IMPORTANT UPDATE — 2025 REGULATORY CHANGE: Ministerial Decision No. 229 of 2025 (issued 28 August 2025) is now the operative law governing qualifying activities for the QFZP regime. It replaces and repeals Ministerial Decision No. 265 of 2023. Any advisory, article, or analysis referencing MD 265 as the current framework is working from outdated information. MD 229 applies retroactively from 1 June 2023. Sources: UAE Ministry of Finance; PwC Middle East Tax Alert (September 2025); KPMG UAE (September 2025); Deloitte Middle East (September 2025).
Introduction: The Assumption That Is Costing Free Zone Companies Money
When the UAE introduced Corporate Tax under Federal Decree-Law No. 47 of 2022, one of the most widespread misconceptions that took hold among business owners was this: if your company is in a free zone, you are automatically exempt from tax. That assumption is wrong — and the Federal Tax Authority is now actively reviewing the first wave of Corporate Tax returns with precisely this misconception in its sights.
The reality is more nuanced, and more demanding. Free zone companies are within the scope of UAE Corporate Tax by default. Every free zone entity — whether in DMCC, JAFZA, DIFC, DAFZA, RAKEZ, or any of the UAE’s 40-plus designated free zones — is a taxable person under the CT Law and must register with the FTA, file annual returns, and pay Corporate Tax unless it satisfies a specific set of conditions that qualify it as a Qualifying Free Zone Person (QFZP).
A QFZP pays 0 per cent Corporate Tax on qualifying income. But the conditions for that status are precise, demanding, and require active, ongoing maintenance. A company that fails any single condition loses its QFZP status entirely — not just for that income stream — and becomes subject to 9 per cent Corporate Tax on all its income for the current tax year and the four subsequent years.
This article explains the full QFZP framework as it stands in April 2026, incorporating the material changes introduced by Ministerial Decision No. 229 of 2025 — the current operative qualifying activities decision — and Ministerial Decision No. 84 of 2025 on audited financial statements. All figures and legal references have been verified against primary sources before publication.
The UAE Corporate Tax Framework: Rates and Structure
The UAE Corporate Tax took effect for financial years beginning on or after 1 June 2023. For most companies operating on a calendar year basis, the first full CT-liable period ran from 1 January 2024 to 31 December 2024, with tax returns due by 30 September 2025.
The standard CT structure applies two rates to taxable income: 0 per cent on the first AED 375,000 of taxable income, and 9 per cent on taxable income above that threshold. For multinational enterprise groups with consolidated global revenue exceeding EUR 750 million, a Domestic Minimum Top-up Tax (DMTT) of 15 per cent has applied from 1 January 2025 under Cabinet Decision No. 142 of 2024, aligning the UAE with the OECD’s Pillar Two global minimum tax framework.
For free zone entities that qualify as QFZPs, the position is different: qualifying income is taxed at 0 per cent, with no threshold. Non-qualifying income within the de minimis limits is taxed at 9 per cent. The AED 375,000 standard threshold that applies to mainland businesses and non-qualifying free zone companies does not apply to QFZPs — their 0 per cent rate is activity-based, not income-level-based.
|
Entity / Income Type |
CT Rate (up to AED 375,000) |
CT Rate (above AED 375,000) |
Key Condition / Note |
|---|---|---|---|
|
Mainland company (LLC, Branch, etc.) |
0% on first AED 375,000 |
9% above AED 375,000 |
Standard regime; Small Business Relief available to Dec 2026 |
|
Free Zone company — NOT a QFZP |
0% on first AED 375,000 |
9% above AED 375,000 |
Treated identically to mainland; free zone status provides no CT benefit |
|
QFZP — Qualifying Income |
0% |
0% |
Must satisfy all 5 conditions; income must be from qualifying activities |
|
QFZP — Non-Qualifying Income |
9% |
9% |
Must be within de minimis limit (5% of revenue or AED 5m, whichever lower) |
|
QFZP that fails any condition |
9% on ALL income |
9% on ALL income |
Loss of QFZP status applies for current year + 4 subsequent years |
|
Multinational (Revenue > EUR 750m) |
15% DMTT |
15% DMTT |
Domestic Minimum Top-up Tax from 1 January 2025 (Cabinet Decision 142 of 2024) |
Sources: Federal Decree-Law No. 47 of 2022; PwC UAE Corporate Tax Summary (March 2026); Farahat & Co CT Guide 2025; Cabinet Decision No. 142 of 2024 (DMTT).
