A free zone licence is not a tax status. The 0% is a test, and failing it costs five years.

The four layers of the test

Article 3(2) of the Corporate Tax Law taxes a QFZP at 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income. Article 18(1) says who is a QFZP: a Free Zone Person that maintains adequate substance in the State, derives Qualifying Income, has not elected out under Article 19, complies with the transfer-pricing rules in Articles 34 and 55, and meets any further conditions set by the Minister. The detail is spread across three instruments:

Layers 1 and 2 decide which income is taxed at 0% and which at 9%. Layers 3 and 4 decide whether the company is a QFZP at all. If it fails either of those, all of its income is taxed under the ordinary rules, for five tax periods.

Layer 1: the 13 Qualifying Activities

Article 2(1) of MD 229/2025 lists them. The definitions in Article 2(3) are narrower than the headings, so read them together:

• Manufacturing and processing of goods or materials: production, improvement or assembly, and preparation, treatment or conversion into another form.
• Trading of Qualifying Commodities: physical trading, hedging derivatives and associated structured commodity financing. The commodity must have a Quoted Price, and retail-packaged products are excluded. The activity does not count at all for a QFZP that earns 51% or more of its Revenue from distribution, warehousing, logistics or inventory management.
• Holding shares and other securities for investment purposes, meaning held without interruption for at least 12 months.
• Ownership, management and operation of Ships in international transport, but not ships used for local transport or leisure, or as floating hotels, restaurants or casinos.
• Reinsurance, fund management and wealth and investment management. The last two count only where the activity is regulated by a UAE Competent Authority (the Central Bank, DFSA, FSRA or SCA).
• Headquarter services to Related Parties and treasury and financing services to Related Parties or for its own account.
• Financing and leasing of Aircraft, including engines and rotable components.
• Distribution of goods or materials in or from a Designated Zone. The goods must enter the State through the Designated Zone, and the customer must be a reseller, a business that processes or alters the goods for sale, or a public benefit entity.
• Logistics services, provided without taking title to the goods.
• Activities ancillary to any of the above, meaning necessary for the main activity, or a minor contribution so closely tied to it that it is not a separate activity (Art. 2(4)).

The list does not include consulting, marketing, software development sold as a service, general trading of finished goods to end users, or most professional services. A free zone company doing that work can still earn Qualifying Income, but only from customers that pass the layer 2 test below.

Layer 1, continued: the 5 Excluded Activities, starting with individuals

Article 2(2) lists what can never produce Qualifying Income, whoever the customer is:

• Any transaction with natural persons. The only exceptions are ships, fund management, wealth and investment management, and aircraft financing and leasing. A free zone company selling to individuals, whether through e-commerce, coaching, retail or consumer services, earns non-qualifying income on every such sale.
• Banking activities.
• Insurance activities, other than reinsurance and captive insurance provided as a headquarter service.
• Regulated finance and leasing, other than commodity-trade financing, ship leasing, the treasury and financing activity above, and aircraft leasing.
• Ownership or exploitation of immovable property, except Commercial Property in a Free Zone dealt with a Free Zone Person.

The rule on individuals catches more businesses than any other. It is not limited to consumers on the mainland. A sale to an individual who lives in the same free zone is still an Excluded Activity, because the exclusion depends on who the customer is, not where they are.

Layer 2: who the customer is, and the Beneficial Recipient rule

Article 3(1) of Cabinet Decision No. 100 of 2023 lets income qualify in two main ways:

• (a) Transactions with a Free Zone Person, in any activity except an Excluded Activity. This is how a free zone consultancy can earn 0% income: by billing another free zone company.
• (b) Transactions with a Non-Free Zone Person, but only in a Qualifying Activity. A mainland client buying consulting from a free zone company produces non-qualifying income. The same client buying goods through a Designated Zone distributor may produce qualifying income.

Route (a) has a condition in Article 3(2) that summaries often skip. The Free Zone customer must be the Beneficial Recipient, which Article 3(3) defines as the person that has the right to use and enjoy the service or good and has no contractual or legal obligation to supply it on to someone else. If a free zone intermediary resells your service to a mainland end client, the intermediary is not the Beneficial Recipient. Your income from it then counts as non-qualifying Revenue under Article 4(2)(a)(3), even though your invoice goes to a free zone company.

Qualifying IP income (patents and copyrighted software, but not trademarks) is a third route, calculated with the nexus formula in Article 4 of MD 229/2025. Any income is a fourth route only if the de minimis test is met.

