Free Zone Corporate Tax and QFZP Status

0 per cent is a rate, not an exemption

The most consequential misunderstanding in the free zone population is that being in a free zone puts you outside the corporate tax system. It does not. A free zone company registers, files, keeps records and is audited exactly like anyone else. What it may get, if it meets the conditions, is a 0 per cent rate on part of its income.

That distinction matters because the obligations that come with being inside the system — registration deadlines, filing deadlines, record standards — apply in full to a company paying nothing.

Who this is for

Companies established in any UAE free zone that want to claim, or believe they already hold, Qualifying Free Zone Person status. In practice the businesses that most need a review are those with a mixed revenue base: some income from other free zone entities or from outside the UAE, and some from the mainland or from activities that fall outside the qualifying list.

A free zone company with a single clean revenue stream from foreign customers usually has a straightforward position. A free zone company that has started selling to mainland customers, or that has added a service line nobody checked against the qualifying activity list, usually does not.

What the work involves

How we run it:

1. Map revenue by counterparty and activity. Every stream classified as qualifying or non-qualifying, with the basis recorded rather than assumed.
2. Test against the de minimis threshold and quantify the headroom, so you know how much non-qualifying revenue the position can absorb before status is at risk.
3. Assess substance. People, premises and expenditure in the free zone proportionate to the activity. A registered address with no operating presence is the classic failure.
4. Review transfer pricing, since compliance with it is a condition of the status rather than a separate obligation.
5. Check the audit position. Audited financial statements are required, and the free zone will usually have its own deadline for them independent of tax.
6. Give you the options while they still exist — restructuring a revenue stream, moving an activity to a separate entity, or accepting standard treatment where that is genuinely the better answer.
7. Document the conclusion so the position is defensible rather than merely asserted.

The five conditions, and where each one fails

QFZP status depends on all of the following holding at once. In our experience the failures cluster:

• Adequate substance in the free zone — the most common failure, in companies operating from elsewhere with a flexi-desk in the zone
• Qualifying income — with excluded activities kept within the de minimis threshold; the second most common failure, usually from mainland sales that grew without anyone tracking them
• Transfer pricing compliance, including documentation — often overlooked entirely in family groups
• Audited financial statements — usually in hand, because the free zone requires them anyway
• No election to be taxed at standard rates — straightforward, but worth confirming rather than assuming

Because the conditions are tested annually, a company that qualified last year is not thereby qualified this year. The review is a recurring exercise, not a one-off opinion.

Mainland sales are the usual culprit

The pattern repeats often enough to be worth naming. A free zone company sells to foreign customers and comfortably qualifies. It then wins a UAE mainland customer, then another, because the demand is there and nobody in the business thinks of it as a tax event.

By year end, mainland revenue has drifted past the de minimis threshold and the status is gone — not just for that year, but for the following period as well. The revenue was profitable and the loss of status was entirely avoidable, either by routing that business through a separate mainland entity or by managing the timing.

This is precisely why the review belongs before year end. In month eleven there are options. In month fourteen there is only an explanation.

What goes wrong

These are the failures we are brought in to correct, in rough order of frequency:

• Treating free zone status as exemption. Registration and filing apply in full at 0 per cent.
• Letting mainland revenue accumulate untracked until it breaches the de minimis threshold.
• Substance in name only. A flexi-desk and a licence, with the actual operation elsewhere, is the position least likely to survive scrutiny.
• Ignoring transfer pricing on the assumption it is a large-group issue. It is a condition of QFZP status.
• Assuming last year’s conclusion still holds. The test is annual.
• Reviewing after year end, when the only remaining question is how much it cost.

Timing and deadlines

The review should happen with at least two months of the financial year remaining — enough time for a revenue stream to be restructured, an activity to be moved, or a decision to be taken deliberately rather than discovered.

Separately, most free zones set their own deadline for audited financial statements, frequently within 90 days of the financial year end, and that sits alongside the tax timetable rather than inside it. Most free zones require audited financial statements; requirements differ by zone (for example DMCC expects audited accounts within 90 days of financial year end)

What you get

• Revenue mapped to qualifying and non-qualifying, with the basis documented
• De minimis headroom quantified, with the date it is projected to be breached where relevant
• A substance assessment against the activity actually carried on
• Written options where the position is at risk, with the cost of each
• A defensible file supporting the QFZP position for the period

Documents we will ask for

What we ask for up front:

• Revenue analysis by customer and by activity for the period to date
• Trade licence, showing the permitted activities
• Details of premises and headcount in the free zone
• Related party transactions and any intercompany agreements
• Prior year audited financial statements
• Prior year corporate tax return, where one has been filed

Fees

A qualifying income review is a fixed-fee engagement scoped on the number of revenue streams and entities involved. A single-activity company with one revenue type is at the light end.

Where the review finds a problem, the remediation — restructuring a revenue stream, establishing a mainland entity, building transfer pricing documentation — is quoted separately once the shape of it is known. We will always tell you what the option costs before you commit to it.

Related

Frequently Asked Questions

Last reviewed 27 July 2026. Rates, thresholds and deadlines change — the e-invoicing provider deadline has already moved once. Confirm current requirements with the Federal Tax Authority before acting, or ask us to check your position.