What Is a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person is a juridical entity incorporated or registered in a UAE free zone that satisfies all five conditions prescribed under Article 18 of the CT Law, as supplemented by Cabinet Decision No. 100 of 2023, Ministerial Decision No. 229 of 2025, and Ministerial Decision No. 84 of 2025. Meeting all five conditions entitles the entity to a 0 per cent CT rate on its qualifying income.
The five conditions are cumulative and non-negotiable. Failing any single one — even temporarily during a tax period — causes the entity to lose its QFZP status for the entirety of that tax period and for the four subsequent tax periods. There is no partial credit, no proportional treatment, and no grace period. This all-or-nothing structure makes the QFZP framework one of the most operationally demanding aspects of the UAE Corporate Tax system.
|
# |
QFZP Condition (Article 18, CT Law) |
What It Requires in Practice |
Key Risk / Common Failure |
|---|---|---|---|
|
1 |
Be a Free Zone Person |
The entity must be a juridical person (company or branch) incorporated, established, or otherwise registered in a UAE Free Zone. Natural persons (sole traders, freelancers) cannot be QFZPs. Branches of foreign companies registered in a free zone can qualify. |
Registration must be in a UAE-approved free zone. Check the official list at mof.gov.ae. |
|
2 |
Maintain Adequate Substance in the Free Zone |
The QFZP must conduct its Core Income-Generating Activities (CIGAs) in the free zone; maintain adequate assets, qualified full-time employees, and operating expenditure in the free zone; and ensure management decisions are made in the UAE. A registered address or flexi-desk alone does not satisfy this condition. |
Most common failure point for holding companies and newly established entities. |
|
3 |
Derive Qualifying Income |
Income must arise from Qualifying Activities as defined in Ministerial Decision No. 229 of 2025 (which replaced MD 265 of 2023 as of August 2025, retroactively effective from 1 June 2023). Non-qualifying income must not exceed the de minimis threshold of 5% of total revenue or AED 5 million — whichever is lower. |
Income from transactions with UAE mainland individuals or from excluded activities is taxed at 9%. |
|
4 |
Not Have Elected into the Standard CT Regime |
A free zone entity can voluntarily elect to be taxed at the standard 9% rate on all income. Once elected, re-entry into the QFZP regime is restricted and subject to specific waiting periods. This election is irrevocable for the current and subsequent four tax periods. |
Voluntary exit is available but re-entry is heavily restricted. Consider carefully before electing out. |
|
5 |
Comply with Transfer Pricing and Prepare Audited Financial Statements |
QFZPs must comply with the UAE’s transfer pricing rules (arm’s length pricing for related-party transactions) and, per Ministerial Decision No. 84 of 2025, must prepare audited financial statements for all tax periods from 1 June 2023. Standalone entities with revenue exceeding AED 50 million must have audited accounts; all QFZPs claiming the 0% rate must maintain audited statements. |
Failure to prepare audited statements is now a disqualifying condition under MD 84 of 2025. |
Sources: Article 18, Federal Decree-Law No. 47 of 2022; Cabinet Decision No. 100 of 2023; Ministerial Decision No. 229 of 2025; Ministerial Decision No. 84 of 2025; FTA Corporate Tax Guide CTGFZP1 (May 2024); ProAct Chartered Accountants QFZP Guide (March 2026).
Condition 2 in Detail: What Does ‘Adequate Substance’ Actually Mean?
The substance condition is the one that most frequently disqualifies free zone companies in practice, particularly holding companies, newly established entities, and businesses that have historically operated with minimal physical presence in the UAE. The FTA’s Corporate Tax Guide CTGFZP1 — the authoritative interpretive guide published in May 2024 — makes clear that substance is assessed by looking at the totality of the facts, not by checking a single indicator.
