Many Free Zone company owners still believe that registering a business in a free economic zone automatically grants the right to a 0% corporate tax rate.
Since the UAE corporate tax regime came into force, along with the subsequent changes to the legislation, this assumption has become one of the most costly misconceptions for businesses.
In practice, a Free Zone company can keep the 0% rate only if it meets specific legal requirements and obtains Qualifying Free Zone Person (QFZP) status. Breaching even one of the mandatory conditions can lead to the loss of the preferential regime for the current tax period and the following four years.
In this article we will look at how UAE corporate tax works, who is actually entitled to the 0% rate, which income counts as qualifying, how the de minimis rule works, and which mistakes most often lead to the loss of QFZP status.
What is the corporate tax rate in the UAE?
The following rates apply tomost companies:
• 0% on the first AED 375,000 of taxable income;
• 9% on taxable income above AED 375,000.
It is important to understand that the threshold is calculated not on revenue, but on taxable income after deducting allowable expenses.
For example, if a company's revenue is AED 600,000 and its deductible expenses are AED 300,000, the taxable income will be AED 300,000. In that case, no corporate tax is payable.
The 0% rate and QFZP status are not the same thing
One of the most common mistakesis confusing these two concepts.
Any UAE company is entitled to the 0% rate on the first AED 375,000 of taxable income.
Qualifying Free Zone Person (QFZP) status allows a Free Zone company to apply the 0% rate to qualifying income above that threshold.
This is precisely why correctly classifying income is critically important for Free Zone companies.
Does a Free Zone company get the 0% rate automatically?
No. This is exactly the misconception that costs business owners the most.
By default, a Free Zone company is a corporate tax payer. It is required to register with the FTA, file tax returns, and comply with the law regardless of whether it expects to apply the 0% rate.
A Free Zone licence and registration in a free economic zone do not, in themselves, grant the right to the preferential regime.
To apply the 0% rate, a company must meet the requirements for Qualifying Free Zone Person (QFZP) status.
Conditions for obtaining QFZP status
Under UAE law, a company must meet a number of conditions simultaneously in each tax period.
1. Adequate economic presence (Substance)
The company must have a genuine presence in the UAE free zone that matches the scale of its activities.
The FTA assesses:
• the existence of an office;
• the presence of qualified employees;
• operating expenses;
• where decisions are made;
• the actual place where the activity is managed.
2. Earning qualifying income
The company must earn income that is recognised as Qualifying Income under the applicable rules.
What counts as qualifying income?
In general terms, qualifying income may include:
• income derived from transactions with other Free Zone companies,
• income derived from owning or using qualifying intellectual property,
• any other income, provided the de minimis requirementis met,
• income derived from qualifying activities – regardless of where the customers are located;
List of qualifying activities:
• a. Manufacturing of goods or materials.
• b. Processing of goods or materials.
• c. Trading of Qualifying Commodities.
• d. Holding of shares and other securities for investment purposes.
• e. Ownership, management and operation of Ships.
• f. Reinsurance services.
• g. Fund management services.
• h. Wealth and investment management services.
• i. Headquarter services to Related Parties.
• j. Treasury and financing services to Related Parties.
• k. Financing and leasing of Aircrafts.
• l. Distribution of goods or materials in or from aDesignated Zone.
• m. Logistics services.
• n. Any activities that are ancillary to the Qualifying Activities listed above.
Excluded activities do not countas qualifying activities for the purposes of the UAE free zone tax benefits.They include certain B2C transactions, banking and insurance services, realestate transactions, and other activities specified by law.
It is important to understand that, to calculate corporate tax, you need to analyse not only the company's licence but also its actual sources of income.
3. Compliance with the de minimis rule
The volume of non-qualifying income must not exceed the established limit.
To keep the preferential tax status, non-qualifying income must stay below the lower of the following amounts:
• AED 5 million;
• 5% of the company's total revenue for the tax period.
For example, if a company's total revenue is AED 25 million, the de minimis limit will be AED 1.25 million(5%).
If non-qualifying income amountsto AED 3 million, the company will lose QFZP status, even though the main partof the business meets the requirements of the preferential regime.
