On 9 July 2026, the Federal Tax Authority (FTA) of the United Arab Emirates published a summary of private clarifications on corporate tax issued by the authority in recent times.
- The FTA clarifies that only legal entities can be QFZPs, while transfer pricing corrections in tax returns alone do not automatically forfeit QFZP status.
- Adequate substance can be satisfied using outsourced or group-sponsored staff, if the QFZP controls employment and bears personnel costs, even in shared workspaces.
- Income is Qualifying Income only when recipients are free zone persons; consulting services to natural persons on UAE free zone formations are explicitly treated as Excluded Activities.
- Qualifying Activities such as holding securities, ship management, and treasury functions are defined broadly, recognising shorter holding periods, third‑party vessel ownership, and group cash investments.
- Distribution and logistics can qualify even with multi‑tiered supply chains and subcontractors, provided customers are non‑end‑users and the QFZP retains core income‑generating functions.
Scope of Tax Clarifications
The Corporate Tax Summary, published on the FTA website in a Q&A format, is based on private clarifications issued by the FTA in response to taxpayer requests submitted up to May 2026.
A significant portion of the summary is dedicated to taxation rules in UAE Free Zones, including:
- Qualifying Free Zone Persons (QFZP);
- Adequate substance requirements;
- Qualifying Income;
- Qualifying Activities.
It also covers other key aspects of UAE corporate tax, including the status of unincorporated partnerships and family foundations, determination of taxable income, participation exemption on dividends, corporate tax registration, and preparation of financial statements.
Below are key positions taken by the FTA that free zone businesses aiming to maintain the 0% corporate tax rate should take note of.
Qualifying Free Zone Persons (QFZPs)
Who can qualify as a QFZP? Only legal entities with separate legal personality can qualify as a Qualifying Free Zone Persons (QFZPs). Natural persons, unincorporated partnerships, discretionary trusts, and other arrangements are not eligible for QFZP status.
Transfer Pricing errors and QFZP status. If a free zone company fails to reflect certain transactions in its financial statements at arm’s length prices, but makes appropriate adjustments in its corporate tax return, it will not lose its QFZP status for that tax period.
The Adequate Substance Test
Renting property while having no employees. A company that rents out property in a free zone to related parties but has no employees does not meet the adequate substance test, as it lacks personnel to administer contracts and supervise performance.
Outsourced staff. The adequate substance requirements (as regards personnel) are met where a QFZP’s employees hold visas sponsored by related parties, provided the QFZP actually bears the staff costs and manages the employment relationship.
Shared workspaces vs. dedicated office. A company may use a shared workspace, provided it is proportionate to the scale of the qualifying activity carried out through it.
Note: Maintaining adequate substance is a statutory condition to qualify as a QFZP and benefit from the zero corporate tax in the UAE (Article 18(1) of the Corporate Tax Law, Article 8 of Cabinet Decision No. 100 of 2023). Adequate substance requires the company to conduct core income-generating activities (CIGA) in the free zone, possess adequate physical assets and qualified full-time employees, and incur adequate operating expenditures.
Qualifying Income
Qualifying Income refers to specific income earned by free zone entities subject to the 0% corporate tax rate (instead of the standard 9% rate). Qualifying Income includes income derived from:
- Transactions with other free zone persons;
- Transactions with any persons when conducting Qualifying Activities; or
- Qualifying intellectual property.
Sale of goods to free zone persons. Income from selling goods to a free zone person who is the beneficial recipient of the goods counts as a QFZP’s Qualifying Income, even if the goods were previously imported or acquired from a non-free zone supplier.
Consulting services to natural persons. If a free zone company provides consulting services regarding a UAE free zone company formation to natural persons (e.g., prospective shareholders), such services constitute “Excluded Activities,” and the resulting income is not Qualifying Income. For such income to qualify, the recipient of the service must be a free zone person.
Qualifying Activities
Fourteen categories of Qualifying Activities are defined for free zone companies applying the 0% tax rate (Article 2 of Ministerial Decision No. 229 of 2025). Key highlights addressed in the FTA summary include:
Holding Securities for Investment Purposes
Holding shares and other securities for less than 12 months may still be recognised as a Qualifying Activity if the taxpayer can demonstrate an initial intention to hold them as a long-term investment (exceeding 12 months). This applies, for example, to portfolio investments managed by an asset manager with a discretionary mandate, provided the QFZP maintains oversight.
Note: The requirement for an uninterrupted 12-month holding period is set out in Article 2(3) of Ministerial Decision No. 229 of 2025.
Ownership, Management, and Operation of Ships
To qualify, a company is not required to simultaneously own, manage, and operate a vessel. Any of these activities may be conducted independently to constitute a Qualifying Activity, provided the relevant functions are substantially performed by the free zone company.
In the examples considered by the FTA, time charters, port services, and cargo-handling services fall within the definition of ship management and operation, even if the vessels are owned by third parties.
Buying and selling ships does not constitute a Qualifying Activity on its own, but qualifies if it is ancillary to the core business of ownership, management, or operation of ships.
Treasury and Financing Services
Providing loans, processing payments, and giving guarantees for related parties qualify as Qualifying Activities. These services directly relate to functions such as cash and liquidity management, financing, debt management, and financial risk management, and fall within the definition of treasury and financing services.
This also covers investing a group parent company’s funds in interest-bearing bank deposits, treasury bonds, and corporate bonds.
Distribution in or from a Designated Zone
A distributor may purchase goods not only from the manufacturer but also from other distributors. However, the customer must not be the end-user of the goods – they must resell the goods or integrate them into other goods for subsequent sale. Otherwise, the activity will not qualify as distribution in or from a Designated Zone.
To verify that the customer is not an end-user, the company must perform due diligence, such as analysis of the customer’s business, obtaining formal undertakings, or incorporating relevant contractual representations.
Logistics Services
A company does not need to carry out the full list of logistics activities set out in Article 2(3)(m) of Ministerial Decision No. 229 of 2025. Performing any single activity is sufficient.
Arranging transport and storage of goods for clients remains a qualifying logistics activity even where the actual transport and storage are carried out by third-party contractors. However, subcontracting must not replace the QFZP’s core income-generating activity.
Ancillary Activities
For an activity to qualify as “ancillary”, there must be a core activity to which it is closely connected. The ancillary activity must be necessary for carrying out the core activity, embedded within it, and serve a supporting function, rather than forming a separate line of business.
The contribution of the ancillary activity relative to the core activity must be minor, assessed by comparing its financial contribution against the business’s overall revenue.
Business Takeaways from the FTA Summary
The FTA summary consolidates previously undisclosed responses given to private applicants into a convenient FAQ format accessible to all taxpayers. In particular, it highlights critical positions that free zone companies should review to preserve QFZP status and maintain eligibility for 0% corporate tax.
It is worth noting that the summary is based on private clarifications in the UAE, which bind the FTA only with respect to the taxpayers who requested them. Many positions depend heavily on individual facts and circumstances. However, the compilation provides valuable insights into the FTA’s administrative approach to interpreting less obvious points in the tax rules.
Tags: corporate tax, UAE
