Qualifying Free Zone Person status in the UAE, including in Dubai free zones, is important in practice from a corporate tax perspective. However, obtaining and maintaining this status is not automatic and requires meeting a number of conditions. These conditions cover, in particular, a company’s activities and income structure, as well as certain aspects of its day-to-day operations.
- Qualifying Free Zone Person status enables access to a 0% corporate tax rate for eligible free zone companies.
- Maintain sufficient substance: physical office, adequate assets, qualified employees in-zone, and relevant operating expenditure.
- Earn qualifying income within thresholds: focus on qualifying activities, free zone end-user transactions, qualifying IP, and meet the de minimis limit.
- Comply with obligations: transfer pricing rules and arm’s length principle, with appropriate documentation.
- Prepare and file audited financial statements; non-compliance triggers loss of status for five tax periods.
Free Zones in the UAE Legal System
UAE free economic zones (FEZs, or free zones) are designated areas created to encourage entrepreneurship and attract investment. Within these zones, a special legal regime applies, which usually offers more flexible conditions for companies, particularly in relation to taxation, compared to the UAE mainland.
For this reason, company formation in UAE free zones is becoming increasingly popular, especially in the Emirate of Dubai, which has the largest number of free zones.
However, it is important to understand that registering a company in a free zone alone is not enough for it to benefit from the preferential corporate tax regime. To do so, the company must hold the special status of a UAE Qualifying Free Zone Person, which in turn depends on meeting a number of conditions.
Why Do You Need Qualifying Free Zone Person Status in the UAE?
The concept of a Qualifying Free Zone Person was introduced into the UAE legal system following the introduction of corporate taxation under Federal Decree-Law No. 47 of 2022, “On the Taxation of Corporations and Businesses”.
Corporate tax forms part of the UAE’s general tax regime for companies and businesses. It applies to both UAE mainland companies and free zone companies. However, a key feature of free zone companies is that they may benefit from a 0% corporate tax rate. To use this relief, a company must have Qualifying Free Zone Person status in the UAE.
In addition, the company must maintain this status on an ongoing basis in order not to lose the right to the relief. This is done by meeting a number of conditions at the same time, which we cover below.
Conditions for Obtaining and Maintaining Qualifying Free Zone Person Status in the UAE
Maintaining Sufficient Substance in the UAE
At present, the requirement to maintain sufficient substance in the UAE remains in place only for Qualifying Free Zone Persons. This requirement is met where a company:
- leases a physical office premises within the free zone;
- has sufficient assets that are actively used in the business, such as office equipment, machinery, IT infrastructure, and similar items;
- has a sufficient number of full-time employees with the necessary qualifications who are physically based in the free zone;
- incurs the necessary operating expenditure in the free zone in relation to its core income generating activities, taking into account the scale of those activities.
Core income generating activities are the most important operations through which a Qualifying Free Zone Person earns its income. These activities may be outsourced to another party located in the free zone, provided that the Qualifying Free Zone Person retains sufficient control.
Earning Qualifying Income as a Free Zone Person
To understand qualifying income, it is important to define a number of key terms, which we explain in the table below:
| Term | Explanation |
|---|---|
|
Qualifying activities |
Activities whose income is treated as qualifying income. The specific list is set out in Ministry of Finance Ministerial Decision No. 229 of 2025 . By way of example, these include:
|
|
Excluded activities |
Activities whose income is treated as non-qualifying income, meaning free zone companies cannot apply the 0% corporate tax rate to it. The same Decision No. 229 includes, for example:
|
|
Qualifying intellectual property (IP) |
Qualifying IP includes:
Marketing-related IP, such as trade marks, is not treated as qualifying IP. |
|
De minimis requirement |
The permitted level of non-qualifying income a company may earn during the relevant tax period while still keeping the right to the 0% corporate tax rate. Under Decision No. 229, non-qualifying income must not exceed:
whichever is lower. |
Accordingly, income is treated as qualifying income if it comes from the following sources:
- transactions with other free zone persons, where that person is the end user of the subject matter of the transaction (that is, they use the goods and services for their own purposes) and where the transactions do not relate to excluded activities;
- transactions with other persons that fall within qualifying activities;
- holding and using qualifying intellectual property;
- other sources, provided that the de minimis requirement is met.
