Qualifying Free Zone Person: how to keep your 0% corporate tax rate

A Dubai Free Zone license gets sold as “0% tax” more often than it should be. That is not false, it is incomplete. The 0% rate is available to a Free Zone company, but only to a company that qualifies for it every single condition, every single period, and the cost of getting it wrong is not a fine you pay once. It is five tax periods at the standard rate.

This article sets out the actual conditions for Qualifying Free Zone Person status, in plain terms, and the mistakes that most often knock a company out of it without the owner noticing until the tax bill arrives.

Being in a Free Zone is the starting point, not the qualification

The 0% Corporate Tax rate for Free Zone companies is not automatic. It applies only to a company that meets the full set of conditions to be a Qualifying Free Zone Person (QFZP). All of the following need to be true at the same time, not most of them:

• The company is a genuine Free Zone Person, correctly licensed and operating within the Free Zone.
• It maintains adequate substance in the Free Zone: real staff, real assets, real operating expenditure and core income-generating activity actually carried out there, not just a registered address.
• Its income is Qualifying Income, meaning it comes from transactions with other Free Zone Persons, or from Qualifying Activities with parties outside the Free Zone that are not Excluded Activities.
• It has not elected to be subject to the standard 9% regime instead, which a Free Zone company can voluntarily choose to do.
• It complies with the transfer pricing rules, including keeping the documentation appropriate to its size.
• Its non-qualifying revenue stays within the de minimis threshold.
• It maintains audited financial statements.

Miss one, and the company does not partially qualify. It fails QFZP status entirely for the period in question.

Qualifying income versus excluded activities

This is the condition most owners misunderstand, because “Qualifying Income” sounds like it should mean “income earned in the Free Zone,” and it does not quite mean that.

Income generally qualifies when it comes from:

• Transactions with other Free Zone Persons, as long as that Free Zone Person is the beneficial recipient (not just passing income through), and the activity is not itself an Excluded Activity
• Qualifying Activities carried out with parties outside the Free Zone, including mainland UAE or overseas, where the activity falls within the categories treated as qualifying

Income generally does not qualify, even from a Free Zone entity, when it falls under an Excluded Activity. Typical excluded categories include most transactions with UAE mainland natural persons, certain banking, insurance and finance activities, and income from owning or exploiting immovable property other than commercial property transacted with other Free Zone Persons. The exact categorisation of an activity as qualifying or excluded is detailed and depends on your specific business, so this is the point where a general article should stop and a real review of your activity should start.

The de minimis rule: how much non-qualifying income is tolerated

Not every dirham of non-qualifying income immediately blows up QFZP status. There is a buffer, and it is worth knowing exactly where the line sits.

De minimis limit	Value
Threshold	The lower of AED 5,000,000 or 5% of total revenue for the period
Result if under the limit	Non-qualifying revenue does not disqualify the company from QFZP status
Result if over the limit	QFZP status is lost for the current period and the following four

The “lower of” wording matters. For a company with AED 20 million total revenue, 5% is AED 1,000,000, which is lower than AED 5,000,000, so AED 1,000,000 is the actual ceiling that applies, not the flat AED 5 million figure. Smaller Free Zone companies are more likely to be capped by the AED 5,000,000 figure itself, but the calculation should be checked each period, not assumed to be whichever number sounds bigger.

Audited financial statements: not optional at this point

A QFZP needs to maintain audited financial statements to keep the 0% rate. This is not a light-touch bookkeeping review, it is a formal audit conducted against IFRS. A company preparing its own accounts, or having an unaudited set reviewed informally by its accountant, does not meet this condition, no matter how accurate the numbers actually are.

For groups filing as a Tax Group, audited special purpose financial statements are required regardless of revenue size. For standalone entities, the audit requirement is tied to claiming QFZP benefits specifically, so a Free Zone company relying on the 0% rate should treat an annual audit as a fixed cost of keeping that status, not an optional extra to consider once it gets bigger.

What actually knocks companies out of QFZP status

In practice, it is rarely a dramatic event that costs a Free Zone company its 0% rate. It is usually one of these:

1. Selling to mainland UAE customers without checking the activity classification. A growing customer base outside the Free Zone can quietly convert Qualifying Income into Excluded Activity income.
2. Renting out property or earning passive income that falls outside the permitted categories, treated by the owner as “just extra income” rather than a status risk.
3. Skipping the annual audit, or treating a management-prepared statement as good enough.
4. Losing track of the de minimis calculation as revenue grows, especially when the 5% figure drops below the flat AED 5,000,000 cap partway through a good year.
5. Not maintaining real substance, for example a Free Zone entity with minimal local staff or activity while most of the actual work happens elsewhere.

The cost of getting it wrong

Breach a single condition, and QFZP status is lost from the start of that tax period and for the following four, five periods total, taxed at the standard 9% rate on all income, including the income that would otherwise have qualified for 0%. There is no partial loss and no way to isolate the breach to only the affected income stream. This is why Free Zone tax planning needs to be reviewed every period, not set up once at incorporation and left alone.

Conclusion

A Free Zone license is not a tax rate, it is an opportunity to earn one. The 0% rate goes to companies that keep every QFZP condition true at the same time: qualifying income, real substance, an audit, transfer pricing compliance and staying under the de minimis limit. The reward for getting it right is 0% on qualifying income. The cost of getting it wrong is 9% on everything, for five periods.

We assess QFZP status, prepare audited financial statements and handle Free Zone corporate tax filing as part of our services, at fixed prices.

Talk to us, the initial consultation is free.

As of July 2026. This article is general information and is no substitute for advice in an individual case.

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