UAE free zone taxes in 2026: 0% on qualifying income and QFZP conditions

The main thing: 0% in a UAE free zone isn't an automatic relief

Let's immediately debunk the market's most costly myth. The phrase "registered a company in a free zone - and you pay 0% tax" is wrong. With the introduction of corporate tax in the UAE (in effect since financial periods starting June 1, 2023), free zones stopped being an automatic tax-free haven. A free zone company is by default a corporate taxpayer just like any other. The 0% rate isn't the status quo, but a special regime you still need to qualify for and confirm every tax period.

The right to 0% tax in a UAE free zone is granted only to those recognized as a Qualifying Free Zone Person (QFZP) - a free zone's qualifying resident. And even for QFZP, not all income is taxed at the zero rate, only qualifying income. Everything falling outside this category is taxed at the regular 9% rate.

So the correct formula is: 0% corporate tax - for QFZP on qualifying income; 9% - on non-qualifying income and income from the mainland above the established threshold. And on top of corporate tax, 5% VAT operates separately. Next we'll break down each element of this construction - what's considered qualifying income, what conditions QFZP meets, how the de minimis threshold works, and where companies most often lose their relief. We keep a basic overview of the entire fee system in the article onUAE taxes, and a general breakdown of corporate tax - in the guide onUAE corporate tax.

What QFZP - Qualifying Free Zone Person - is

QFZP (Qualifying Free Zone Person) is a legal entity registered in a UAE free zone that has met all conditions for applying the zero corporate tax rate to its qualifying income. The key word here is "met". QFZP status isn't assigned upon registration and isn't granted once and for all. This is a regime checked at the end of each tax period: met the conditions - apply 0% to qualifying income; failed even one - lose the relief entirely.

The Free Zone Person definition covers not only the parent company, but also:

• Legal entities, incorporated, established, or otherwise registered in a free zone.
• Branchesof companies operating in a free zone.

It's important to understand the difference: being a Free Zone Person means simply having a company in a free zone. Being a Qualifying Free Zone Person means additionally meeting a set of strict conditions and having the right to 0%. These are two different things, and it's exactly conflating them that most mistaken expectations are built on. If you're just planning a structure, start with the breakdown of formats in the article onUAE free zonesand on registering a company in the UAE, to build the activity for QFZP requirements in advance.

QFZP conditions 2026: five mandatory requirements

To apply the zero rate, a Qualifying Free Zone Person must meet all conditions simultaneously - not selectively, but in aggregate. Failing any of them means losing status. Let's gather the 2026 requirements into a checklist table.

Note: even one "lagging" condition zeroes out the entire relief. For example, a company can conduct perfectly qualifying activity but lack real presence (substance) in the free zone - and that's enough to lose QFZP status. So the status needs not just obtaining, but systematically maintaining. After this section - about how we help build a structure for the zero rate.

Qualifying and excluded activities

The list of qualifying and excluded activities is fixed in a ministerial decision (the current version - Ministerial Decision No. 229 of 2025, replacing the earlier Decision No. 265 of 2023). This isn't a free interpretation, but a closed list by which the tax authority determines whether your income falls under 0%.

Ofqualifying activities, generally the following are included:

• Manufacturing and processing of goods and materials.
• Trading in qualifying commodities (metals, including gold, minerals, energy resources, agricultural goods, industrial chemicals).
• Holding shares and securities for investment purposes (a holding function).
• Ownership, management, and operation of ships.
• Reinsurance, fund and wealth management services under a financial regulator's supervision.
• Treasury and financial services to related parties, headquarter services, distribution of goods from a designated zone.
• Activity ancillary to the above.

Ofexcluded activitiesinclude, in particular: banking activity, classic insurance, sales to individuals (with narrow exceptions), and most real estate operations outside free zones. Income from these areas is taxed at 9% and isn't qualifying. So the first practical step in planning is to check your actual activity type against the current list, not rely on a general "I have a free zone".

The de minimis threshold: 5% or 5 million AED

The state understands that any real company can have a small amount of non-qualifying income - a one-off mainland deal, a sale to an individual, and so on. To avoid stripping a business of status over a trifle, the de minimis threshold was introduced - a safeguard within which a small amount of non-qualifying income is acceptable.

