Qualifying Free Zone Persons (QFZPs) under UAE Corporate Tax

The UAE Corporate Tax law provides special treatment for Qualifying Free Zone Persons (QFZPs), allowing them to benefit from a 0% corporate tax rate on certain types of income, provided specific conditions are met. This is designed to maintain the UAE’s attractiveness as a global business hub while aligning with international tax standards.

What is a Qualifying Free Zone Person?

A QFZP is a free zone entity that:

  1. Maintains adequate substance in the UAE (i.e., has sufficient assets, employees, and operations in the Free Zone),
  2. Derives Qualifying Income,
  3. Has not elected to be subject to the standard 9% CT rate,
  4. Complies with transfer pricing and economic substance regulations,
  5. Prepares audited financial statements,
  6. Meets any other conditions specified by the Ministry of Finance.

What is Qualifying Income?

The 0% tax rate applies to Qualifying Income, which includes:

  • Income from transactions with businesses located outside the UAE,
  • Income from transactions with other Free Zone entities,
  • Certain types of passive income, such as interest, royalties, dividends, and capital gains from shareholdings.

Note: Income from mainland UAE clients generally does not qualify for the 0% rate unless it relates to specific regulated activities and conditions are met. Otherwise, such income is subject to the 9% corporate tax.

Hybrid Tax Treatment

A QFZP can have a dual tax structure:

  • 0% CT on qualifying income.
  • 9% CT on non-qualifying income (e.g., income from mainland UAE customers that doesn’t meet the conditions).

Strategic Considerations for Free Zone Businesses

  • Careful structuring of business operations is essential to retain QFZP status.
  • Businesses should ensure proper segmentation of income streams.
  • Ongoing compliance with substance and reporting requirements is critical to avoid reclassification.
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