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Yes. BPOAS serves clients across all 7 Emirates and manages UAE entities for overseas owners who cannot be on-site themselves.

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We come to your office, verify physical source documents ourselves, and run every account through two departments - accounting and tax - before you see a number. Most firms work remotely from what you send them.

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UAE Corporate Tax and Free Zones: The Qualifying Free Zone Person Rules

Free zone companies in the UAE have always operated with a degree of tax certainty that mainland companies did not have. The free zone promise — zero or low tax for a specified period — was a core part of the business case for setting up there. UAE Corporate Tax changed that landscape in a way that many free zone business owners have not fully processed.

A free zone entity does not automatically pay zero CT. It qualifies for a 0% rate on qualifying income only if it meets a defined set of conditions — conditions related to substance, the nature of its income, and compliance with the CT Law’s administrative requirements. A business that assumed its legacy free zone arrangement still meant zero tax may be in for a difficult conversation.

This guide sets out the conditions for Qualifying Free Zone Person status, what income counts as qualifying under Ministerial Decision No. 229 of 2025, what the de minimis test requires, and what disqualifies a free zone entity from the 0% rate — including the most common errors we see in practice.

The Legal Framework

Free zone corporate tax is governed by Article 18 of Federal Decree-Law No. 47 of 2022 (the UAE Corporate Tax Law), which establishes the Qualifying Free Zone Person framework. The conditions for qualifying income — including the list of qualifying activities — are set out in Ministerial Decision No. 229 of 2025, which replaced Ministerial Decision No. 265 of 2023 with retroactive effect from 1 June 2023.

The key feature of the QFZP regime is the rate split: qualifying income is taxed at 0%, while non-qualifying income is taxed at the standard 9% rate on income above the AED 375,000 threshold. The regime does not exempt a free zone entity from CT — it applies a differential rate based on the nature of the income.

Source: Federal Decree-Law No. 47 of 2022, Article 18; Ministerial Decision No. 229 of 2025.

The Four Conditions for QFZP Status

A free zone entity must meet all four of the following conditions to be treated as a Qualifying Free Zone Person for a given tax period.

1. Adequate substance in the UAE

The business must maintain adequate substance in the UAE — meaning adequate assets, qualified employees, and decision-making activity in the UAE, relevant to the nature and scale of its activities. This does not require the entity to be a large employer. A holding company can demonstrate adequate substance with a small team if its activities are genuinely managed and controlled from the UAE. What it cannot do is exist on paper only, with no real employees, no physical presence, and no meaningful activity taking place in the UAE.

2. Income that qualifies as qualifying income

The entity’s income must meet the qualifying income definition under the CT Law and MD 229/2025. Income from transactions with other Free Zone Persons — and income from Non-Free Zone Persons that relates to a Qualifying Activity — counts as qualifying income. Income that falls outside this definition, including income from excluded activities, is non-qualifying and taxed at 9%.

3. Non-qualifying revenue within the de minimis threshold

A QFZP is permitted to have some non-qualifying income without losing its status — but only up to a defined limit. If non-qualifying revenue exceeds the de minimis threshold in any tax period, the entity loses QFZP status for the entire period, and all income becomes subject to the standard 9% CT rate.

4. No election to be treated as a mainland taxable person

A free zone entity that has elected to be treated as a mainland taxable person under Article 19 of the CT Law cannot hold QFZP status for the same period. The Article 19 election applies period by period; it does not carry forward automatically.

Source: Federal Decree-Law No. 47 of 2022, Article 18.

Qualifying Activities: What Generates Qualifying Income from Non-Free Zone Persons

Income from transactions with other Free Zone Persons is qualifying income by default. For income generated from transactions with Non-Free Zone Persons (mainland UAE or foreign counterparties), it qualifies only if it relates to a Qualifying Activity listed in MD 229/2025. The qualifying activities are:

Manufacturing of goods or materials
Processing of goods or materials
Holding of shares and other securities (for the entity’s own investment account)
Ownership, management, and operation of ships
Reinsurance services regulated by a competent authority in the UAE
Fund management services regulated by a competent authority in the UAE
Wealth and investment management services regulated by a competent authority
Headquarter services provided to related parties
Treasury and financing services provided to related parties
Financing and leasing of aircraft, engines, components, and related equipment
Distribution of goods or materials in or from a Designated Zone
Logistics services
Any other activity as determined by the Minister

Source: Ministerial Decision No. 229 of 2025, Articles 1‑3.

Excluded Activities: What Cannot Be Qualifying Income

Certain activities are specifically excluded from qualifying income status regardless of the counterparty. These are Excluded Activities under MD 229/2025:

Transactions with natural persons, unless the natural person is carrying on a business and the transaction relates to a Qualifying Activity
Regulated banking activities
Regulated finance activities
Regulated insurance activities (other than reinsurance)
Ownership or exploitation of immovable property, with a limited exception for commercial property located in a Free Zone that is transacted with other Free Zone Persons or Free Zone Entities

Income from excluded activities is non-qualifying income. Whether that matters depends on how much non-qualifying revenue the entity has relative to the de minimis threshold.