At the same time, the following are not taken into account when calculating total revenue:
- income attributable to permanent establishments of the Qualifying Free Zone Person located outside the free zone;
- income from real estate transactions (except transactions with Qualifying Free Zone Persons involving commercial real estate located in a free zone);
- income from holding and using non-qualifying IP.
Not Electing for the Standard Corporate Tax Rate
Under Article 19 of Federal Decree-Law No. 47, a Qualifying Free Zone Person may move to the general corporate tax regime and elect to be taxed at the standard rates.
At present, the standard UAE corporate tax rates are:
- 0% on taxable income up to AED 375,000; and
- 9% on taxable income above AED 375,000 (only on the amount exceeding AED 375,000).
The election to apply the standard tax regime may take effect:
- from the start of the tax period in which the election is made, meaning it applies retrospectively to the current tax period; or
- from the following tax period.
Complying with Transfer Pricing Rules
UAE Qualifying Free Zone Persons must comply with transfer pricing rules, meaning the pricing of transactions between related parties. In particular, this includes the following requirements:
| Requirement | What it means |
|---|---|
|
Arm’s length principle |
This principle means that the financial outcomes of transactions:
must be consistent with market conditions and reflect the economic substance of the parties’ activities. |
|
Maintaining transfer pricing documentation |
This requirement involves preparing and keeping documentation relating to transactions with related parties to evidence compliance with the arm’s length principle. The tax authority may request this documentation. |
Preparing Audited Financial Statements
Under UAE Ministry of Finance Ministerial Decision No. 84 of 2025, Qualifying Free Zone Persons must prepare and file audited financial statements.
The audit must be carried out by independent licensed auditors or audit firms in line with International Standards on Auditing (ISA), the applicable UAE legal requirements, and the relevant free zone rules. For example, in the DMCC free zone (Dubai), audits may only be performed by audit firms approved by the DMCC Authority.
In addition, Decision No. 84 provides that Qualifying Free Zone Persons that distribute goods or materials into, or out of, a Designated Zone must follow additional procedures set by the UAE tax authority. Designated Zones are specific areas within the UAE that, for VAT purposes, are treated as being outside the UAE. Many free zones are also treated as Designated Zones for VAT purposes.
Beyond the requirements listed above, the Minister of Finance may introduce further conditions that UAE free zone persons must meet in order to qualify for Qualifying Free Zone Person status.
Consequences of Losing Qualifying Free Zone Person Status in the UAE
If a free zone person stops meeting even one of the criteria listed above, it loses its Qualifying Free Zone Person status. In this case, the free zone person also loses the right to the preferential tax treatment, and its income will be taxed under the standard rules that apply to UAE mainland companies.
Under Ministry of Finance Ministerial Decision No. 139 of 2023, Qualifying Free Zone Person status is lost from the start of the tax period in which the non-compliance with any of the prescribed conditions occurs. Once lost, the status cannot be restored for the following four tax periods.
As a result, the free zone person will not be able to benefit from the preferential corporate tax treatment for five consecutive tax periods.
Conclusion
Having Qualifying Free Zone Person status in the UAE, including in the Emirate of Dubai, allows companies to benefit from preferential corporate tax treatment. However, simply registering a company in a free zone does not automatically mean that this status is granted. To obtain and maintain it, a company must meet the following conditions:
- maintain sufficient substance in the UAE;
- earn qualifying income (taking into account the de minimis requirement);
- not elect for the standard corporate tax rate;
- comply with transfer pricing rules; and
- prepare and file audited financial statements.
If even one requirement is not met, the right to the preferential tax treatment is lost for five consecutive tax periods.
