What Is a Qualifying Free Zone Person Under UAE Corporate Tax?

The introduction of the long-awaited federal Corporate Tax (CT) regime by the United Arab Emirates (UAE) has made the role of a Qualifying Free Zone Person (QFZP) essential for businesses operating within Free Zones. A QFZP may qualify for a 0% CT rate on eligible income, provided they meet certain conditions. This article will clarify what constitutes a qualifying free zone person, as well as how a Free Zone company can ensure it satisfies the necessary criteria. It will cover the definition, conditions, advantages, and compliance obligations associated with being a QFZP.

1. What Is a Free Zone Person?

First, it’s important to define a Free Zone Person. Under the UAE CT law, a Free Zone Person is a juridical person—that is, a legal entity such as a company or branch—incorporated, established or registered in a Free Zone. This includes:

• A company with its head office in a Free Zone.
• A branch of a non-resident company established within a Free Zone.
• Even a UAE-resident company that has a branch in a Free Zone: the branch is treated as the “Free Zone Business,” while the rest of the business (outside the Free Zone) may be treated as a Domestic Permanent Establishment (PE).

Importantly, natural persons or unincorporated partnerships (i.e., non-juridical persons) do not qualify as Free Zone Persons.

2. Why Does the Qualifying Status Matter?

Under the UAE Corporate Tax regime, all Free Zone Persons are taxable persons, meaning they must register for CT, prepare financial statements, and file annual tax returns. However, not all Free Zone Persons are QFZPs.

• A QFZP that meets all required conditions benefits from 0% CT on its qualifying income.
• For any income that is not qualifying, the QFZP pays the standard CT rate of 9%.
• If a Free Zone Person fails to satisfy the QFZP criteria during a tax period, it ceases to be a qualifying free zone person from the start of that period.

Therefore, maintaining QFZP status is crucial for Free Zone businesses that want to take full advantage of the 0% rate.

3. Key Conditions to Be a Qualifying Free Zone Person

To be deemed a Qualifying Free Zone Person, a Free Zone Person must satisfy all the following conditions:

1. Adequate Substance
   • The entity must maintain adequate substance within the Free Zone.
   • It must perform its core income-generating activities (CIGAs) within the Free Zone and have an adequate number of employees, assets, and operating expenditure relative to its level of business.
   • Outsourcing of activities within a Free Zone is allowed, but only if the QFZP supervises the outsourced activities sufficiently.
2. Qualifying Income
   • The Free Zone Person must derive qualifying income as defined under Cabinet Decision No. 55 of 2023 and relevant Ministerial Decisions.
   • Qualifying income can come from:
     • Transactions with other Free Zone Persons (unless from excluded activities).
     • Transactions with non-Free Zone Persons when the activity qualifies (i.e., “qualifying activities”) and isn’t excluded.
     • Other types of income, subject to a de minimis rule (see below).
3. No Election to Be Taxed under the Standard Regime
   • The Free Zone Person should not have made an election to be taxed at the standard CT rate of 9% on all its income.
4. Transfer Pricing Compliance
   • QFZPs must comply with arm’s-length principles in related-party transactions.
   • They must maintain transfer pricing documentation, including local file / master file, as required.
5. Audited Financial Statements
   • A QFZP must prepare and maintain audited financial statements in accordance with IFRS (or IFRS for SMEs).
6. De Minimis Rule
   • The non-qualifying revenue of a Free Zone Person must not exceed the lower of:
     • 5% of its total revenue, or
     • AED 5 million.
   • If a QFZP fails to meet this threshold, it may lose its QFZP status.

4. Qualifying and Excluded Activities

To understand qualifying income, it helps to know which activities are considered qualifying and which are excluded.

Qualifying Activities

According to Ministerial Decision No. 139 of 2023, qualifying activities include:

• Manufacturing or processing of goods.
• Holding of shares and securities.
• Ownership, management, or operation of ships.
• Reinsurance services, or regulated fund / wealth management.
• Headquarters or financing services to related parties.
• Financing and leasing of aircraft.
• Distribution of goods from a designated zone, with certain conditions.
• Logistics activities, and ancillary activities related to the above.

