Understand the Ongoing Conditions to Secure Your 0% Tax Rate — Because Claiming is One Thing, Keeping it is Another.
The introduction of UAE Corporate Tax in June 2023 brought significant attention to the 0% tax regime for Qualifying Free Zone Persons (QFZPs). Many businesses registered in Free Zones have assumed that they automatically qualify — but the reality is far more nuanced.
While the 0% rate is an attractive incentive, maintaining eligibility requires continuous compliance with a series of specific and evolving conditions — not just at the time of registration or filing, but throughout the financial year.
This blog outlines the core conditions, practical steps, and red flags that Free Zone companies must keep in mind to protect their 0% corporate tax benefit and avoid reclassification as a Taxable Person at 9%.
Who Qualifies for the 0% Rate?
According to Article 18 of the UAE Corporate Tax Law, a Free Zone entity may be treated as a Qualifying Free Zone Person (QFZP) if it meets the following conditions throughout the tax period:
1. Maintain Adequate Substance in the Free Zone
What this means:
Your business must have sufficient economic presence in the Free Zone — this includes office space, employees, and core income-generating activities.
What you need to do:
- Operate from a real physical office in the Free Zone (not just a flexi-desk).
- Have qualified employees performing core functions.
- Ensure management and operations are conducted from the Free Zone.
Risk of Non-Compliance:
If your operations are largely elsewhere (e.g. mainland) or outsourced, the FTA may disqualify you from QFZP status.
2. Earn Qualifying Income Only
What this means:
You must derive income only from Qualifying Activities, and avoid Non-Qualifying Income, unless it is from within the Free Zone or is subject to de minimis thresholds.
Qualifying Activities may include:
- Manufacturing and processing
- Holding of shares and securities
- Ownership and operation of ships
- Reinsurance and fund management
- Headquarter services to related parties in Free Zones or foreign jurisdictions
- Distribution of goods in/from a designated zone
Non-Qualifying Activities include:
- Income from individuals
- Income from mainland entities (unless within limits)
- Regulated banking, finance, insurance (except reinsurance), and real estate services
Always map your income sources monthly to monitor any shift that could jeopardize your status.
3. Avoid Exceeding the De Minimis Threshold
What this means:
If your business earns non-qualifying income, you must ensure:
- That non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is lower.
What you need to track:
- Every instance of mainland-sourced income or income from non-qualifying activities
- Total revenue against which the percentage is calculated
Risk:
Exceeding the threshold even once during the year automatically disqualifies you from the 0% rate for the entire period.
4. Maintain Transfer Pricing and Arm’s Length Compliance
What this means:
All transactions with related parties must comply with transfer pricing rules, including:
- Arm’s length pricing
- Proper documentation (Local File, Master File if applicable)
What to do:
- Keep contracts, invoices, and benchmarks to support your pricing
- Disclose related party transactions correctly in the return
- Prepare transfer pricing documentation if required (mandatory for large businesses)
5. Prepare and Maintain Proper Financial Statements
What this means:
You must maintain audited or reliable financials that support your tax position.
Requirements:
- If revenue exceeds AED 50 million → audited financial statements are mandatory.
- If under AED 50 million → proper records must still be maintained in accordance with accepted accounting standards.
6. File a Corporate Tax Return and Make Annual Declarations
What this means:
Even if you qualify for 0%, you are still required to register and file a Corporate Tax Return and Qualifying Free Zone Declaration.
What to do:
- Submit your return by the due date (9 months from end of your financial year).
- Tick the right boxes confirming your QFZP status.
- Ensure supporting documentation aligns with your declaration.
Failure to file = Disqualification + Penalties
Common Red Flags That Can Trigger Disqualification
- Generating service income from UAE mainland clients
- Using Free Zone license only as a “paper entity” with operations elsewhere
- Outsourcing key business functions without real oversight
- Having no employees or office space
- Exceeding the 5% de minimis threshold
- Failing to maintain documentation for related party transactions
Conclusion: Stay Eligible, Stay Prepared
Claiming the 0% rate is not enough — sustaining it requires discipline and documentation. Free Zone businesses must treat this benefit as a conditional status, not a guaranteed right. A single misstep — even temporary — can cost your company thousands in taxes and penalties.
At Stratify Consulting Group, we work closely with Free Zone businesses across industries to review structures, track compliance, and file tax returns with confidence. If you’re unsure about your QFZP eligibility or want to safeguard your tax position, now is the time to act.
Reach out to us for a Free QFZP Eligibility Review.
Let’s keep your 0% tax status compliant, clean, and secure — all year round.
