In brief
A UAE Free Zone licence does not automatically make a company's income tax-free. The 0% Corporate Tax rate is available only where the company qualifies as a Qualifying Free Zone Person (QFZP) and the relevant income meets the definition of Qualifying Income.
The assessment is not based only on where the company was incorporated. It depends on what the company does, who it transacts with, where its activities are performed, and whether it continues to satisfy the wider QFZP conditions.
What is a Qualifying Free Zone Person?
A Free Zone Person is generally a juridical person incorporated, established, or registered in a UAE Free Zone. To retain QFZP status, the company must:
- maintain adequate substance in the relevant Free Zone;
- derive Qualifying Income;
- comply with the arm's-length principle and applicable transfer-pricing requirements;
- prepare and maintain audited financial statements;
- remain within the permitted de minimis threshold for non-qualifying revenue; and
- not elect to be taxed under the ordinary Corporate Tax regime.
A QFZP is subject to 0% Corporate Tax on its Qualifying Income. Income that remains taxable rather than qualifying—such as income attributable to certain permanent establishments, property, or non-qualifying intellectual property—may be subject to 9%.
Unlike an ordinary taxable person, a QFZP does not receive the standard 0% band on the first AED 375,000 of its non-qualifying taxable income.
Which income can qualify for the 0% rate?
Qualifying Income broadly falls into four categories.
Transactions with another Free Zone Person
Income from a transaction with another Free Zone Person can qualify where:
- the customer is the beneficial recipient of the goods or services;
- the transaction does not relate to an Excluded Activity; and
- the income is not caught by the special rules for permanent establishments, immovable property, or intellectual property.
The activity itself does not necessarily have to appear on the list of Qualifying Activities. For example, professional services supplied to a Free Zone company may qualify where that company genuinely uses the services for its own Free Zone business and is not simply acting as an intermediary for another party.
A Free Zone address on an invoice is not sufficient by itself. The supplier should establish who actually receives and uses the service.
Transactions with a Non-Free Zone Person
Income from a mainland or overseas customer can qualify only where it arises from a specifically listed Qualifying Activity and is not an Excluded Activity. This is a more restrictive test.
A Free Zone consultancy serving mainland or overseas clients, for example, should not assume its income qualifies merely because the work is performed from a Free Zone. General consultancy is not itself a listed Qualifying Activity.
Qualifying Intellectual Property
A qualifying portion of income from patents, copyrighted software, and other eligible intellectual property may benefit from the 0% rate.
The qualifying amount is calculated using a modified nexus approach, connecting the income to the company's qualifying research and development expenditure. Detailed records must establish ownership, expenditure, income, and the relationship between the R&D activity and the resulting income. Marketing-related intellectual property, such as trademarks, is generally outside the qualifying category.
Other income within the de minimis rules
A limited amount of otherwise non-qualifying revenue may be tolerated without causing the company to lose QFZP status. The non-qualifying revenue must not exceed the lower of:
- 5% of total relevant revenue; or
- AED 5 million.
The calculation is performed for each Tax Period. It should therefore be monitored throughout the year, rather than calculated for the first time when the Corporate Tax return is due. The precise income included in, or excluded from, the calculation must also be considered. Certain permanent-establishment, property, and intellectual-property revenue is treated separately.
Current Qualifying Activities
Under Ministerial Decision No. 229 of 2025, the principal Qualifying Activities include:
- manufacturing or processing goods and materials;
- trading Qualifying Commodities;
- holding shares and other securities for investment purposes;
- ownership, management, and operation of qualifying ships;
- reinsurance services;
- regulated fund management services;
- regulated wealth and investment management services;
- headquarters services supplied to Related Parties;
- treasury and financing services supplied to Related Parties or conducted for the QFZP's own account;
- financing and leasing aircraft, engines, and rotable components;
- distribution of goods or materials in or from a Designated Zone, subject to the prescribed conditions;
- logistics services; and
- activities that are genuinely ancillary to one of the listed activities.
