The UAE’s 0% corporate tax position for free zone businesses is real and anchored in federal legislation. Many companies legitimately pay 0% on qualifying profits.
The part that causes trouble is the assumption that the 0% rate comes “by default” with a free zone licence. The corporate tax framework works differently. The UAE 0% corporate tax position is tied to a specific status: Qualifying Free Zone Person (QFZP). You qualify, you maintain the conditions, and you re-test the position in each tax period.
The rules also evolved. In August 2025, Ministerial Decision No. 229 of 2025 replaced the earlier Ministerial Decision No. 265 of 2023, retroactively applying from the start of the regime. Going into 2026, QFZP status is still achievable, and the consequences of getting it wrong remain serious.
Part One: Who Can Be a Qualifying Free Zone Person?
A business becomes a QFZP only when it satisfies six cumulative conditions. Missing one condition collapses the status for the tax period.
Condition 1: You must be a Free Zone juridical person
A QFZP must be a juridical person incorporated, established, or registered in a UAE Free Zone. Branches of foreign companies registered in a free zone are included. Sole traders, freelancers as natural persons, unincorporated partnerships, and natural persons sit outside this definition.
A structural nuance matters for planning:
- A UAE mainland company with a free zone branch creates a Free Zone Person at branch level, while the mainland parent has a Domestic Permanent Establishment (DPE) position.
- A free zone company operating through a mainland branch also creates a DPE.
The UAE 0% corporate tax applies to the free zone portion, not the mainland branch portion.
Condition 2: Adequate substance in the Free Zone
This is the condition that filters out “licence-only” structures.
The framework requires the QFZP’s Core Income-Generating Activities (CIGAs) to be conducted in the free zone, supported by:
- adequate assets in the free zone, proportionate to the business
- an adequate number of qualified full-time employees based in the free zone
- adequate operating expenditure incurred in the free zone
There is no fixed formula for “adequate.” The FTA applies a case-by-case view.
For early-stage businesses: if a free zone entity is still in a preparatory phase and has not begun generating revenue, it can retain QFZP status for that period. A lack of revenue by itself does not automatically disqualify the status.
Condition 3: You must derive Qualifying Income
Qualifying Income is defined through the corporate tax framework and the FTA guide. We will come to that in Part Two.
Condition 4: No election into the standard corporate tax regime
A free zone company can elect to be taxed under the standard corporate tax regime (9% with the AED 375,000 nil-rate band). Once made, the election applies for the current tax period and the next four tax periods. Re-entry into the QFZP regime is not immediate.
Condition 5: Transfer pricing compliance
Transactions with related parties must be at arm’s length. Documentation obligations apply at certain thresholds, including Master File and Local File requirements for larger related-party positions, and Country-by-Country reporting for very large multinational groups.
Condition 6: Audited financial statements
QFZPs must prepare audited financial statements for relevant periods. This catches smaller entities that rely on internal management accounts. Unaudited numbers are insufficient to support a 0% UAE corporate tax when audited financial statements are required for QFZP status.
Part Two: What is Qualifying Income?
Once QFZP status is established, the 0% rate applies to Qualifying Income. Income falling outside the qualifying definition is taxed at 9% even if QFZP status remains intact.
Qualifying Income falls into four categories.
Category 1: Income from transactions with other Free Zone Persons
Income from providing goods or services to another Free Zone Person is treated as Qualifying Income, subject to two conditions:
- Beneficial Recipient test: The Free Zone Person receiving the goods or services must be the actual end user, not a conduit, agent, nominee, or intermediary passing the benefit to a third party. The FTA guidance supports obtaining a written statement/undertaking from the free zone counterparty confirming beneficial recipient status.
- No Excluded Activity: If the transaction involves an excluded activity, the income is non-qualifying.
Category 2: Income from Qualifying Activities with non-Free Zone Persons
When the counterparty is a UAE mainland entity, a foreign entity, or another non-Free Zone Person, income is Qualifying Income only if the underlying activity is a Qualifying Activity under Ministerial Decision No. 229 of 2025, and the activity is not excluded.
