 months. |
| Group headquarter, treasury or financing services to related parties | Qualifying Activities, but they need transfer pricing support, because the related-party price must be at arm’s length. |
| Selling to individuals, such as consumer e-commerce | Transactions with natural persons are an Excluded Activity, except in a few named activities. This revenue counts against the de minimis limit. |
| Letting residential or mainland property | An Excluded Activity. Income from immovable property is taxed at 9%, apart from the narrow commercial-property exception. |
| Distribution of goods in or from a Designated Zone | A Qualifying Activity if the goods go to resellers or processors, or public benefit entities, and imports enter through the Designated Zone. From periods starting on 1 January 2026, FTA Decision No. 6 of 2026 requires an agreed-upon procedures report from an independent auditor to evidence this. |
This map is my reading of the decision for common founder cases. Whether your own activity falls inside a category depends on your contracts and your licence, so test it before you rely on it.
What Happens When a Qualifying Free Zone Person Fails a Test
Fact: under Article 5 of Ministerial Decision No. 229 of 2025 and the FTA guide, a company that fails a condition at any time in a tax period stops being a Qualifying Free Zone Person from the beginning of that period and for the four tax periods after it. The guide gives an example. A company with a calendar tax year that fails the de minimis test in 2024 is not a Qualifying Free Zone Person until the end of 2028, even if it meets every condition in 2025 to 2028. It is tested again for 2029. Past failure does not affect eligibility after that.
While the status is lost, the company is taxed under the standard rules: 0% on the first AED 375,000 of taxable income and 9% above. Taxable income is calculated normally, so the effect depends on how much of your profit was riding on the 0% rate.
The table uses one illustrative company. It has AED 20 million of revenue, which gives a de minimis limit of AED 1 million, and AED 3 million of taxable income, of which I assume AED 250,000 comes from the non-qualifying revenue in scenario A. I also assume taxable income equals accounting profit and ignore adjustments.
| Scenario | Tax in the year | If repeated for five periods |
|---|---|---|
| A. Non-qualifying revenue AED 900,000 (inside the limit). Taxable income not qualifying: AED 250,000, taxed at 9% | AED 22,500 | AED 112,500 |
| B. Non-qualifying revenue AED 1,100,000 (AED 100,000 over the limit). Status lost, full AED 3 million taxed under standard rules | AED 236,250 | AED 1,181,250 |
An extra AED 100,000 of revenue moves the tax bill from AED 22,500 to AED 236,250 in the first year, and the same position carries into the next four periods. That cliff is the real risk. It is why I would track the de minimis ratio every quarter, not once a year at the audit.
The mirror case is a small service company that never qualified. Take a free zone consultancy with AED 1.5 million of revenue, all from customers outside the free zones, and AED 600,000 of taxable income. Its de minimis limit is AED 75,000, so it is not a Qualifying Free Zone Person. Under the standard rules its tax is AED 20,250, or nothing if it qualifies for and elects Small Business Relief. In that case the status was never worth much, and a plan that assumed 0% was simply wrong.
Qualifying Free Zone Person vs Small Business Relief
The two regimes can look like alternatives for a small free zone company. They are mutually exclusive in a given period, and they reward different businesses.
| Qualifying Free Zone Person | Small Business Relief | |
|---|---|---|
| Who it suits | Free zone companies doing qualifying work with real substance in the zone | Small resident businesses with revenue of AED 3 million or less, in or outside a free zone |
| Rate | 0% on Qualifying Income, 9% on other taxable income from the first dirham | No Corporate Tax for the period, because taxable income is treated as nil |
| AED 375,000 zero band | Not available | Not needed, because the election removes the charge |
| Test | Substance, income mix, de minimis, no election, audit, transfer pricing | Revenue of AED 3 million or less in the period and every earlier one |
| Loss relief and group reliefs | Not available: no Small Business Relief, tax grouping, group relief or loss transfer | Losses of the election period are not recorded |
| Lock-in if you leave | Five periods outside the regime if you fail or elect out | Revenue above AED 3 million ends access permanently |
The FTA guide states that a Qualifying Free Zone Person does not qualify for Small Business Relief, so there is no way to hold both in the same period. A company that elects out of the status under Article 19 can use the relief if it meets the revenue test. The election can take effect from the start of the current period or the next one, and it must be made by the due date of the return. It then lasts for the same five periods. I set out the relief itself, including the extension to 2029, in UAE Small Business Relief.