Layer 3: de minimis, measured on Revenue, not profit

Under Article 3 of MD 229/2025, the de minimis requirement is met if non-qualifying Revenue in the tax period is no more than 5% of total Revenue or AED 5,000,000, whichever is lower. Three points follow:

• It is a Revenue test. A small non-qualifying contract with a high margin and a large one with a thin margin count the same way. The test looks at turnover, not profit.
• The AED 5 million cap takes over at AED 100 million of total Revenue. Below that the 5% is the lower figure; above it, the fixed AED 5 million applies. (Our arithmetic: 5% of 100 million is 5 million.)
• Some income is left out of both sides of the fraction. Article 4(3) of CD 100/2023 excludes Revenue from free zone property dealt with Non-Free Zone Persons (commercial property) or with anyone (non-commercial property), Revenue attributable to a domestic or foreign permanent establishment, and income from non-qualifying intellectual property. That income is still taxed at 9% under Articles 5 to 7, but it does not count towards the 5%.

Everything counted as non-qualifying Revenue within the limit is still taxed at 9%. The de minimis rule does not make that income tax-free. It only prevents it from costing you QFZP status.

Layer 4: the conditions that are not about income

• Adequate substance (Art. 8, CD 100/2023). The core income-generating activities must take place in a Free Zone or Designated Zone, with adequate assets, enough qualified full-time employees there and adequate operating expenditure for each activity. Outsourcing is allowed only to a person in a Free Zone or Designated Zone and under adequate supervision. For Qualifying IP, it may also go to anyone in the State or to an unrelated person abroad.
• Audited financial statements (Art. 5(1)(b), MD 229/2025, read with MD 84/2025). Every QFZP must have them, whatever its revenue. For periods starting on or after 1 January 2025, Decision 84 applies.
• Transfer pricing (Art. 18(1)(d)). Dealings with Related Parties and Connected Persons must be at arm's length, and the disclosure and documentation requirements of Article 55 must be met.
• No election to be taxed under the ordinary rules (Art. 19).

Fail once, and the result lasts five periods

Article 5(2) of MD 229/2025 provides that a QFZP that fails any condition at any time during a tax period ceases to be a QFZP from the beginning of that tax period and for the following four tax periods. The FTA's guide gives an example: a calendar-year company that breaches de minimis in 2024 is not a QFZP from 1 January 2024 until the end of 2028, even if it meets every condition from 2025 onwards. It is tested again for 2029, and a new failure starts another five-period block.

This works backwards within the year. If you breach the limit in November, income you had already treated as 0% since January is taxed at the ordinary rates. That is why the de minimis position needs checking during the year, not only at year-end.

A QFZP gets no AED 375,000 zero band

This is the least understood part of the regime. The ordinary rate schedule in Article 3(1) taxes the first AED 375,000 of Taxable Income at 0%. The QFZP schedule in Article 3(2) does not include that band: every dirham of non-qualifying Taxable Income is taxed at 9%. The FTA's guide states it directly: a QFZP is not entitled to 0% on its first AED 375,000. The same guide adds that a QFZP cannot use Small Business Relief, form a Tax Group, or claim Qualifying Group Relief, Business Restructuring Relief or transfers of Tax Losses.

So QFZP status can cost a small company money. Two illustrations follow. They are our own arithmetic, not official examples, and both companies meet de minimis:

Setting the two taxes equal gives a simple rule of thumb, which is our own derivation. For one tax period, before losses, reliefs and audit costs, QFZP status saves tax only if Qualifying Income is more than AED 375,000. Below that, the 0% band under the ordinary rules is worth more than the 0% rate on Qualifying Income. Company B could also qualify for Small Business Relief if its Revenue is no more than AED 3,000,000, which a QFZP cannot claim. Our Small Business Relief guide explains the costs of that election.

Electing out: how it works and how long it lasts

Under Article 19 of the Corporate Tax Law, a QFZP can elect to be taxed at the ordinary rates, from the start of the tax period in which it elects or from the start of the next one. According to the FTA's guide, the election can be made during the period or in that period's tax return, but not after the filing deadline. It then applies for the elected period and the following four. For a period ending 31 December 2025, the last day to elect was therefore the return deadline, 30 September 2026, and an election made by then covers 2025 to 2029. That date has passed. A QFZP that did not elect for 2025 can next elect from the start of its 2026 period, in the 2026 return due by 30 September 2027, and that election would cover 2026 to 2030. See the deadline and penalties guide.

