The headline that the UAE's free zones still offer a 0% corporate tax rate is true — but the rate is conditional, not automatic. Keeping it depends on qualifying as a Qualifying Free Zone Person (QFZP) and staying inside a tightly drawn set of rules on income, activities and substance. A single misstep can cost the 0% rate for the current year and the following four.
Key takeaway
Under Federal Decree-Law No. 47 of 2022 and Cabinet Decision No. 100 of 2023, a QFZP pays 0% on "Qualifying Income" and 9% on income that is not qualifying. To be a QFZP a Free Zone Person must maintain adequate substance in the zone, earn qualifying income, satisfy the de minimis rule (non-qualifying revenue no more than the lower of 5% of total revenue or AED 5 million), keep audited financial statements, comply with transfer-pricing rules, and not elect to be taxed at the standard rate. The list of Qualifying and Excluded Activities is set by Ministerial Decision — originally No. 265 of 2023, now replaced by Ministerial Decision No. 229 of 2025 with retroactive effect from 1 June 2023.
1. The 0% rate is conditional
The UAE corporate tax regime took effect for financial years starting on or after 1 June 2023. Free zones were not carved out of it. Instead, the law created the QFZP — a Free Zone Person that meets every qualifying condition and, in return, applies 0% to its Qualifying Income while paying the standard 9% on any income that falls outside that definition. A Free Zone Person that fails the conditions is simply an ordinary taxable person paying 9% above the AED 375,000 threshold.
2. The qualifying conditions
To be — and remain — a QFZP, a business must satisfy all of the following:
- Adequate substance in the free zone: core income-generating activities, with adequate assets, qualified employees and operating expenditure carried on in the zone (substance can be outsourced within the zone if adequately supervised).
- Qualifying Income: income that falls within the categories defined by Cabinet Decision No. 100 of 2023.
- De minimis test: non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million in the tax period.
- No election to the standard rate: the business must not have elected to be taxed at 9%.
- Transfer pricing: compliance with the arm's-length principle and transfer-pricing documentation.
- Audited financial statements: the QFZP must prepare and maintain audited accounts.
3. Qualifying vs Excluded Activities
What counts as Qualifying Income turns heavily on the activity generating it. The activity lists were first set by Ministerial Decision No. 265 of 2023 and have since been replaced by Ministerial Decision No. 229 of 2025, effective retroactively from 1 June 2023, with Cabinet Decision No. 100 remaining in force.
Qualifying Activities typically include manufacturing and processing of goods, holding of shares and securities, ship ownership and operation, regulated fund and wealth management, treasury and financing services to related parties, and the distribution of goods from or to a designated zone. Excluded Activities — which generally do not qualify even if carried on in a zone — include income from immovable property (other than commercial property used within a zone), income from intangible assets outside the qualifying patent regime, and most transactions with natural persons.
4. The de minimis rule in practice
The de minimis test is the most common reason a Free Zone Person loses QFZP status without realising it. Non-qualifying revenue is capped at the lower of 5% of total revenue or AED 5 million. A business with AED 40 million of total revenue is held to the 5% figure (AED 2 million), not AED 5 million. Exceed the cap in a tax period and QFZP status is lost — not just for the non-qualifying slice, but for the entire period.
5. The cost of failing — five years out
The penalty for breaching the QFZP conditions is severe and deliberate. A Free Zone Person that fails to meet the conditions in a tax period ceases to be a QFZP from the beginning of that period and for the following four tax periods. During that window all of its income is taxed at the standard 9% rate. There is no annual reset — one bad year carries a five-year tax cost, which makes ongoing monitoring far cheaper than remediation.
6. What a free zone business should do
- Map every revenue stream against the Qualifying / Excluded Activity lists in Ministerial Decision No. 229 of 2025.
- Track non-qualifying revenue monthly against the de minimis cap — do not wait for year-end.
- Document substance: assets, headcount and operating expenditure physically in the zone.
- Maintain audited financial statements — they are a condition, not an option.
- Prepare transfer-pricing documentation for related-party and head-office dealings.
- Model the cost-benefit of QFZP status versus electing the standard rate where qualifying income is marginal.
7. Conclusion
The 0% free zone rate remains one of the most valuable features of doing business in the DIFC, ADGM and the wider UAE free zones — but it now has to be earned and defended each year. Treating QFZP status as a continuous compliance discipline, rather than a one-time assumption, is what separates businesses that keep the rate from those that quietly lose it for five years.
This article is for general information only and does not constitute legal advice. For advice on a specific free zone corporate-tax position or QFZP assessment, please contact us. Last updated: 27 June 2026.