QFZP: Is Your Income Actually Qualifying Income?
If you run an international business through a UAE free zone, the question that matters is not "does the zone give 0%" but "does my income pass the test". The zone gives nothing by itself. The 0% rate belongs to a Qualifying Free Zone Person and applies only to its Qualifying Income. Everything else that company earns is taxed at 9% from the first dirham: the 0% band on the first AED 375,000 of taxable income exists only for ordinary taxpayers and is not available to a QFZP at all (Article 3 of Federal Decree-Law No. 47 of 2022). The operative conditions are in Ministerial Decision No. 229 of 2025, which replaced Decision No. 265 of 2023 and applies retroactively from 1 June 2023.
The five-part test, in the order an auditor reads it
- Substance in the zone. Core income-generating activities are performed in the free zone, with adequate people, premises and expenditure. Outsourcing inside the zone is possible if you supervise it; a mailbox and a director abroad are not.
- Qualifying Income. Income from transactions with other free zone persons that are the beneficial recipients, income from qualifying activities with anyone, and a limited category of income from qualifying intellectual property.
- De minimis. Non-qualifying revenue does not exceed the lower of AED 5 million or 5% of total revenue.
- Audited financial statements. An explicit condition under Ministerial Decision No. 84 of 2025. No audit, no status, whatever the numbers say.
- Transfer pricing and no election out. Related-party dealings at arm's length with documentation, and the company has not elected to be taxed under the standard regime.
A company fails the whole test by failing one part. There is no partial status.
Where the qualifying activities list bites
The list in Decision No. 229/2025 includes, among others, manufacturing and processing, holding of shares and securities, ownership and operation of ships, headquarters services to related parties, treasury and financing services to related parties, logistics, and distribution of goods from a designated zone. Excluded activities include transactions with individuals, most banking, insurance and finance activities, and most dealings in immovable property. Three things people miss:
- Distribution only counts from a designated zone, and only where goods are resold or processed, not to end consumers in the UAE.
- "Related parties" is a defined term. Headquarters or treasury services to an unrelated client are not the same activity.
- The licence wording proves nothing. The test is applied to each contract and each flow of money, not to the activity name on the licence.
The arithmetic, on one example
Revenue AED 20 million, of which AED 800,000 comes from advisory work for a mainland client. Five per cent of revenue is AED 1 million, which is lower than AED 5 million, so the cap is AED 1 million. The company is under the cap and keeps the status. The AED 800,000 is still taxed at 9% from the first dirham, because it is not Qualifying Income. Next year the same client pays AED 1.2 million: the cap is breached, the status is gone for that period and the four following ones, and the whole taxable income is taxed at 9% under the standard rules.
Substance is where international groups get caught
Groups used to holding companies in other jurisdictions often assume that a registered office and a resident director are enough. For QFZP purposes they are not. The FTA looks at who actually performs the core activity, where the decisions are taken, whether the staff and premises are proportionate to the income, and whether the expenditure in the zone supports the claim. A holding company with one part-time director and AED 200 million of dividends will be asked what that director does for the money. Document the answer before the question arrives.
If you are part of a large group
Two further layers apply. Multinational groups with consolidated revenue of EUR 750 million or more are subject to a 15% domestic minimum top-up tax from 1 January 2025, so the free zone 0% is not the end of the group's calculation. And Small Business Relief, the regime for companies with revenue of no more than AED 3 million per period (tax periods ending on or before 31 December 2029), is not available to a QFZP; a small free zone company chooses one regime or the other.
A quarterly routine that protects the status
- Reconcile every new contract against the qualifying list before signature
- Compute non-qualifying revenue against the cap each quarter, not at year end
- Keep qualifying and non-qualifying revenue in separate ledgers with separate cost allocation
- Update the substance file: headcount, payroll, lease, board minutes held in the zone
- Confirm the auditor is engaged and the audit timetable fits the return deadline
Registration is not optional
A QFZP registers for corporate tax with the FTA through EmaraTax like any other taxable person and files a return claiming the status for the period. The penalty for missing the registration deadline is AED 10,000; a return not filed costs AED 500 per month for the first twelve months and AED 1,000 per month after that. The election is made in the return; it is not granted by the zone.
When not to bother
If a meaningful share of revenue comes from UAE mainland customers or from individuals, the cap will be breached and the audit and separate accounting cost will still be paid. In that case it is cheaper to accept the standard regime, with its 0% band on the first AED 375,000, than to chase a status you will lose.
Frequently asked questions
Does the AED 375,000 zero band apply to our non-qualifying income?
No. A QFZP pays 9% on all taxable income that is not Qualifying Income, from the first dirham. The band applies only to taxpayers outside the QFZP regime.
Can the status be regained after a breach?
Not before the current period and the four following periods have passed.
Is an audit needed if all income is qualifying?
Yes. Audited financial statements are a condition of the status itself, not a consequence of having taxable income.
This is a general framework, not legal advice. UAE law changes, and procedures differ between emirates and free zones. We review each situation individually.