The three pillars of adequate substance for a QFZP are as follows. First, the entity must conduct its Core Income-Generating Activities (CIGAs) — the activities that are directly responsible for generating the entity’s income — in the free zone or in another UAE free zone or designated zone. CIGAs cannot be outsourced outside the UAE, though they can be outsourced to a related or third party within a free zone, provided the QFZP maintains adequate supervision of the outsourced activity. Second, the QFZP must maintain adequate assets in the free zone — meaning physical assets, equipment, and infrastructure appropriate to the scale and nature of the business. Third, the QFZP must employ an adequate number of qualified full-time employees and incur an adequate amount of operating expenditure in the free zone.
What constitutes ‘adequate’ is assessed on a case-by-case basis relative to the nature and scale of the income being generated. A company generating AED 50 million in revenue from a manufacturing operation will need to demonstrate meaningfully more substance than a small holding company with a single investment. The FTA is explicit that a registered address, a flexi-desk, or a single part-time administrator is not adequate substance for a business generating material income.
Critical point: Management decisions must be made in the UAE by people who are actually present here. Board meetings held remotely, with directors based entirely overseas, can undermine the substance condition even where physical assets and employees exist in the free zone. This is an area of particular scrutiny in FTA examinations.
The De Minimis Rule: How Much Non-Qualifying Income Is Permitted?
A QFZP is not required to have zero non-qualifying income. The de minimis rule, established under Cabinet Decision No. 100 of 2023, allows a QFZP to receive a limited amount of non-qualifying income without losing its QFZP status — provided that non-qualifying income does not exceed the lower of 5 per cent of the QFZP’s total revenue for the tax period, or AED 5 million.
Where non-qualifying income stays within this threshold, it is still taxed at 9 per cent, but the entity retains its QFZP status for the period and its qualifying income remains at 0 per cent. Where non-qualifying income exceeds the de minimis threshold, the entity loses QFZP status for the entire tax period — and all income, qualifying and non-qualifying alike, becomes taxable at 9 per cent.
Ministerial Decision No. 229 of 2025 introduced an important technical refinement to the de minimis calculation: certain revenue categories — including income attributable to domestic permanent establishments and income from foreign permanent establishments — are carved out of both the numerator and denominator of the de minimis test. This prevents income that is already taxed at 9 per cent from distorting the calculation and potentially causing an inadvertent de minimis breach.
Practical example: A QFZP with total revenue of AED 10 million can receive up to AED 500,000 in non-qualifying income (5% of AED 10m) without breaching de minimis. That non-qualifying income is still taxed at 9%, but the remaining AED 9.5 million in qualifying income remains at 0%. If non-qualifying income reaches AED 600,000, the entire AED 10 million becomes taxable at 9% — a swing of approximately AED 855,000 in additional tax.
Qualifying Activities vs Excluded Activities: The Updated MD 229 of 2025 List
The single most important regulatory development for the QFZP framework in 2025 is the replacement of Ministerial Decision No. 265 of 2023 with Ministerial Decision No. 229 of 2025, issued on 28 August 2025 and effective retroactively from 1 June 2023. The new decision expands the qualifying activities list in several commercially significant ways and introduces new requirements around commodity trading, treasury services, and distribution activities.