Excluded Activities

Certain activities are explicitly excluded, meaning income from them doesn’t count as qualifying unless under specific conditions:

• Transactions with natural persons, subject to limited exceptions.
• Regulated banking, leasing, insurance, and finance businesses.
• Ownership or exploitation of intellectual property (IP) (though there may be limited IP carve-outs).
• Ownership or exploitation of real estate, except in specific Free Zone–to–Free Zone real estate transactions.

5. Consequences of Non-Compliance

Failing to meet any of the qualifying conditions can have serious tax implications:

• A Free Zone Person that loses its QFZP status will be taxed at 9% on its entire income (not just the non-qualifying part) for a minimum of five tax years.
• To regain QFZP status, the entity typically needs to re-test in later years, depending on applicable rules.
• Even QFZPs must maintain ongoing compliance: substance, documentation, transfer pricing, and audited accounts must be kept up to date.

6. Benefits of Being a Qualifying Free Zone Person

There are major advantages for Free Zone businesses to qualify:

1. 0 % Corporate Tax
   • The most publicized benefit: qualifying income is taxed at zero percent, which is a huge incentive.
2. Competitive Edge
   • Free Zone companies structured correctly can offer lower-cost operations due to tax advantages, attracting international clients.
3. Predictability
   • With clearly defined rules, Free Zone businesses can plan their operations, staffing, and expenses to stay within qualifying rules.
4. Substance Alignment
   • The substance requirements ensure that businesses have real operational presence, which helps align with economic substance regulations and demonstrates substance to regulators.

7. Key Compliance and Practical Considerations

For Free Zone businesses aiming to be QFZPs, here are essential practical considerations:

• Check Free Zone Designation: Not all Free Zones may be “designated zones” for CT purposes. Companies should confirm with their Free Zone Authority whether their zone is recognized for the QFZP regime.
• Build Substance: Maintain real operations in the Free Zone — hire local / qualified staff, rent premises, and incur real expenses. Outsourced activities are allowed but must be well-supervised.
• Track Revenue Streams: Clearly distinguish between qualifying income and non-qualifying revenue. Use accounting systems to segment revenue by activity and customer.
• Maintain Transfer Pricing Documentation: Keep master/local files, conduct benchmarking, and document related-party transactions according to arm’s-length standards.
• Audit Financial Statements: Ensure annual audited IFRS (or IFRS for SMEs) financial statements are prepared.
• Monitor the De Minimis Rule: Regularly check the ratio of non-qualifying revenues to total revenue. Staying under the threshold is critical.
• Consider Elections Carefully: While a Free Zone Person can opt into the standard 9% CT rate, doing so means giving up 0% benefits — this decision should be made carefully in consultation with tax advisors.
• Prepare for Disqualification Risks: Understand the risk of losing QFZP status (and hence 0% benefit) and what it means to re-test or requalify in future years.

8. Common Misconceptions

• “Free Zone = Automatically 0% CT”: Not true. Only Qualifying Free Zone Persons enjoy 0% on certain income.
• Natural persons or partnerships qualify: No — only juridical persons are eligible.
• All income of a QFZP is taxed at 0%: No — only its qualifying income. Non-qualifying income may be taxed at 9%.
• No need to register or file: Even QFZPs must register for CT, file returns, maintain accounts and comply with documentation.

Final Thoughts

A Qualifying Free Zone Person (QFZP) in the UAE Corporate Tax regime represents a powerful tax status for companies operating in Free Zones. By meeting clearly defined criteria—such as maintaining substance, deriving qualifying income, adhering to transfer-pricing rules, preparing audited financials, and staying within de minimis thresholds—Free Zone entities can access a 0% corporate tax rate on qualifying income.

However, this benefit comes with rigorous compliance obligations and risks: losing the status means facing a 9% tax on all income for at least five years. Therefore, Free Zone businesses should carefully structure their operations, document their activities, and continuously monitor their eligibility. With thorough planning and governance, the QFZP regime offers both tax efficiency and legitimacy in the UAE’s evolving corporate tax landscape.