Source: Ministerial Decision No. 229 of 2025, Article 4.

The De Minimis Test: When Some Non-Qualifying Income Is Permitted

A QFZP that has some non-qualifying revenue does not automatically lose its status. The CT Law permits a de minimis level of non-qualifying income. A free zone entity retains QFZP status for a tax period as long as its non-qualifying revenue does not exceed the lower of:

5% of total revenue for the tax period; or
AED 5,000,000

Both figures apply simultaneously. The de minimis cap is the lower of the two.

For a business with total revenue of AED 8 million: 5% = AED 400,000. The cap is AED 400,000, not AED 5 million. Non-qualifying revenue of AED 450,000 would breach the test even though it is well below AED 5 million, because it exceeds 5% of total revenue.

For a business with total revenue of AED 200 million: 5% = AED 10 million. The cap is AED 5 million — because that is the lower figure. Non-qualifying revenue above AED 5 million loses QFZP status regardless of how small it is as a proportion of total revenue.

The consequence of breaching the de minimis test is significant: the entity loses QFZP status for the entire tax period. All income — qualifying and non-qualifying alike — becomes subject to the standard 9% rate on taxable income above AED 375,000. There is no partial 0% application. The loss of QFZP status for one period does not carry forward automatically — the entity can re-qualify in subsequent periods if conditions are met.

Source: Ministerial Decision No. 229 of 2025, Article 5.

What Happens to Non-Qualifying Income Within the De Minimis Limit

While non-qualifying revenue remains below the de minimis threshold, the QFZP retains its status. The CT treatment for that period is:

Qualifying income: 0% CT rate
Non-qualifying income: 9% CT rate on taxable income from non-qualifying activities, above the AED 375,000 threshold

The two income streams are tracked separately. The QFZP rate applies to qualifying income; the standard rate applies to non-qualifying income. A free zone entity with some mainland-facing non-qualifying revenue does not face a binary choice between QFZP status and full CT, as long as the non-qualifying revenue stays within the de minimis limit.

Source: Federal Decree-Law No. 47 of 2022, Article 18.

Common Disqualifiers We See in Practice

No real substance in the UAE

A holding company or dormant entity incorporated in a free zone but with no employees, no operational assets, and no management activity in the UAE will struggle to demonstrate adequate substance. The FTA may question whether the entity genuinely operates in the UAE. Adequate substance requires more than a registered address and a trade licence.

Significant income from natural persons

Free zone entities that sell directly to individual customers — retail, B2C services, certain professional services — generate income from transactions with natural persons. This is an excluded activity. Where this income is material relative to total revenue, the de minimis test may be breached.

Real estate income from non-qualifying property

Owning commercial real estate outside a Designated Zone, or any residential property, generates income from the ownership of immovable property — an excluded activity. This type of income is not qualifying income regardless of the tenant’s status or the location of the property. Free zone entities with significant real estate holdings outside permitted categories face de minimis exposure.

Legacy free zone tax holidays

Some free zones historically granted entities a zero-tax guarantee for 15, 20, or 50 years. These guarantees typically pre-date the UAE CT Law and were issued under the free zone authority’s own statutory powers. The CT Law applies to all entities operating in the UAE as a matter of Federal law. Whether older guarantees interact with the CT Law is a legal question each entity should assess with UAE legal counsel. Operating on the assumption that a legacy guarantee means no CT obligation — without legal review — is a compliance risk.

Common Misunderstandings

“All free zone companies pay 0% Corporate Tax.” Free zone incorporation alone does not determine the CT rate. QFZP status is earned by meeting the substance, income, and de minimis conditions in each tax period. An entity that does not meet these conditions is subject to CT at the standard rate.

“We registered in a free zone years ago and have always paid zero tax, so nothing changes under CT.” The CT Law applies from the first day of each entity’s first tax period starting on or after 1 June 2023. Prior zero-tax arrangements under free zone authority rules are separate from Federal CT obligations. The CT Law applies regardless of what pre-CT arrangements provided.

“The de minimis means we can have some mainland income without any problem.” Partly correct, but the threshold calculation is proportional for smaller businesses. A business with AED 6 million in total revenue has a de minimis cap of AED 300,000 — not AED 5 million. And if the cap is breached, QFZP status is lost for the entire period, not just for the non-qualifying portion.

“We don’t deal with the mainland at all, so we automatically qualify.” Two conditions remain independent of mainland dealings: adequate substance (which must be demonstrated with actual employees and assets) and the qualifying activity test (which applies to the type of business the entity conducts). An entity with no mainland dealings but no real UAE-based operations still fails the substance test.

“Our entity held QFZP status last year, so it carries forward automatically.” QFZP status is assessed period by period. A change in business activity, revenue mix, or staffing levels can affect the outcome in a given period. The four conditions must be met fresh each year.

Prepared by BPOAS. This article provides general guidance and does not constitute specific tax advice. Businesses should seek advice from a qualified UAE tax professional on their individual circumstances.