|
Qualifying Activities (0% Rate Eligible) |
Excluded Activities (9% Rate Triggered) |
Key Note |
|---|---|---|
|
Manufacturing or processing of goods |
Transactions with natural persons (individuals), except for qualifying activities |
MD 229/2025 is the current operative decision — replaces MD 265/2023 |
|
Trading of qualifying commodities (metals, minerals, energy, agriculture, industrial chemicals, carbon credits — MD 229/2025 expanded list) |
Banking services (subject to banking regulatory oversight) |
Commodity trading expanded; ‘raw form’ restriction removed |
|
Holding of shares and other securities for investment purposes |
Insurance services (other than reinsurance) |
|
|
Ownership, management, and operation of ships |
Finance and leasing activities (other than qualifying treasury/financing) |
|
|
Reinsurance services |
Ownership or exploitation of immovable property — except commercial property in free zones transacted with other free zone persons |
Reinsurance added under revised MD 229/2025 framework |
|
Fund management services (regulated funds) |
Ownership or exploitation of intellectual property (unless via the IP income qualifying pathway) |
|
|
Wealth and investment management services |
Any activities carried out on the UAE mainland |
|
|
Headquarter services to Related Parties |
||
|
Treasury and financing services to Related Parties or for own account (expanded by MD 229/2025) |
Own-account treasury now qualifying — new under MD 229/2025 |
|
|
Aircraft financing and leasing |
||
|
Distribution of goods or materials in or from a Designated Zone |
Must be imported through Designated Zone per MD 229/2025 clarification |
|
|
Logistics services |
||
|
Any ancillary activities to the above qualifying activities |
Sources: Ministerial Decision No. 229 of 2025 (UAE Ministry of Finance, 28 August 2025); PwC Middle East Tax Alert (September 2025); KPMG UAE (September 2025); Deloitte Middle East (September 2025); Crowe UAE (September 2025).
The Key Expansions Under MD 229 of 2025
Three changes in MD 229 of 2025 deserve particular attention from free zone business owners and their advisers.
The Audited Financial Statements Requirement: Ministerial Decision No. 84 of 2025
One of the most significant compliance changes of 2025 for QFZPs is the formalisation of the audited financial statements requirement under Ministerial Decision No. 84 of 2025. This decision, referenced in Article 5 of MD 229 of 2025, establishes that all QFZPs must prepare audited financial statements for all tax periods commencing from 1 June 2023 — meaning the requirement applies retrospectively from the start of the CT regime.
The specific trigger thresholds under MD 84 of 2025 are as follows: any standalone entity that is claiming QFZP benefits must prepare audited financial statements regardless of revenue level; standalone entities with revenue exceeding AED 50 million must have audited accounts as a general CT obligation; and corporate tax groups must file audited special-purpose financial statements regardless of revenue.
The practical implication is that any free zone company that has claimed QFZP status since 1 June 2023 without having prepared audited financial statements for those periods is now in a non-compliant position. This should be remedied urgently, as failure to maintain audited statements is a disqualifying condition that can trigger QFZP status loss retrospectively.
What Happens When QFZP Status Is Lost?
The consequences of losing QFZP status are severe and non-proportional. If a QFZP fails any one of the five qualifying conditions at any point during a tax period — even for a single transaction or for a brief period — it ceases to be a QFZP from the beginning of that entire tax period. This means all income for that tax year, qualifying and non-qualifying alike, becomes subject to 9 per cent Corporate Tax. The QFZP status loss then persists for the four subsequent tax periods, meaning a single compliance failure can trigger up to five years of standard-rate taxation.
After the five-year disqualification period expires, the entity may retest its QFZP eligibility in the sixth year — but it must satisfy all five conditions afresh. The process is not automatic, and the FTA’s scrutiny of re-applicant QFZPs is understood to be more intensive than for first-time applicants.
The most common triggers for QFZP status loss identified in FTA examinations are: (1) exceeding the de minimis threshold on non-qualifying income; (2) insufficient substance — particularly weak employee headcount or management decision-making occurring outside the UAE; (3) conducting excluded activities, including transactions with UAE mainland individuals; and (4) failure to prepare audited financial statements. Source: ProAct Chartered Accountants QFZP Guide, March 2026.
Registration and Filing Obligations: What All Free Zone Companies Must Do
Regardless of whether a free zone company qualifies as a QFZP, it has mandatory registration and filing obligations that cannot be ignored.
Every free zone entity within the scope of UAE Corporate Tax — which covers virtually all trading, service, and investment entities — must register with the FTA through the EmaraTax portal. Failure to register carries a fixed AED 10,000 administrative penalty, assessed automatically once the relevant deadline passes. The FTA does not issue advance warning notices.