The Qualifying Activities under MD 229 of 2025 includes:
- Manufacturing and Processing
- Trading of Qualifying Commodities (physical and derivative trading of commodities with quoted prices on a recognised exchange or via recognised price reporting agencies). MD 229 expanded scope, including several trade finance structures, and added a restriction: commodity trading is disqualified when 51% or more of total revenue comes from distribution, warehousing, logistics, or inventory management functions.
- Holding of Shares and Other Securities
- Ownership, Management, and Operation of Ships
- Regulated Fund Management, Wealth and Investment Management (also one of the limited areas where services to natural persons can still fall within a qualifying route)
- Regulated Reinsurance Services
- Headquarter Services to Related Parties
- Treasury and Financing Services to Related Parties or for Own Account
- Aircraft Financing and Leasing
- Logistics Services in or from a Designated Zone
- Distribution of Goods or Materials in or from a Designated Zone, with the condition that when distributing to customers within the UAE outside a Designated Zone, the goods must physically enter the Designated Zone; for other scenarios, physical entry is not required. The sale must be to a reseller, processor, or public-benefit user rather than an end consumer. The FTA guide also confirms high-sea sales can qualify as distribution for QFZP purposes.
- Ancillary Activities that support the core qualifying activity without an independent commercial purpose
Category 3: Income from Qualifying Intellectual Property
The UAE 0% corporate tax rate can apply to income from exploitation of Qualifying Intellectual Property, defined in your research as patents, copyrighted software, and functionally equivalent rights (e.g., utility models). Marketing IP such as trademarks and brand names is excluded.
Access to this benefit requires demonstrating a nexus between IP income and qualifying R&D expenditure, using a modified nexus approach with an uplift of up to 30% (capped at a 100% nexus fraction).
Category 4: Other income covered by the de-minimis rule
Income that is non-qualifying in nature can still be tolerated up to the de-minimis threshold. This buffer prevents minor, incidental non-qualifying revenue from automatically destroying QFZP status.
What is Explicitly Not Qualifying Income?
Categories that remain outside the 0% regime:
- income attributable to a Foreign Permanent Establishment (FPE) is taxed at 9%
- income attributable to a Domestic Permanent Establishment (DPE) is taxed at 9%
- income from immovable property, with the narrow exception of commercial real estate in a free zone when the income arises from transactions with another Free Zone Person
- income from IP that fails the qualifying IP nexus requirements
Part Three: Qualifying Activities vs Excluded Activities
This line is central. Income from an Excluded Activity is non-qualifying income. If non-qualifying revenue exceeds the de-minimis threshold, QFZP status is lost for five years.
Excluded activities under MD 229 of 2025 include:
- transactions with natural persons (business-to-consumer), with the limited exceptions
- regulated banking, finance, and leasing activities (while treasury/financing to related parties, fund management, reinsurance remain within qualifying pathways)
- regulated insurance, with reinsurance treated differently
- IP exploitation that does not meet qualifying IP criteria (including licensing of trademarks and trade names)
- ownership/exploitation of immovable property outside the narrow free zone-to-free zone commercial carve-out
Performing an excluded activity does not automatically destroy QFZP status in isolation. The de-minimis rule creates a buffer. The buffer is small and the consequences of crossing it are severe.
Part Four: The De-Minimis Rule: The 5% / AED 5M Test
The de-minimis rule is one of the most commercially important pieces of the regime.
The rule
A QFZP satisfies the de-minimis requirement when non-qualifying revenue does not exceed:
- 5% of total revenue, or
- AED 5,000,000,
whichever is lower.
This is a “lower of two” test.
What counts as non-qualifying revenue
- Revenue from Excluded Activities
- Revenue from activities that are not Qualifying Activities when the counterparty is a non-Free Zone Person
- Revenue from transactions with Free Zone Persons where the recipient is not the Beneficial Recipient
What is excluded from the de-minimis calculation
Certain revenues are excluded from both the numerator and denominator in the de-minimis calculation, including:
- revenue attributable to a DPE
- revenue attributable to an FPE
- certain immovable property revenue categories
Worked examples
- A firm with AED 8m total revenue has a 5% cap of AED 400k.
- A company with AED 200m total revenue is capped at AED 5m, even though 5% would be AED 10m.
- A logistics QFZP with DPE revenue excludes DPE revenue from the de-minimis calculation.
