When UAE corporate tax was introduced, one of the most debated questions was what would happen to the free zones. Thousands of businesses had established in DMCC, JAFZA, IFZA, DAFZA, and others specifically for the tax efficiency those structures offered.
The answer is nuanced. The 0% rate survives, but only for businesses that genuinely satisfy the Qualifying Free Zone Person (QFZP) test. Get it wrong, and your income is taxed at 9%, the same standard rate as a mainland company.
This guide explains how the test works, what changed under Ministerial Decision No. 229 of 2025, and what free zone businesses need to do to protect their 0% position.
The Two-Rate Structure
Under UAE Corporate Tax Law, free zone companies face a two-rate structure:
- 0% on qualifying income
- 9% on non-qualifying income
There is no blanket 0% rate for all free zone income. The rate that applies depends on whether specific conditions are met and whether the income falls within the definition of qualifying income.
A company can have both qualifying and non-qualifying income in the same tax period. The qualifying portions are taxed at 0%, the rest at 9%.
What Is a Qualifying Free Zone Person
To access the 0% rate, a free zone entity must qualify as a Qualifying Free Zone Person (QFZP). The conditions are:
1. Maintenance of adequate substance in the UAE
The entity must have sufficient employees, assets, and expenditure within the UAE to support its core income-generating activities. The FTA has not set fixed headcount or spend thresholds; the assessment is qualitative, based on whether the substance is proportionate to the nature and scale of the business.
2. Qualifying income must make up at least 95% of total revenue
This is the most important test. If more than 5% of your total revenue in a tax period comes from non-qualifying sources (primarily mainland UAE customers), you lose QFZP status entirely for that period, meaning all income, including what would otherwise qualify, gets taxed at 9%.
3. Not making an election to be subject to corporate tax at the standard rate
Some businesses voluntarily elect out of the QFZP regime. Once elected, that decision cannot easily be reversed.
4. Transfer pricing compliance
All transactions between the free zone entity and related parties must be conducted on arm’s length terms and properly documented.
5. Audited financial statements
From 2025 onwards, all QFZPs are required to file corporate tax returns supported by audited financial statements. This is a new and significant compliance requirement for smaller free zone entities that previously relied on management accounts.
What Is Qualifying Income
Qualifying income was defined and updated under Ministerial Decision No. 229 of 2025, which replaced the earlier Ministerial Decision No. 265 of 2023, effective retroactively from 1 June 2023.
Income is qualifying if it arises from:
- Transactions with other free zone entities: sales of goods, provision of services, and other dealings between businesses within the same or different UAE free zones
- Transactions with foreign persons: exports of goods or services to customers outside the UAE
- Qualifying activities as specifically listed in the ministerial decisions, including fund management, ship operations, certain financial services, and headquarters services
- Passive income including dividends, interest, royalties, and capital gains from qualifying sources, subject to conditions
The key boundary is mainland UAE customers. Revenue from UAE mainland businesses or individuals generally falls outside qualifying income and counts toward the 5% non-qualifying tolerance.
The 5% De Minimis Rule in Practice
The 5% test requires careful monitoring throughout the year, not just at year-end.
Consider a free zone trading company with annual revenue of AED 10 million. If AED 600,000 of that comes from UAE mainland customers, that represents 6% of total revenue. The 5% threshold is breached. The company loses QFZP status for the entire tax period, and the full AED 10 million is subject to 9% corporate tax.
This is not a marginal difference. On AED 10 million of revenue, the difference between qualifying and losing QFZP status could be AED 900,000 in tax liability (9% of taxable income, assuming no deductions).
Free zone businesses that serve mainland UAE customers need to either keep that revenue below 5% of total, or restructure so that mainland sales are handled by a separate mainland entity.
What Changed Under Ministerial Decision 229 of 2025
The September 2025 update introduced several refinements:
Revised list of qualifying activities
The activities that generate qualifying income were updated. Some activities that were borderline under MD 265 were clarified, and certain financial services and headquartering activities received more specific treatment.
Retroactive application
Both MD 229 and its companion decision apply from 1 June 2023. This means businesses that have already filed or are preparing to file their first CT returns need to assess their income classification against the updated rules, not just the original ones.
Stricter monitoring of the 95% test
The FTA’s guidance makes clear that the 95% qualifying revenue test will be a primary focus in compliance reviews and audits of free zone entities.
Audited Accounts: A New Compliance Burden From 2025
Before 2025, some smaller free zone entities operated without formal audits, using management accounts or IFRS-based internally prepared statements. Under the updated QFZP requirements, audited financial statements are now mandatory for entities claiming the 0% rate.
This creates a practical challenge. Audit timelines typically run three to six months after year-end. For a December year-end company, that means audited accounts may not be ready until June, and the CT return is due by September. The sequencing is tight.
Free zone businesses that have not already engaged an audit firm for their FY2024 or FY2025 accounts should do so now. Waiting until the last quarter before the CT return deadline is a risk.
Common Misconceptions We Encounter
“Being in a free zone means I pay 0% tax”
No. Being in a free zone is a precondition, not a guarantee. You must actively satisfy the QFZP conditions every tax period.
“My free zone certificate guarantees my 0% rate”
The free zone authority issues business licences, not tax rulings. The FTA determines your tax status based on the CT Law and ministerial decisions, not what your free zone certificate says.
“I had a customer in mainland Dubai — that small amount will not affect me”
Small amounts can breach the 5% threshold if your total revenue is not large enough to absorb them. Every mainland transaction needs to be tracked and tested against the threshold.
“I do not need audited accounts because I am small”
From 2025, audited accounts are required for all QFZPs regardless of size.
Free zone corporate tax planning is one of the highest-stakes areas of UAE CT compliance. The gap between getting it right (0%) and getting it wrong (9%) is material for almost any trading or services business. At Peakvisory FZC, we work with free zone entities to assess their QFZP eligibility, review income classification, and prepare defensible CT returns. If you are not certain whether your business meets the qualifying income tests, get a specialist review before your next CT filing deadline. Speak to the Peakvisory team at peakvisory.net