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:
- Maintain Adequate Substance in the Free Zone
To qualify as a QFZP, a business must demonstrate real economic substance within the Free Zone throughout the tax period. This means having a genuine physical presence, including appropriate office space, employees, and decision-making functions carried out within the Free Zone. The Federal Tax Authority (FTA) expects core income-generating activities and management to be performed from the Free Zone itself. If operations are primarily conducted elsewhere – such as the mainland- or if the entity exists only on paper, the 0% tax status may be denied.
- Earn Only Qualifying Income
Eligibility for the 0% rate depends heavily on the nature and source of income earned. A Free Zone company must derive income from qualifying activities as prescribed under the Corporate Tax Law and relevant Cabinet Decisions. While certain activities such as manufacturing, holding investments, fund management, and distribution from designated zones are generally acceptable, income from mainland clients, individuals, or restricted activities can jeopardize eligibility. Businesses should continuously monitor income streams to ensure they remain within qualifying parameters.
- Stay Within the De Minimis Threshold
The law allows limited non-qualifying income under the de minimis rule, but strict thresholds apply. Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower, during the tax period. Even a single breach of this limit results in the loss of QFZP status for the entire year. Ongoing tracking of revenue sources is therefore critical to ensure the threshold is not exceeded unintentionally.
- Comply With Transfer Pricing and Arm’s Length Rules
All transactions with related parties must be conducted on an arm’s length basis and supported by proper documentation. Free Zone entities are not exempt from transfer pricing regulations, and incorrect pricing or inadequate documentation can lead to adjustments and loss of the 0% benefit. Contracts, invoices, benchmarking analyses, and disclosure of related party transactions must be maintained and accurately reported in the corporate tax return.
- Maintain Proper Financial Statements
Reliable financial records are essential to support QFZP status. Businesses with annual revenue exceeding AED 50 million are required to prepare audited financial statements, while those below this threshold must still maintain proper accounts in line with acceptable accounting standards. Inconsistent, incomplete, or unsupported financials can raise compliance concerns and undermine the company’s tax position.
- Register, File, and Declare Annually
Qualifying for the 0% rate does not remove the obligation to register for corporate tax, file an annual tax return, and submit the Qualifying Free Zone Person declaration. These filings must be completed accurately and on time—within nine months of the financial year-end. Failure to file, or incorrect declarations, can result in automatic disqualification from the 0% regime along with 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.