Annual Corporate Tax returns must be filed within nine months of the end of the relevant tax period. For calendar-year companies, this means the deadline is 30 September each year — with the first return for the 2024 tax year having fallen due on 30 September 2025. Late filing penalties accrue at 14 per cent per annum on any outstanding tax liability, consistent with the late payment penalty framework under Cabinet Decision No. 75 of 2023.
QFZPs must additionally maintain complete financial records — including all contracts, invoices, bank statements, and FTA correspondence — for a minimum of seven years from the end of the relevant tax period. Transfer pricing documentation must be prepared wherever related-party transactions exceed the relevant materiality thresholds.
Small Business Relief: Is It Available to Free Zone Companies?
The UAE CT Law introduced a Small Business Relief (SBR) mechanism that allows a taxable person to elect to be treated as having zero taxable income for a tax period, provided total revenue does not exceed AED 3 million in that period and in the previous period. SBR is available for tax periods ending on or before 31 December 2026 as a transitional measure and must be actively elected — it is not automatically applied.
Free zone companies can elect SBR, but doing so carries implications for QFZP status. A free zone entity that elects SBR is treated as not having derived qualifying income for that period, which means it cannot simultaneously claim QFZP benefits. For a free zone company with revenue below AED 3 million and predominantly qualifying income, the more advantageous position is generally to maintain QFZP status and claim the 0 per cent qualifying income rate rather than electing SBR — but each situation should be assessed on its specific facts.
Practical Steps: What Free Zone Companies Should Do Now
Given the complexity of the QFZP framework and the material changes introduced in 2025, free zone companies should treat the following actions as urgent priorities.
Frequently Asked Questions
No. This is the single most dangerous misconception about the UAE CT regime. Free zone companies are within the scope of UAE Corporate Tax by default and must register, file, and pay tax unless they satisfy all five conditions for QFZP status. A free zone trade licence or free zone address provides no automatic tax exemption.
A Free Zone Person (FZP) is any juridical entity incorporated or registered in a UAE free zone. All FZPs are taxable persons under the CT Law. A Qualifying Free Zone Person (QFZP) is a Free Zone Person that satisfies all five conditions under Article 18 of the CT Law and the relevant ministerial decisions, entitling it to a 0 per cent CT rate on qualifying income. Not all Free Zone Persons are QFZPs.
Ministerial Decision No. 229 of 2025, issued 28 August 2025 and effective retroactively from 1 June 2023. It replaced and repealed Ministerial Decision No. 265 of 2023. Any article, adviser, or compliance tool referencing MD 265 as the current operative decision is working from outdated information and should be disregarded for planning or filing purposes.
Yes. Under Ministerial Decision No. 84 of 2025, all entities claiming QFZP benefits must prepare audited financial statements for all tax periods commencing from 1 June 2023. This requirement applies retroactively. Failure to maintain audited financial statements is a disqualifying condition under MD 229 of 2025, which incorporates MD 84 as an additional QFZP condition.
Yes. Under Ministerial Decision No. 84 of 2025, all entities claiming QFZP benefits must prepare audited financial statements for all tax periods commencing from 1 June 2023. This requirement applies retroactively. Failure to maintain audited financial statements is a disqualifying condition under MD 229 of 2025, which incorporates MD 84 as an additional QFZP condition.
Conducting an excluded activity does not automatically strip QFZP status if the resulting non-qualifying revenue remains within the de minimis threshold. However, if the excluded activity generates non-qualifying revenue exceeding 5 per cent of total revenue or AED 5 million — whichever is lower — the entity loses QFZP status for the entire tax period and the four subsequent tax periods. All income then becomes taxable at 9 per cent.
Yes, but with important constraints. Transactions with UAE mainland businesses (juridical persons) can qualify if they relate to qualifying activities. Transactions with UAE mainland natural persons (individual consumers) are generally treated as excluded activities — meaning they generate non-qualifying income that counts against the de minimis threshold. Free zone businesses with significant retail or direct-to-consumer mainland revenue are at particular risk of de minimis breaches.
