Who Are Qualifying Free Zone Persons and How Are They Taxed?
Understanding the Role of Qualifying Free Zone Persons
Free Zones in the UAE have long been popular for their tax advantages. But under the Corporate Tax system, not every Free Zone company will enjoy full tax relief. That is where the concept of a Qualifying Free Zone Person comes in. These are businesses that continue to benefit from a zero percent tax rate but only if they follow the rules.
If your business is based in a Free Zone, this could apply to you. But it is not automatic. You need to meet several conditions, and the benefits are tied to specific types of income. Let’s look at what it takes to qualify and how this status affects your tax obligations.
What Does It Mean to Be a Qualifying Free Zone Person?
A Qualifying Free Zone Person, often called a QFZP, is a company or individual operating in a UAE Free Zone that meets the conditions set out by the Federal Tax Authority. These businesses can continue to enjoy a zero percent Corporate Tax rate, but only on qualifying income.
If the business fails to meet the conditions at any time, it will be taxed at the normal rate of nine percent and this applies to all its income, not just the part that breaks the rules.
Conditions You Must Meet
To be treated as a Qualifying Free Zone Person, you must:
- Have enough business presence in the Free Zone. This means staff, assets, and operations must actually be based there.
- Earn income that is considered qualifying under the law.
- Keep proper audited financial statements.
- Follow the UAE’s transfer pricing rules when dealing with related parties.
- Make sure non-qualifying income is below a certain threshold. This is called the de minimis rule.
- Not choose to be taxed at the normal nine percent rate. Some businesses do this for strategic reasons.
Failing any one of these conditions can cost you your QFZP status. That is why ongoing compliance is so important.
What Counts as Qualifying Income?
Not all income earned by Free Zone companies is tax-free. To enjoy the zero percent rate, income must fall into certain categories. These include:
- Payments received from other Free Zone companies, as long as the work or service does not involve excluded activities
- Earnings from doing specific approved work with companies outside the Free Zone
- Other income that meets the rules and stays within the allowed limits for non-qualifying income
If your income falls outside these categories, it might be taxed even if you meet all the other conditions.
What Activities Are Not Allowed?
Certain activities will immediately make your income ineligible for the zero percent rate. These are called excluded activities. They include:
- Doing business with individual people, unless it falls under specific approved services
- Running regulated banking, insurance, or finance operations
- Leasing or owning real estate in the UAE, unless it is Free Zone commercial property rented to another Free Zone business
- Making money from intellectual property, such as licensing or trademarks
- Providing services that support any of the activities above
If your company earns money from any of these, that income will be taxed at the regular rate. Worse, if it makes up too much of your total revenue, you could lose your QFZP status entirely.
What Is the De Minimis Threshold?
The de minimis threshold is a rule that lets QFZPs earn a small amount of non-qualifying income without losing their tax benefits. You can earn up to five percent of your total income or up to five million dirhams, whichever is lower from non-qualifying sources.
If you go over that limit in any tax period, your entire income will be taxed at the normal rate. And not just for that year. The penalty period lasts for five years. That is why careful tracking of revenue sources is critical.
Reporting and Filing Requirements
Even if you qualify for the zero percent rate, you still have to file a full Corporate Tax return. The UAE does not allow you to skip this step. You will need to submit audited financial statements, document your income sources, and comply with all recordkeeping rules.
If your business deals with related companies, you also need to complete transfer pricing reports. This includes disclosure forms and, if you pass the revenue threshold, full master and local files.
What Happens If You Break the Rules?
Losing your Qualifying Free Zone Person status can have big consequences. If you breach any of the conditions, your entire income becomes subject to the nine percent Corporate Tax. This penalty stays in place for five years. During that time, you cannot reapply for QFZP treatment.
Common reasons companies lose status include:
- Earning too much non-qualifying income
- Skipping audit requirements
- Choosing to be taxed at nine percent
- Missing filing deadlines or transfer pricing obligations
Staying compliant is not just about saving on taxes. It is about keeping your business in good standing and avoiding years of penalties.
If your business is based in a Free Zone and you want to hold on to the tax benefits, make sure you meet every QFZP condition. And if you're unsure about your income or obligations, using a tool like Tax Star can make the process clearer and easier.
Frequently Asked Questions
Do I need to apply for QFZP status?
You do not file a separate application, but you must confirm your status through your tax return and meet all the conditions each year.
Can I still qualify if I lease my office in a Free Zone?
Yes. What matters is that your operations, staff, and assets are based in the Free Zone not whether you own the property.
What if my non-qualifying income is just slightly over the limit?
Even a small breach of the de minimis threshold will remove your QFZP status for five years. There is no grace margin.
Is Free Zone income always tax-free?
No. Only qualifying income earned by compliant Free Zone businesses is eligible for the zero percent rate.
Can I go back to QFZP status after five years?
Yes. After the five-year period, you can requalify but you will need to meet all the conditions again.
Do I still need to submit a Corporate Tax return?
Yes. Every Free Zone company, even those with zero percent tax, must file their return.
Can I lose QFZP status without knowing it?
If you do not track your income sources properly or miss audit and filing requirements, it can happen without warning. It is important to stay on top of your obligations.
