Last updated: October 28, 2026
Most founders who set up in a free zone hear "0% tax" and stop there. The rate is real, but it is attached to a status, not to the licence. A company has to qualify as a Qualifying Free Zone Person (QFZP) and then keep meeting the conditions in every tax period. Miss one and the 0% rate goes with it.
What the 0% rate actually covers
The 0% rate applies to a QFZP's qualifying income only. Income that does not qualify is taxed at the standard 9% rate. So the practical question is never "are we in a free zone?" but "which of our revenue counts as qualifying, and how much of it is not?" That mix is something to look at every year, not once at incorporation.
The conditions a QFZP must meet
- Adequate substance in a free zone - real people, premises and decision-making in the UAE, proportionate to the activity
- Qualifying income - earned from the kinds of transactions and activities the rules treat as qualifying
- Transfer pricing compliance - dealings with related parties on arm's length terms, properly documented
- Audited financial statements - prepared to IFRS, which is why the audit calendar matters here
- No election for the standard regime - you have not chosen to be taxed at 9%
Substance is where companies get caught
A flexi-desk and a licence on their own are a thin answer to the substance test for many businesses. The expectation is that the activity genuinely happens here: staff who do the work, management who make the decisions, and costs that match what the company claims to do. A holding company and a trading company are judged differently, so the test depends on your activity, not on a one-size checklist.
The de minimis cap
Even a company that qualifies is allowed only a small amount of non-qualifying revenue. The cap is the lower of 5% of total revenue or AED 5 million in the tax period. Stay under it and the status holds. Go over it and the consequences below apply, which is why revenue mix needs to be tracked through the year rather than discovered at filing.
What happens if you fall out of status
If a company stops meeting the conditions, or breaches the de minimis cap, it loses QFZP status for that tax period and, as the rules are generally described, for the following four tax periods as well. During that time it is taxed under the standard regime. This is the reason we reassess the position annually rather than assuming it carries over from the first year.
Where companies drift out of qualifying
Four patterns come up repeatedly: assuming the free zone licence alone delivers 0%; income from customers outside the free zone, which can be non-qualifying depending on the activity, quietly growing past the cap; related-party dealings with no transfer pricing record; and a year-end audit that was never scheduled. None of these are exotic. They are the ordinary result of nobody checking the position until the return is due.
Where this fits into your Corporate Tax work
QFZP assessment sits alongside Corporate Tax registration and filing and the audit that your financial statements depend on. The rules and thresholds in this article reflect our understanding at the date above - confirm the current position with the Federal Tax Authority's guidance for your own activity before relying on it.