Electing out is a five-year commitment. Company B's figures may look different in three years' time if it wins free zone clients with qualifying income above AED 375,000. Model several years before electing, not only the current one.

What Ministerial Decision 229 of 2025 changed

MD 229/2025 was issued on 28 August 2025 and repealed MD 265/2023. Article 7 makes it effective from 1 June 2023, the start of the Corporate Tax regime. We compared the two texts clause by clause. The list of activities is the same length, but several definitions changed:

Unchanged: the list of Excluded Activities, the individuals rule, the de minimis figures (5% or AED 5 million), the definitions of ship, fund management and headquarter services, and the five-period lock-out. The FTA's free zone guide (CTGFZP1, May 2024) was written before MD 229 and still cites MD 265. The article numbers for de minimis and the lock-out are the same in both decisions, but read the guide's commodity and distribution examples against the new definitions.

MD 229/2025 applies from 1 June 2023, so a commodity trader whose products did not qualify under the old "raw form" test may now qualify for earlier periods. Whether an earlier return can or should be corrected for this is a question for a registered tax agent. Voluntary Disclosure has its own rules and penalties.

A self-check before you file

• List your revenue streams and, for each one, record the activity, whether the customer is a Free Zone Person or not, and whether the customer is an individual.
• Remove Excluded Activities first. Any sale to an individual outside the four exceptions is non-qualifying.
• For free zone customers, check the Beneficial Recipient. Does the customer use what you sell, or pass it on?
• Work out the de minimis ratio on Revenue, after taking out property, permanent establishment and non-qualifying IP Revenue under Art. 4(3), and compare it with 5% and AED 5 million.
• Check substance for each activity: people, premises and spending in the zone, and supervision of anything outsourced.
• Get the financial statements audited, and have your transfer-pricing disclosures ready.
• Compare the tax both ways. If Qualifying Income is below AED 375,000, calculate the ordinary rules as well, over five years, before claiming QFZP status in the return.

Frequently asked questions

Sources

• Rates, QFZP definition and election — Federal Decree-Law No. 47 of 2022 (PDF), Arts. 3, 18, 19, Ministry of Finance
• Qualifying Income, Beneficial Recipient, de minimis scope, substance — Cabinet Decision No. 100 of 2023 (PDF), Ministry of Finance
• Activity lists, de minimis figures, conditions, lock-out — Ministerial Decision No. 229 of 2025 (PDF), Ministry of Finance
• Recognised price reporting agencies — Ministerial Decision No. 230 of 2025 (PDF), Ministry of Finance
• Previous rules, for comparison — Ministerial Decision No. 265 of 2023 (PDF, repealed), Ministry of Finance
• Election, lock-out examples, no zero band — Corporate Tax Guide: Free Zone Persons (CTGFZP1, May 2024), Federal Tax Authority
• Legislation library — Ministry of Finance · Federal Tax Authority

Verified 24 September 2026. On that date we downloaded and read in full Ministerial Decision No. 229 of 2025, Ministerial Decision No. 230 of 2025, Cabinet Decision No. 100 of 2023 and the repealed Ministerial Decision No. 265 of 2023, and compared the last with MD 229 clause by clause. We also read Articles 3, 18 and 19 of the Corporate Tax Law and the election and lock-out sections of the FTA's Free Zone Persons guide (CTGFZP1). The Ministry of Finance legislation list, checked the same day, showed no amendment to Decisions 229, 230 or 100. Three things here are our own work and are marked where they appear: the two company illustrations, the break-even rule that QFZP status saves tax only above AED 375,000 of Qualifying Income, and the observation that the AED 5 million cap takes over at AED 100 million of total Revenue. Nothing here is advice on your own position. QFZP status turns on facts about your customers and substance, so confirm them with a registered tax agent before you file.

Related

• Corporate tax calculator: the 0% and 9% bands, with Small Business Relief and the QFZP option included.
• The 30 September 2026 deadline, now passed: what a late 2025 return costs, and why the QFZP election for 2025 closed with it.
• Corporate Tax losses: the group loss transfers a QFZP is shut out of, even on its 9% income.
• Small Business Relief, extended to 2029: the relief a QFZP cannot claim, and what it costs in a loss year.
• Business setup cost calculator: free zone and mainland licence prices side by side.