The QFZP Regime: 0% on Qualifying Income

Legal Framework

The QFZP regime is governed by Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025 on qualifying activities (which replaced Ministerial Decision No. 265 of 2023 with retroactive effect from 1 June 2023). It falls within the framework of Federal Decree-Law No. 47 of 2022 (art. 18) establishing the UAE Corporate Tax effective June 1, 2023.

QFZP status applies automatically to a Free Zone Person that meets all the conditions — unless it elects to be subject to the standard Corporate Tax regime (Federal Decree-Law No. 47 of 2022, art. 19). A distinction must be drawn between:

• Free Zone Person — any entity registered in a recognized UAE free zone.
• Qualifying Free Zone Person (QFZP) — a Free Zone Person that satisfies all the conditions of Article 18 and its implementing decisions, thereby benefiting from the 0% rate on its qualifying income.

The Five Cumulative Conditions

1. Adequate substance in the UAE — premises, employees, and core activities effectively located in the Emirates. See the Substance test page.
2. Income derived from qualifying activities — as listed in Ministerial Decision No. 229 of 2025 (formerly MD No. 265 of 2023). See the Qualifying activities page.
3. Compliance with the de minimis rule — non-qualifying revenue must be capped at the lower of 5% of total turnover or AED 5 million. See the De minimis rule page.
4. Audited financial statements — financials audited by a UAE-licensed auditor.
5. Application of arm's length transfer pricing — intra-group transactions must comply with OECD transfer pricing principles.

Scope of Qualifying Income

Qualifying income includes, in particular:

• Income derived from transactions with other Free Zone Persons (provided they are the actual beneficial owners).
• Income from qualifying activities carried out with non-Free Zone Persons, whether established in the UAE (mainland) or abroad — the texts do not require customers to be located outside the UAE.
• Certain passive income (interest, royalties) under strict conditions.

Conversely, non-qualifying income notably includes:

• Income from transactions with UAE-resident entities located outside a free zone (except for listed cases).
• Real estate income (subject to certain Free Zone exceptions).
• Income from excluded activities (banking, insurance outside a free zone, etc.).

Application of the 9% Rate on Non-Qualifying Income

Non-qualifying income — within the limits of the de minimis rule — is taxed at 9% from the first dirham: the 0% band up to AED 375,000, available to ordinary taxable persons (art. 3(1) of the law and Cabinet Decision No. 116 of 2022), does not apply to QFZPs, whose rates fall under art. 3(2). Qualifying income remains at 0%. This dual-rate system requires rigorous cost accounting to allocate flows correctly.

Filing Calendar

The entity must file an annual Corporate Tax return within nine months following the end of the financial year (Federal Decree-Law No. 47 of 2022, art. 53). For a fiscal year ending December 31, the return must be filed by September 30 of the following year. Compliance with the QFZP conditions is assessed period by period and reflected in each annual return.

Common Mistakes

• Exceeding the de minimis threshold without noticing (the calculation should be performed quarterly).
• Carrying on activities outside the qualifying list while assuming they qualify (case-by-case verification with counsel is recommended).
• Failing to implement cost accounting that separates qualifying from non-qualifying income.
• Underestimating the required substance (premises, employees, decision-making).
• Confusing free zones with Designated Zones: QFZP status is open to entities in any free zone within the meaning of the Corporate Tax Law, but certain activities — notably the distribution of goods — only qualify when conducted in or from a Designated Zone (Ministerial Decision No. 229 of 2025).