Generally, no. The FTA’s guidance is explicit that a registered address or minimal office arrangement alone does not constitute adequate substance. Substance requires real operational presence: qualified, full-time employees physically present in the free zone, physical assets appropriate to the business activity, material operating expenditure incurred in the free zone, and management decisions being made in the UAE. A flexi-desk without supporting employee and operational substance is typically insufficient.
File a voluntary disclosure through the FTA’s EmaraTax portal as soon as possible — before any FTA audit notification is issued. The voluntary disclosure penalty under Cabinet Decision No. 129 of 2025 (effective 14 April 2026) is 1 per cent per month of the tax difference until disclosure, which is substantially lower than the post-audit-notification rate of 15 per cent fixed plus 1 per cent monthly. Seek professional tax advice before filing to ensure the disclosure is correctly structured.
IncHub Corporate Services provides end-to-end Corporate Tax compliance support for free zone entities across the UAE. Our services include QFZP eligibility assessment against the current MD 229 of 2025 framework; revenue stream mapping and de minimis threshold monitoring; substance gap analysis and remediation planning; coordination with licensed auditors for financial statement preparation; Corporate Tax registration through EmaraTax; annual CT return preparation; and voluntary disclosure filing where prior periods require correction. Contact us at inchub.ae to schedule a CT compliance review.
Author’s Note | IncHub Corporate ServicesThis article was researched and verified by the IncHub Corporate Services advisory team in April 2026. All regulatory information has been cross-referenced against primary sources: the UAE Ministry of Finance official text of Ministerial Decision No. 229 of 2025, Federal Decree-Law No. 47 of 2022, Cabinet Decision No. 100 of 2023, and the FTA’s Corporate Tax Guide CTGFZP1 (May 2024). Supporting verification was conducted against PwC Middle East Tax Alert (September 2025), KPMG UAE (September 2025), Deloitte Middle East (September 2025), and Farahat & Co CT Guide 2025.A critical regulatory note: Ministerial Decision No. 265 of 2023 has been repealed and replaced by Ministerial Decision No. 229 of 2025, effective retroactively from 1 June 2023. Any advice or content referencing MD 265 as the current governing instrument is outdated and should not be relied upon.IncHub Corporate Services Providers LLC is a UAE-licensed corporate services firm specialising in company formation, Corporate Tax and VAT compliance, AML advisory, VARA and crypto licensing, and PRO and visa services for founders and SMEs across the UAE.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. The QFZP framework is complex and highly fact-specific. Readers should seek independent professional advice before making any decisions based on this content.
Verified Sources and References
All regulatory claims and figures in this article have been verified against the following primary and authoritative sources.
1. UAE Ministry of Finance — Ministerial Decision No. 229 of 2025 (Official Text) — Current operative qualifying activities decision; replaces MD 265 of 2023; effective retroactively from 1 June 2023
2. FTA — Corporate Tax Guide on Free Zone Persons (CTGFZP1, May 2024) — FTA’s authoritative interpretive guide on the QFZP framework; substance requirements; de minimis calculation; worked examples
3. PwC Middle East — UAE CT: New Ministerial Decisions No. 229 and No. 230 of 2025 (September 2025) — Analysis of MD 229 changes; commodity trading expansion; treasury services expansion; de minimis carve-out
4. KPMG UAE — Updated Rules for Qualifying Free Zone Persons (September 2025) — Detailed breakdown of MD 229 vs MD 265 changes; audited financial statements requirements under MD 84 of 2025
5. Deloitte Middle East — New Decisions Regarding Qualifying Activities (September 2025) — MD 229 and MD 230 analysis; retroactive application confirmed; voluntary disclosure implications for prior filings
6. PwC UAE — Corporate Tax Credits and Incentives (March 2026) — QFZP five conditions summarised; 0% rate mechanism; Small Business Relief interaction8. Middle East Briefing — Understanding UAE’s New Free Zone Tax Regulations, MD 229 and 230 (October 2025) — De minimis carve-out mechanics; substance test tightening; OECD BEPS alignment
