Qualifying Activities for 0% Corporate Tax in Free Zones (2026)

Free zone companies want the 0% corporate tax rate. Getting it requires more than just having a free zone license.

The 0% rate is available only to Qualifying Free Zone Persons (QFZPs) earning Qualifying Income from Qualifying Activities. The rules, set out in Ministerial Decision No. 265 of 2023, define exactly which activities qualify — and which do not. Misunderstanding these rules can result in the entire income being taxed at 9%.

This guide covers every qualifying activity, the excluded activities, substance requirements, and the de minimis safety valve. For free zone tax advisory, visit the FindCPA corporate tax directory.

What Are Qualifying Activities Under UAE Corporate Tax Law?

Qualifying Activities are specific business activities listed in Ministerial Decision No. 265 of 2023 that a Qualifying Free Zone Person (QFZP) may perform to benefit from the 0% corporate tax rate on Qualifying Income. The list includes manufacturing, commodity trading, holding company activities, treasury operations, shipping, fund management, and certain headquarters functions — but excludes income from regulated financial services, insurance, and transactions with mainland natural persons.

The qualifying activities under the Ministerial Decision:

Critical nuance — "ancillary activities": An activity qualifies as ancillary only if it is necessary for and directly supports a qualifying activity. It cannot be the primary activity itself. For example, marketing services supporting a qualifying commodity trading operation are ancillary. Standalone marketing services are not qualifying.

What Activities Are Excluded From the 0% Rate?

Excluded activities are those that cannot qualify for the 0% rate regardless of the free zone person's status. They include direct insurance, banking, finance, leasing, and any transaction involving a natural person — except for qualifying activities where the counterparty type is irrelevant (such as commodity trading on an exchange). Income from excluded activities is taxed at 9% even for a QFZP.

The excluded activities:

The natural person exclusion deserves attention. If your free zone company sells goods or services to individuals (natural persons) — whether in the UAE or abroad — that income does not qualify for the 0% rate. This effectively excludes B2C free zone businesses from the benefit.

Exception: The natural person exclusion does not apply to qualifying activities listed in items 1, 2, 5, 11, and 12 above (manufacturing, processing, shipping, aircraft leasing, and distribution from designated zones). For these activities, the counterparty type is irrelevant.

What Is the De Minimis Threshold?

The de minimis threshold allows a QFZP to earn a limited amount of non-qualifying income without losing the 0% rate on qualifying income. Non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue. If breached, the QFZP loses its 0% rate on all income for that tax period — not just the excess. This is a cliff-edge rule, not a gradual phase-out.

The cliff-edge nature is critical. If you earn AED 100 million in qualifying revenue and AED 5,000,001 in non-qualifying revenue, your entire AED 105 million is taxed at 9%. That one dirham of excess non-qualifying revenue costs you AED 9 million in additional tax.

Planning implication: Monitor non-qualifying revenue closely throughout the year. If you are approaching the threshold, consider:

• Restructuring the non-qualifying activity into a separate entity
• Timing transactions to stay within the threshold
• Reviewing whether any non-qualifying income can be reclassified as ancillary

What Substance Requirements Must a QFZP Meet?

A QFZP must demonstrate adequate substance in the UAE: sufficient qualified employees, adequate operating expenditure relative to income, and physical office space proportional to the activities conducted. The FTA evaluates substance on a case-by-case basis. Brass-plate entities with no real operations in the free zone will not qualify — the substance must be genuine and proportionate to the income being earned.

The substance requirements are principles-based, not prescriptive. The Ministerial Decision does not specify minimum headcounts or expenditure ratios. Instead, it requires:

1. Adequate number of qualified employees — employees (or equivalents via outsourcing) with the skills and qualifications needed for the qualifying activities
2. Adequate operating expenditure — spending on premises, staff, technology, and services proportionate to the income generated
3. Core income-generating activities (CIGAs) — the essential activities that drive income must be conducted in or directed from the free zone
4. Physical presence — real office space, not just a virtual address

Practical benchmarks (not official — based on market practice and FTA guidance patterns):

Outsourcing is permitted — but only within the same free zone or another UAE free zone. You can outsource operational functions, but you must retain direction and control. The outsourcing arrangement must be documented and the service provider must have its own substance.

