QFZP: the real requirements to keep the Corporate Tax exemption

Being in a free zone does not mean being exempt from Corporate Tax. Every free zone company is subject to the tax and must register. The preferential regime only applies to those with Qualifying Free Zone Person (QFZP) status and only on their qualifying income.

That status is not something you apply for once and keep forever. The requirements must be met every financial year and you must be able to prove it.

The requirements

A free zone company must meet all of these conditions at the same time:

1. Maintain adequate substance in the zone.
2. Earn qualifying income.
3. Respect the de minimis threshold for non-qualifying income.
4. Not have elected to be taxed at the general rate.
5. Comply with the transfer pricing rules and keep the documentation.
6. Prepare audited financial statements.

If just one fails, there is no preferential regime.

Substance: what lies behind the licence

The company must carry out its core activities in the free zone, with resources appropriate to its volume:

• Assets.
• Qualified staff.
• Operating expenditure.

Some of those functions can be outsourced within the zone, provided there is real supervision. A licence with a shared space and nobody working in it is unlikely to pass this analysis.

Qualifying income: where I see most errors

Not everything a free zone company invoices is qualifying income. Broadly speaking, the following are:

1. Income from other free zone persons who are the beneficial recipients, except from excluded activities.
2. Income from qualifying activities carried out with any client, except from excluded activities.
3. Certain income linked to qualifying intellectual property.

Qualifying activities

These are a closed list, set out in Ministerial Decision 229 of 2025, which replaced Decision 265 of 2023 with effect from 1 June 2023:

1. Manufacturing of goods or materials.
2. Processing of goods or materials.
3. Trading of qualifying commodities.
4. Holding of shares and other securities for investment.
5. Ownership, management and operation of ships.
6. Reinsurance.
7. Fund management.
8. Wealth and investment management.
9. Headquarter services to related parties.
10. Treasury and financing services to related parties.
11. Financing and leasing of aircraft.
12. Distribution of goods or materials in or from a designated zone.
13. Logistics services.
14. Activities ancillary to the above.

Some have their own requirements, such as regulation of the activity or, in commodity trading, the existence of a recognised market price.

Excluded activities

1. Transactions with natural persons, subject to certain exceptions.
2. Banking activities.
3. Insurance activities, with exceptions such as reinsurance.
4. Finance and leasing activities, subject to exceptions.
5. Ownership or exploitation of immovable property, except commercial property in a free zone with another free zone person.
6. Activities ancillary to the above.

The most common confusion

Many free zone companies provide consultancy, marketing or technology services to clients located outside the Emirates. These are perfectly legitimate activities, but as a general rule they are not on the list.

Invoicing abroad does not make income qualifying. What counts is the activity carried out and who receives it: if the service is not on the list and the client is not a free zone person, that income does not benefit from the preferential regime.

The de minimis threshold

Status is maintained if non-qualifying income does not exceed the lower of these two figures:

1. 5% of total revenue.
2. AED 5 million.

Income within that margin is taxed at the general rate, but it does not cost the company its status. However, if the threshold is exceeded, even slightly, the consequences affect the whole company.

Audit

Companies applying the regime must have audited financial statements. It is an obligation best planned from the start of the financial year, because accounts that are late or incomplete complicate everything else.

What is at stake

Losing QFZP status does not affect only the year of the breach. As a general rule, the company can no longer apply the regime in that financial year and the following four, being taxed at the general rate of 9%.

Five checks before year end

1. What part of my income is really qualifying, client by client?
2. Am I below the de minimis threshold?
3. Do I have in the zone the substance my activity requires?
4. Are my related-party transactions documented?
5. Is the audit planned, and on time?

If you are unsure about any of them, it is best to review it before filing the return. On the compliance and administration page I explain how I work on this with my team, and on the setting up in the UAE page how to take it into account from the moment the company is incorporated.