The 2025 decision expanded and clarified several areas, including qualifying commodities, own-account treasury activities, and distribution involving public benefit entities. It replaced Ministerial Decision No. 265 of 2023.
Dubai's Virtual Assets Regulatory Authority has also been recognised as a competent authority for relevant fund management and wealth and investment management activities.
Which activities are excluded?
Excluded Activities generally include:
- transactions with natural persons, subject to specific exceptions;
- banking activities;
- insurance activities other than permitted reinsurance and related qualifying headquarters activities;
- finance and leasing activities outside the stated qualifying exceptions;
- ownership or exploitation of immovable property, except certain transactions involving commercial property in a Free Zone; and
- activities ancillary to an Excluded Activity.
Income from an Excluded Activity can affect the de minimis calculation even when the customer is another Free Zone Person. This is why customer location cannot be reviewed separately from the nature of the transaction.
Permanent-establishment, property, and IP rules
Some income is separated from the Free Zone regime even where the company remains a QFZP. This can include income attributable to:
- a Domestic Permanent Establishment outside the Free Zone;
- a Foreign Permanent Establishment;
- commercial property in a Free Zone supplied to a Non-Free Zone Person;
- non-commercial property supplied to any person; and
- intellectual property that does not meet the qualifying requirements.
The associated profit must be calculated separately using appropriate accounting and arm's-length principles. It may then be subject to the 9% rate.
A practical transaction test
For each material revenue stream, a Free Zone company should be able to answer:
- Who is the contractual customer?
- Is the customer a Free Zone Person?
- Is that customer the genuine beneficial recipient?
- What activity actually generates the income?
- Is it a listed Qualifying Activity?
- Is it an Excluded Activity?
- Where are the core income-generating activities performed?
- Is the income connected to a permanent establishment, property, or intellectual property?
- How does the revenue affect the de minimis calculation?
- What documents support the conclusion?
The analysis should follow the commercial reality of the transaction, not simply the licence description or wording used on the invoice.
Why adequate substance matters
QFZP status depends on maintaining adequate substance in the Free Zone throughout the Tax Period. The company must conduct its core income-generating activities in the required Free Zone or Designated Zone and maintain an appropriate level of:
- qualified employees;
- operating expenditure;
- assets and facilities; and
- management and supervision.
Some activities may be outsourced, but the QFZP must retain adequate supervision and satisfy the applicable location requirements. A flexi-desk and a Free Zone licence do not, by themselves, establish that the company has sufficient substance.
What records should be maintained?
A defensible QFZP file should normally include:
- trade licences and activity descriptions;
- customer contracts and invoices;
- evidence of customers' Free Zone status;
- beneficial-recipient confirmations where appropriate;
- revenue classification by customer and activity;
- de minimis calculations updated during the year;
- evidence of employees, premises, assets, and operating expenditure;
- transfer-pricing policies and supporting documentation;
- expense-allocation methodologies;
- separate records for permanent establishments, property, and intellectual property; and
- audited financial statements.
All QFZPs must prepare and maintain audited financial statements, irrespective of revenue.
The cost of getting the classification wrong
If a company fails a QFZP condition, it can lose its qualifying status from the beginning of that Tax Period and for the following four Tax Periods. That can convert what appeared to be a small classification problem into a five-period tax exposure.
Common mistakes include relying on the customer's invoice address without checking the beneficial recipient, treating a licence activity as proof of the actual income-generating activity, and leaving the de minimis calculation until the tax return is due.
The safer approach is to review the revenue model before contracts are signed, not after the year has closed.
Kapiti perspective
Qualifying Income is not determined by one fact. It is the outcome of a connected system:
Entity status → customer → activity → location → substance → documentation → ongoing monitoring
A company should model these elements together before relying on the 0% rate. In practice, that means mapping transactions, classifying revenue, testing substance, and maintaining a compliance file that supports the position throughout the Tax Period.