QFZP and Qualifying Income: The Free Zone Tax Rules Explained

Free zone businesses can still enjoy 0% corporate tax, but only if they meet the strict definition of a Qualifying Free Zone Person and only on income that meets the qualifying definition. Get either wrong and you lose the benefit for five years.

What makes a free zone person qualifying

A QFZP must have adequate substance in the free zone, meaning real economic activity, qualified employees, premises, and operating expenses there. A nameplate in IFZA with no people is not enough. The FTA will look at headcount, payroll, lease commitments and where decisions are taken.

You must also derive qualifying income, comply with the de-minimis rule, prepare audited financial statements (a hard requirement, no exceptions), and meet transfer pricing obligations on related-party transactions. Miss any of these and the entire entity reverts to 9% corporate tax.

Qualifying activities

The Ministry has published a list: manufacturing and processing of goods; holding shares and securities; ownership, management and operation of ships; reinsurance; fund management; wealth and investment management for QIPs; headquarters services to related parties; treasury and financing services; financing and leasing of aircraft; logistics services; distribution from a designated zone.

Each has detailed sub-rules. 'Distribution from a designated zone' for example only applies to importing goods into a designated zone and selling them to other businesses, with no break in zone status. Selling to UAE mainland customers from a non-designated free zone does not qualify.

The de-minimis trap

Even a qualifying entity may have some non-qualifying income, say a small B2C side-line. The de-minimis rule allows up to AED 5,000,000 or 5% of total revenue, whichever is lower. Up to that cap, non-qualifying income is allowed without losing QFZP status.

But cross by AED 1 and you lose QFZP status for that year and the next four years. This is the most common 'cliff edge' in the regime. We recommend a monthly tracker and a hard-stop alert at 80% of the de-minimis cap so finance can intervene before the threshold is breached.

Documentation and the audit gate

Every QFZP must produce IFRS-compliant audited financial statements, not just management accounts. The audit must be performed by a registered auditor who confirms the qualifying / non-qualifying split. Without this audit, the FTA will reject the QFZP claim on first review.

Plan for a 6-week audit window and budget AED 12,000-25,000 for an SME audit. Acowntant clients get audit-ready statements pre-built; if you are not a customer, allocate Q1 to find an auditor for a December year-end.

This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.