Many business owners mistakenly assess the de minimis rule solely in terms of the absolute amount of revenue.
4. Not electing the standard tax regime
The company must not voluntarilyswitch to the general corporate tax regime.
5. Compliance with the arm's length principle
Transactions with related parties must be carried out on market terms.
Where necessary, transferpricing documentation must be prepared.
6. Audited financial statements
Under the applicable requirements, every QFZP must have audited financial statements, regardless of the level of revenue.
What happens if QFZP status is lost?
If a company breaches at least one of the mandatory conditions or exceeds the de minimis threshold, QFZP status is lost from the start of the relevant tax period.
As a result:
• all taxable income above AED 375,000 is taxed at the 9% rate;
• the preferential regime does not apply for that period;
• the standard tax system also applies for the following four tax periods.
In effect, a company can lose the right to apply the QFZP regime for five tax periods.
This is exactly why tax planning and monitoring of the business structure should be carried out in advance, not after a request is received from the FTA.
Which companies most often lose the right to the 0% rate?
The greatest risks arise for companies with a varied operating structure, in particular:
• trading companies in free zones (Free Zone) – due to alack of control over the types of goods sold and the presence of additionalsources of income;
• international holding structures – due to a lack ofcontrol over transactions with related parties; for example, granting loans tounrelated persons abroad usually does not create qualifying income;
• logistics and shipping companies – due to the risk ofmisclassifying income and failing to comply with the arm's length principlewhen working with shipowners that are related parties;
• companies with a mixed income structure – due to a lackof control over the types of income received and compliance with the de minimisrequirement;
• groups of companies with a large volume of intra-group transactions – due to the risk of failing to comply with the arm's length principle in transactions with related parties.
Can a small company avoid paying corporate tax?
Some companies may be eligible for Small Business Relief.
If a company's revenue does not exceed AED 3,000,000, the company can use this relief and be treated as having no taxable income for the relevant period.
However, Small Business Relief and the QFZP regime cannot be applied at the same time in the same tax period.
Choosing a regime therefore requires analysing the specific business structure and calculating the tax consequences.
How to keep the 0% corporate tax rate?
Most companies lose the right to the preferential regime not because of complex tax schemes, but because of alack of timely control over the business structure.
To reduce risks, companies usually choose one of two approaches:
• bringing in an in-house tax specialist;
• outsourcing corporate tax support to external consultants.
It is especially important to regularly analyse the income structure before the end of the tax period, since correcting mistakes after an FTA audit is often far more expensive.
INBUSINESS provides end-to-end support on UAE corporate tax matters – from registration and reporting to analysing compliance with QFZP requirements, assessing income structures, and supporting holding companies, trading groups, and international structures.
Our team brings together specialists with experience in the Big Four, international taxation, corporate finance, commodity trading, and shipping.
If you want to check whether your company meets the requirements for applying the 0% rate, book a consultation. We will carry out a preliminary analysis of your business structure, identify potential risks, and offer practical recommendations for addressing them.
Frequently asked questions
Does a Free Zone company need to register for corporate tax?
Yes. Registration and filing ofa tax return are mandatory for all companies, even when the 0% rate applies.
Can Small Business Relief and QFZP status be applied at the same time?
No. A company cannot use both regimes in the same tax period.
What happens if QFZP statusis lost?
The company loses the right to the preferential regime in the current tax period and for the following four tax periods.
When is the corporate tax return filed?
The return is filed through the EmaraTax system within nine months after the end of the relevant tax period.
Can the FTA check compliance with QFZP requirements?
Yes. The FTA may request documents confirming compliance with the conditions of the regime, including financial statements, information on the income structure, transfer pricing, and data on the company's activities.
Can transfer pricing documentation be prepared in-house?
Yes. A company can prepare the set of documents itself to substantiate the market terms of transactions with related parties. During an audit, the tax authority may either accept the substantiation provided or insist on a more detailed analysis and an independent valuation.
This information is current asof June 2026 and is for general information purposes only. This article doesnot constitute individual tax advice.