The rule is simple in wording but strict in consequences. Non-qualifying revenue for the tax period mustn't exceedthe smaller of two values:

• 5% of total revenueof the company for the period, or
• 5 000 000 AED(five million dirhams).

It's exactly the smaller of the two numbers that's taken. For a large company with high revenue, the limiter becomes the absolute 5 million AED; for a small one - the relative 5%. It's the share of exactly non-qualifying revenue in the total that's calculated.

And here's the key and most painful point: if non-qualifying revenue exceeds the threshold on even one of the criteria - the company loses QFZP status not on the excess, but entirely and for the whole tax period. That is, not only the "excess" income falls under 9%, but absolutely all the company's income for the year, including what would have been qualifying. The de minimis threshold isn't a "tax bracket", but a red line: cross it - lose the relief entirely.

Mainland income and the 9% rate: where the line runs

The most common trap for free zone company owners is working with the UAE mainland. Many proceed from the logic "I'm in a free zone, so I have 0% on everything". In fact, income received from mainland clients is in most cases considered non-qualifying.

Let's break down by situation:

• Services to mainland clients- generally non-qualifying income. If such revenue exceeds the de minimis threshold, QFZP status is lost.
• Supplying goods to the mainland- taxed at 9% as income not falling under qualifying income (with certain exceptions for designated zones and distribution).
• Transactions between free zones- qualifying income, provided the counterparty is also a Free Zone Person and the ultimate beneficiary.
• Export and international operations- qualifying income.

So a company wanting to keep 0% must clearly separate flows: what goes to the international market and between free zones (0%), and what goes to the mainland (risk of 9% and losing status). If the business model is tied to mainland clients, it's sometimes more to work as a regular 9% taxpayer on profit above 375,000 AED than to balance on the edge of losing QFZP. This is a matter of sober calculation, not the desire to "get zero at any cost".

Real presence (substance): not "a company on paper"

One of the QFZP conditions most often underestimated is the requirement of adequate substance. The time of "dormant" shell companies registered for the zero rate has passed. The state wants to see real economic activity in the free zone, not a mailing address.

What's checked within substance:

• Core income-generating activities (CIGA)must actually be performed in the free zone, not abroad or outsourced with no control.
• Sufficient assets- an office, equipment, resources matching the scale of activity.
• Sufficient staff- qualified employees genuinely engaged in the business.
• Sufficient operating expenses- real spending on conducting activity in the free zone.

Outsourcing part of the functions is allowed - but on condition that it's performed in the same free zone and under the company's proper control. Simply registering a legal entity with a minimal office and no employees doesn't meet the substance requirement. So when planning a structure for 0%, presence needs building in from the start: select the office format, staff, and expenses for the business's scale, not try to "top up" substance retroactively before a check.

Audit, reporting, and the arm's-length principle

The zero rate comes bundled with transparency obligations. Even the smallest QFZP can't limit itself to "home" bookkeeping - the law requires serious reporting discipline.

The main requirements of this block:

• Audited financial statements.A QFZP must prepare an audit under international standards (IFRS) regardless of revenue size. This isn't an option, but a condition for retaining status.
• The arm's-length principle.All related-party transactions must be conducted at market prices, as between independent companies. Profit can't be artificially reallocated within the group to "hide" income under the zero rate.
• Transfer pricing documentation.Documentation justifying prices in intragroup transactions needs keeping for the arm's-length principle.
• Not electing the standard regime.The company mustn't voluntarily switch to standard 9% taxation - such an election closes the door to 0% for several years.

These requirements make the QFZP regime a tool for a real, structured business, not for formal savings. But for those conducting activity seriously, audit and transfer pricing aren't a barrier, but a way to reliably protect their zero rate under any check.

VAT 5%: a separate tax, not to be confused with corporate tax

A common confusion: entrepreneurs mix up corporate tax and VAT, thinking "0% in a free zone" exempts from everything. This isn't so. VAT is a separate tax with its own rules, and QFZP status doesn't affect it.

What's important to know about VAT in the context of free zones:

• The standard rate - 5%.It applies to most goods and services in the UAE regardless of whether the company is in a free zone or on the mainland.
• VAT registration is mandatoryupon exceeding the established threshold of taxable supplies (voluntary registration is also possible below the threshold).
• Designated zones- specific free zones with special VAT status, where supplies of goods within the zone under certain conditions may be considered outside the scope of VAT. But this concerns goods and narrow scenarios, not services and not corporate tax.