My view. For a profitable service company under AED 3 million of revenue and with mainly mainland or overseas customers, electing out is often the more honest route, because the status would be lost anyway or would sit permanently on the edge of the de minimis limit. For a larger company with genuine qualifying income, the status is worth defending: the relief is not available above AED 3 million of revenue.
A Four-Question Decision Guide
- Where are my customers? List revenue by customer type: free zone companies, mainland companies, individuals, overseas. Compare non-qualifying revenue with the limit above.
- Where do the people and assets sit? Name the full-time employees, premises and spending that perform the core activities inside the free zone. If the answer is “the founder, abroad”, treat the status as unproven.
- Can I evidence it? Contracts, payroll, audited statements, transfer pricing files and, for distribution, the new agreed-upon procedures report.
- What does failure cost, and what does electing out cost? Model the standard rules and Small Business Relief against the status, using five periods, not one.
If questions 1 and 2 give a clear yes, defend the status and monitor the ratio. If either gives a clear no, plan as an ordinary taxpayer. The expensive case is the middle one: a company that hopes to qualify, has no monitoring, and finds out at audit time. If you are choosing the structure in the first place, I compare the setup routes in free zone vs mainland in Dubai.
What to Do Before Your Next Return
- Split revenue for the tax period into qualifying and non-qualifying, and compare the second figure with the lower of AED 5 million and 5% of total revenue.
- Write a substance file: who does the core work, where, under which contract, and what it costs.
- Check each activity against the Qualifying and Excluded lists in Ministerial Decision No. 229 of 2025, not against the older decision.
- Confirm the audit and the transfer pricing documents for related-party transactions.
- Decide on the election before the return due date, and record the reason.
Limits of this article. It covers a free zone company under the Corporate Tax Law. It does not cover the Domestic Minimum Top-up Tax for large multinational groups, VAT treatment of free zones and Designated Zones, or any specific company. Tax periods and elections have deadlines, guidance can change, and the FTA Free Zone Persons guide has not been updated for Ministerial Decision No. 229 of 2025. Confirm the position with a registered tax agent before you file.
FAQ
What is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a free zone company or branch that meets every condition in Article 18 of the UAE Corporate Tax Law and the related decisions. It pays 0% on Qualifying Income and 9% on its other taxable income. Failing any one condition ends the status for the period and the following four.
What is the de minimis limit for a Qualifying Free Zone Person?
Non-qualifying revenue must not exceed the lower of AED 5,000,000 or 5% of total revenue in the tax period. Ministerial Decision No. 229 of 2025 sets this test. A company with AED 10 million of revenue therefore has a limit of AED 500,000, and a company with AED 200 million has a limit of AED 5 million.
How long do you lose the 0% rate if you fail one condition?
According to the FTA Free Zone Persons guide, a Qualifying Free Zone Person that fails a condition, or elects to be taxed normally, loses the status from the start of that tax period and for the four tax periods after it. For a company with a calendar tax year, failing in 2026 means no 0% rate until 2031.
Can a Qualifying Free Zone Person use Small Business Relief?
No. The FTA guide states that a Qualifying Free Zone Person does not qualify for Small Business Relief, the AED 375,000 zero-rate band, tax grouping or the group and restructuring reliefs. A free zone company that is not a Qualifying Free Zone Person, including one that elected out, can claim the relief if it meets the revenue test.
Does a consulting or marketing company in a free zone qualify for the 0% rate?
Usually not. Consulting, marketing, software and design are not on the Qualifying Activities list in Ministerial Decision No. 229 of 2025. Revenue from customers outside the free zones is non-qualifying revenue, and it must stay within the de minimis limit. Services to other free zone companies that are the beneficial recipient can still be Qualifying Income.
Your Next Step
Take your last management accounts and write two numbers on one page: non-qualifying revenue, and the lower of AED 5 million and 5% of total revenue. That tells you how close you are to the edge. If you are planning a free zone company, or you hold one and are unsure whether the 0% rate will survive your next audit, you can contact us to discuss how the tax position fits the wider business plan.
