With the rollout of Corporate Tax in the UAE effective for fiscal years starting on or after July 1, 2023, businesses operating in Free Zones have been awaiting clarity on how the new tax regime impacts them. This alert focuses on identifying what qualifies a Free Zone Person (FZP) as a Qualifying Free Zone Person (QFZP) and what conditions need to be met to maintain a 0% tax rate on qualifying income. It also outlines which types of income remain taxable and which common corporate tax reliefs are unavailable to QFZPs. This is the first alert in M2K’s UAE Corporate Tax Series and sets the groundwork for deeper discussions in future editions.
Preface
The UAE is made up of seven Emirates and over 45 Free Zones (FZs), which have been crucial in supporting economic growth. These FZs offer regulatory and infrastructure benefits to businesses.
With the introduction of UAE Corporate Tax (CT), effective for financial years beginning July 1, 2023, there has been heightened interest in how Free Zone businesses will be treated under this new framework. The policies around FZ taxation have evolved significantly — from the public consultation document in April 2022 to the Corporate Tax Guide for Free Zone Persons released in May 2024.
This blog explores the key features of the QFZP regime, especially who qualifies and how.
Taxation of Free Zone Persons
At a high level, Qualifying Income for QFZPs includes:
- Transactions with other Free Zone Persons
- Certain activities conducted from within the FZ or a Designated Zone (DZ), in case of distribution activities
Here’s how the tax rates apply:
| Type of Income | Tax Rate |
| Qualifying Income | 0% |
| Non-Qualifying Income | 9% |
Important points:
- These tax provisions apply only during the remaining tax incentive period specified by the relevant Free Zone’s own legislation.
- QFZPs cannot use the standard CT benefit of 0% on taxable income up to AED 375,000.
- This means the entire non-qualifying income is taxed at 9%, based on adjusted profit/loss statements as per CT Law.
QFZP is Not Eligible for Certain Reliefs
QFZPs are excluded from the following general corporate tax benefits:
- Small Business Relief
- Transfers within a Qualifying Group
- Qualifying Group Relief
- Business Restructuring Relief
- Tax loss relief and transfer of losses
- Tax Group regime
The technical implications and edge cases related to these exclusions will be covered in future alerts of the UAE CT Series.
Conditions for QFZP
To qualify as a QFZP, a Free Zone Person must meet all the following conditions:
- Juridical Person
Must be a legal entity such as a company or LLP. - Established in a Free Zone
Incorporated, registered, or otherwise legally set up within a Free Zone. - Maintains Adequate Substance in FZ
Should have sufficient operations and physical presence in the Free Zone. - Derives Qualifying Income
Must earn income that qualifies under the 0% rate category (e.g., income from eligible transactions within the FZ). - Not Opted for Standard CT
Should not have chosen to be taxed under the regular UAE Corporate Tax regime. - Complies with Arm’s Length Principle
Transactions with related parties must follow fair pricing rules. - Maintains Audited Financial Statements
Yearly financials must be audited by approved professionals. - Non-Qualifying Income Meets De Minimis Requirements
If non-qualifying income exists, it must not exceed the limits defined under the “de minimis” rule. - Maintains Transfer Pricing Documentation
Proper documentation must be in place for related-party transactions.
Failure to meet any one of these eight conditions would mean the business cannot claim QFZP status – and must pay standard tax rates.
Conclusion
The new Corporate Tax regime in the UAE has added layers of compliance, especially for businesses in Free Zones. This first alert from M2K Advisors lays down the core framework for understanding who qualifies as a QFZP and what it takes to enjoy the 0% tax benefit.
The conditions are strict and layered — covering everything from legal registration and income type to governance and documentation. QFZPs also lose out on several general CT reliefs, which may affect strategic planning.
As Free Zone businesses prepare for full compliance, a detailed understanding of QFZP eligibility is the critical first step. Stay tuned for the next parts of this UAE Corporate Tax Series, where specific elements like qualifying income, excluded activities, and computational aspects will be explored further