The conclusion is simple: 0% corporate tax on qualifying income and 5% VAT are two independent systems. A free zone company can simultaneously have zero corporate tax on qualifying income and at the same time be a full-fledged VAT payer on its supplies. Both systems need accounting for together when planning a structure.

The price of a mistake: losing QFZP status for five years

The main reason the QFZP regime can't be treated lightly is the severity of the consequences for violating conditions. There's no fine "on the excess" or a soft warning here. The logic is harsh: didn't meet the condition - lost the status entirely.

How this works:

• Failing any condition(substance, de minimis, audit, arm's length, etc.) means losing QFZP status from the start of the relevant tax period.
• 9% rate on all income.The company becomes a regular corporate taxpayer and pays 9% on all taxable income for that period, not just the problematic part.
• A five-year block.As a general rule, the status is lost not for one year, but for the current tax period and the four following ones - meaning returning to 0% won't be possible soon.

That's exactly why qualifying income, presence, audit, and the de minimis threshold need monitoring not once a year before filing, but throughout the entire period. One large deal with a mainland client in December can zero out the relief for the whole year and close access to it for years ahead. The 0% regime in a UAE free zone is about discipline, not luck.

Who the free zone's zero rate really suits

After all the nuances, the natural question is: for whom is the QFZP regime a genuinely working model, and for whom a source of problems? a answer matters more than nice advertising about "tax-free Dubai".

The free zone's zero rate fits naturally with a business that:

• Works the international market- exporting goods and services to clients outside the UAE.
• Trades between free zonesor commodities from the qualifying activities list.
• Performs holding, treasury, or shipping functions, headquarter services for the group.
• Is ready for real presence- an office, staff, expenses, and an audit in the free zone.

But here's who the QFZP regime is inconvenient or risky for:

• A business tied predominantly to mainland clients.
• Retail sales to individuals, banking and insurance services (excluded activities).
• Shell companies with no real presence.

For such scenarios it's sometimes more advantageous and calmer to work as a regular 9% taxpayer on profit above 375,000 AED than to constantly risk losing the relief. The format choice is always individual - it makes sense to calculate both options on the specific business's numbers, relying on the format breakdown in the article onUAE free zones.

What qualifying income is - a free zone's qualifying income

Qualifying income is the heart of the entire relief. It's exactly to it, and only it, that the 0% rate is applied. Simplifying, income from activity the state has decided to encourage in free zones, and from transactions tied to the international market or other free zones, not the mainland economy, is considered qualifying.

In general terms, qualifying income includes:

• Income from transactions with other free zones- when the buyer is also a Free Zone Person and is the ultimate recipient (beneficiary) of the goods or service.
• Income from operations abroad- international trade and services for clients outside the UAE.
• Income from qualifying activities- the list of which is established by a ministerial decision (in detail - in the next section).

But here's what in most cases is NOT qualifying income: revenue from mainland clients, income from excluded activities, and income from transactions not falling under qualifying categories. Such income is taxed at 9% - and, more importantly, if there's too much of it, the company loses QFZP status entirely. The line between "0%" and "9%" runs exactly through the nature of the income, not the fact of being in a free zone.

How to check your business for 0%: an expert's view

In practice, most problems with the zero rate arise not from malicious intent, but because the company owner didn't check the income structure in advance. Let's give the practical self-check algorithm we go through with clients.

• Step 1. Check the activity type.Find your activity in the current list of qualifying activities. If it's not there or it's excluded - there won't be 0%.
• Step 2. Break revenue down by source.How much comes from abroad and between free zones (0%), and how much - from the mainland and individuals (risk of 9%).
• Step 3. Calculate de minimis.Non-qualifying revenue must be below the smaller of the values: 5% or 5 million AED.
• Step 4. Check presence.Whether there's a real office, staff, expenses, whether CIGA is conducted in the free zone.
• Step 5. Close the formalities.An IFRS audit, transfer pricing documentation, no election of the standard regime.

It's better to run this algorithm not before filing the report, but at the structure planning stage - then there's time to restructure flows. Current activity lists and conditions are always worth checking at the official portal ofthe UAE Ministry of Finance (mof.gov.ae), since ministerial decisions are periodically updated.