Qualifying Free Zone Person rules explained: the 0% rate in 2026

A Qualifying Free Zone Person (QFZP) is a UAE free zone company or branch that pays 0% corporate tax on its qualifying income and 9% on other taxable income. To qualify, it must keep adequate substance in the free zone, earn qualifying income and meet the de minimis test. It must also comply with transfer pricing rules, keep audited financial statements and not elect into the standard regime. If it fails a condition, it loses QFZP status for that tax period and the following four.

The regime is set out in Article 18 of the Corporate Tax Law, Cabinet Decision No. 100 of 2023 on qualifying income and Ministerial Decision No. 229 of 2025 on qualifying and excluded activities. The FTA’s Free Zone Persons guide (CTGFZP1, May 2024) is the most detailed official explanation, although it was written before Ministerial Decision No. 229 of 2025 replaced the earlier activities decision (FTA). The May 2024 edition is still the current one. The FTA’s public clarification TAXP010, issued on 2 October 2026, explains free zones and designated zones for tax purposes (FTA, TAXP010).

What are the conditions to be a Qualifying Free Zone Person?

A free zone person must meet all of the following for the whole tax period:

1. It maintains adequate substance in the free zone.
2. It derives qualifying income.
3. It has not elected to be subject to corporate tax at the standard rates.
4. It complies with the arm’s length principle and transfer pricing documentation requirements.
5. It prepares and maintains audited financial statements.
6. Its non-qualifying revenue stays within the de minimis limit.

Each condition is tested separately, and the FTA can ask for evidence of each.

What counts as qualifying income?

Cabinet Decision No. 100 of 2023 sets out the categories, and in summary, qualifying income is:

• income from transactions with other free zone persons, except income from excluded activities, where the other free zone person is the beneficial recipient;
• income from transactions with non-free zone persons, but only for qualifying activities that are not excluded activities;
• income from qualifying intellectual property, calculated under a specific formula;
• other income, as long as the de minimis requirement is met.

Income attributable to a domestic or foreign permanent establishment, and most income from immovable property, is not qualifying income.

Which activities are qualifying activities?

Ministerial Decision No. 229 of 2025, issued on 28 August 2025 and effective from 1 June 2023, replaced the earlier Ministerial Decision No. 265 of 2023. The qualifying activities include manufacturing and processing goods, holding shares and other securities for investment purposes, ship ownership and operation, regulated reinsurance, regulated fund management, regulated wealth and investment management, headquarter services to related parties, treasury and financing services to related parties or for its own account, aircraft financing and leasing, distribution of goods in or from a designated zone, logistics services, and trading of qualifying commodities.

The 2025 decision broadened the commodities rules. Qualifying commodities now include industrial chemicals, associated by-products and environmental commodities such as carbon credits, provided a quoted price exists from a recognised exchange or an approved price reporting agency (Ministerial Decision No. 229 of 2025, Art. 1; Deloitte, September 2025, secondary; KPMG, September 2025, secondary).

Excluded activities include transactions with natural persons (with limited exceptions), banking activities, insurance activities other than reinsurance and captive insurance for related parties, finance and leasing other than the specified categories, and the ownership or exploitation of immovable property other than commercial property in a free zone with other free zone persons.

How does the de minimis test work?

Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million in the tax period. Certain revenue, such as from immovable property in a free zone, is disregarded in the calculation.

Two examples show the effect. A free zone holding company with total revenue of AED 20 million can have up to AED 1 million of non-qualifying revenue, because 5% is lower than AED 5 million. A company with AED 200 million of revenue is capped at AED 5 million, because that is lower than 5%. Breaching the limit means losing QFZP status, so monitor the test during the year, not only at the year end.

What does adequate substance mean?

The free zone person must carry out its core income-generating activities in the free zone, with adequate assets, an adequate number of qualified full-time employees and adequate operating expenditure, relative to the level of activity. Outsourcing is possible to a related or third party in the free zone, provided the QFZP adequately supervises the outsourced activity. Our article on substance after the repeal of the economic substance regulations explains why substance still counts for holding companies.

What changed in 2026?

FTA Decision No. 6 of 2026, issued on 2 June 2026, added a requirement for QFZPs that distribute goods in or from a designated zone. They must obtain an agreed-upon procedures report from an independent UAE licensed auditor, evidencing that customers are resellers and that imports actually came through a designated zone. The report is due within 30 days after the corporate tax return deadline and applies to tax periods beginning on or after 1 January 2026. Failing to submit it means the conditions are treated as not met (FTA Decision No. 6 of 2026). PBF has written on the new compliance requirement for free zone distributors.

How do family structures use the QFZP regime?

The FTA’s public clarification CTP008 shows the regime in family structures. A free zone holding company or SPV that holds shares for investment can earn qualifying income from that activity. A single family office in a free zone, however, cannot get 0% on wealth or investment management services unless it is regulated by a UAE competent authority (the Central Bank, DFSA, FSRA or SCA, or another entity the Minister determines, under Ministerial Decision No. 229 of 2025). Holding a licence without regulatory oversight is not enough (FTA, CTP008).

Real estate is the other common trap. A free zone SPV holding residential or mainland property earns non-qualifying income, which can breach the de minimis limit and cost the whole entity its status. Many families hold property separately for this reason. Our UAE corporate tax guide for family offices maps the alternatives, including the participation exemption, which can make the free zone regime unnecessary for some holding companies.

What happens if a company loses QFZP status?

It is taxed at the standard rates from the beginning of the tax period in which it failed a condition, and it cannot return to the regime for the following four tax periods. Because the exclusion lasts so long, families usually decide early whether the regime is worth the conditions or whether the standard regime with exemptions gives a similar result with less risk.

The conditions also need watching every year, not only at set-up. A new contract, a property purchase or a change in staff can move a company out of the regime without anyone noticing. That is one reason groups give a single person, in-house or fractional, ownership of the test.

In practice that owner checks the de minimis figures during the year, keeps the substance evidence and the audited accounts on file, makes sure transfer pricing documentation exists for related-party income, and diarises the agreed-upon procedures report where it applies. Within, by PBF, is fractional tax advisory: your tax team, within your business. A senior tax team works as part of your group, alongside your accountants, lawyers and trustees, and can own this for a few free zone entities without a full-time hire, bringing in PBF’s transfer pricing specialists when the pricing itself needs work. See how Within works.