Part Five: Ten traps that trigger disqualification
These are the patterns your research highlights as recurring points of failure.
1) Failure is all-or-nothing
Failure of a qualifying condition can trigger 9% tax on all taxable income for the affected year and the next four years, with loss applied from the start of the tax period.
2) Crossing the de-minimis threshold by a small amount
A breach by AED 1 is still a breach.
3) Mainland customers for non-qualifying activities
Mainland customers are not the issue by themselves. The activity classification is the issue. Where services fall outside the Qualifying Activities list, mainland revenue becomes non-qualifying and accumulates quickly.
4) Beneficial recipient failures
Agent and intermediary structures fail the beneficial recipient test.
5) Substance erosion over time
Relocating staff, shifting decision-making, and reducing genuine free zone operations can erode substance.
6) Immovable property income traps
Qualifying treatment is narrow. Commercial property in a free zone leased to another Free Zone Person can qualify; other scenarios may fall outside.
7) Trademarks and trade names never qualify as IP income
Trademark royalties remain non-qualifying under the framework described.
8) The 51% logistics revenue test for commodity traders
If logistics/warehousing/inventory management revenue becomes 51%+ of total revenue, commodity trading qualifying status can be lost under MD 229.
9) Opting out locks you in
A voluntary election into the standard regime applies for the period plus four more. The timing of that decision matters.
10) Weak income segregation in financial statements
QFZPs need financial statements that clearly separate qualifying and non-qualifying streams with defensible cost allocation. The FTA guide’s approach involves functional analysis and cost allocation.
Part Six: The Five-Year Disqualification Rule
If a free zone entity fails a qualifying condition in a tax period:
- it ceases to be a QFZP from the beginning of that tax period
- it remains disqualified for that period and the next four tax periods
- all taxable income is subject to 9% during the lockout (with the standard AED 375,000 nil-rate band)
- it cannot access Small Business Relief during the disqualification period
Part Seven: What Changed Under Ministerial Decision No. 229 of 2025?
The key changes under MD 229 of 2025 include:
- expanded qualifying commodities (including industrial chemicals, by-products, and environmental commodities such as carbon credits and renewable energy certificates)
- recognition of price reporting agencies under MD 230 of 2025
- expanded commodity trading financial structures (prepayment, factoring, forfaiting, countertrade, warehouse receipt financing, export receivable financing, project finance, Islamic trade finance, streaming arrangements)
- the new 51% logistics revenue test for commodity traders
- clarifications that affect how qualifying IP income is treated within the framework
- audited financial statements required for QFZPs under the referenced framework
- transfer pricing documentation alignment with OECD BEPS standards within the framework described
Part Eight: Practical compliance framework for 2026
Step 1: Map every revenue stream
Track for each stream:
- counterparty type (Free Zone Person / non-Free Zone Person / individual)
- beneficial recipient status
- underlying activity and its classification (Qualifying / Excluded / Ancillary)
- whether an absolute exclusion applies (DPE, FPE, immovable property categories)
Step 2: Run the de-minimis test quarterly
A quarterly check gives time to correct course while the year is still moving.
Step 3: Maintain substance contemporaneously
Keep leases, employment contracts, payroll records, decision minutes, capex and opex evidence, and operational documentation in order as the year runs.
Step 4: Build compliant accounting architecture
Segregate qualifying and non-qualifying income at revenue level with cost allocation logic that can hold up in audit.
Step 5: Transfer pricing documentation
Assess related-party transactions continuously, with Master File / Local File obligations where thresholds apply.
Step 6: Annual QFZP health check
Re-test eligibility at the start of each tax period, and reassess before launching new services or onboarding new customer types that shift the income mix.
A 0% Position You Can Defend in 2026
The UAE free zone 0% corporate tax remains one of the strongest incentives available. It works best when your operating model lines up with qualifying activities, documented substance, and clean income classification.
The regime is strict. The de-minimis buffer stays tight. The lockout period stays long. Your safest advantage comes from treating QFZP compliance as a year-round operating discipline, supported by systems that track revenue streams before they drift.
At Advantia we help founders structure revenue correctly, set up QFZP-ready reporting, and run ongoing checks across qualifying income, de-minimis exposure, and substance evidence, so your 0% position stays supported on paper and in practice.