How Does Qualifying Commodity Trading Work?

Qualifying Commodities are defined as physical commodities traded on a recognized commodity exchange or priced by reference to a benchmark price published by a recognized exchange. The QFZP does not need to trade on the exchange itself — but the commodity must be of a type that is traded on one. This covers crude oil, refined petroleum, metals, agricultural commodities, and petrochemicals — but not finished goods or manufactured products.

The commodity trading qualification has specific requirements:

• The commodity must be a Qualifying Commodity (physical, exchange-traded type)
• Trading must be conducted as a qualifying activity from the free zone
• The counterparty can be anyone — the natural person exclusion does not apply to commodity trading if the goods are qualifying commodities under items 1 or 2

Recognized exchanges include (non-exhaustive):

What does not qualify: Trading finished goods (electronics, clothing, machinery) is not commodity trading even if done from a free zone. These are regular trading activities that qualify only if the free zone entity meets separate qualifying activity criteria (distribution from a designated zone, or manufacturing/processing).

What Are the Record-Keeping Requirements for QFZPs?

QFZPs must maintain audited financial statements, transfer pricing documentation for related party transactions, and detailed records supporting the classification of income as qualifying or non-qualifying. The FTA may request documentation at any time, and failure to maintain adequate records can result in loss of QFZP status. Records must be kept for a minimum of 7 years after the relevant tax period.

Required documentation:

The audited financial statements requirement is absolute. Unlike mainland companies where audit requirements depend on entity type and size, every QFZP must have audited financial statements — regardless of revenue or company size. A review engagement or compilation is not sufficient.

How Do Free Zone Companies Lose QFZP Status?

A free zone company loses QFZP status if it fails any of the conditions in the relevant tax period: breaching the de minimis threshold, inadequate substance, failure to maintain audited financials, or making an election to be taxed at the standard rate. Loss of status is per-period — you can regain it in a subsequent period if all conditions are met again. However, once lost for a period, all income for that period becomes taxable at 9%.

Triggers for losing QFZP status:

1. De minimis breach — non-qualifying revenue exceeds AED 5 million or 5% of total revenue
2. Substance failure — FTA determines inadequate employees, expenditure, or CIGA
3. Audit failure — not obtaining audited financial statements
4. Election to be taxed — voluntarily choosing the standard 9% rate
5. Non-compliance — failure to meet corporate tax filing obligations
6. Excluded activity income — if income is entirely from excluded activities, there is no qualifying income to benefit from 0%

Recovery mechanism: QFZP status is assessed each tax period. A company that fails the conditions in Year 1 can re-qualify in Year 2 by meeting all conditions. There is no mandatory "cooling off" period — but the FTA may scrutinize re-qualification claims more closely.

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Frequently Asked Questions

Can a free zone company have both qualifying and non-qualifying income?

Yes. A QFZP can earn non-qualifying income and still retain the 0% rate on qualifying income — as long as the non-qualifying portion stays within the de minimis threshold (lower of AED 5 million or 5% of total revenue). The non-qualifying income is taxed at 9%. This allows mixed activities within limits.

Do I need a separate entity for each qualifying activity?

No. A single QFZP can perform multiple qualifying activities. However, if you also have significant non-qualifying activities that might breach the de minimis threshold, it may be prudent to separate qualifying and non-qualifying activities into different entities.

Does the 0% rate apply forever?

The 0% rate is guaranteed for the earlier of 50 years from the date the QFZP regime came into effect or any period specified in the free zone's own tax incentive framework. After this period, the rate automatically converts to the prevailing minimum tax rate (currently 9%). For most free zone companies, this means the 0% rate is available until approximately 2073.

Can a mainland company transfer its business to a free zone to get 0%?

Technically possible, but the FTA has anti-avoidance provisions. General Anti-Avoidance Rules (GAAR) can deny benefits if the primary purpose of a restructuring is to obtain the 0% rate without genuine commercial substance. The transfer must have real business rationale, and the free zone entity must meet all substance requirements independently.

Are intercompany transactions between free zone entities qualifying?

Transactions between QFZPs in the same or different free zones can generate qualifying income, provided the underlying activity is a qualifying activity and the transaction is at arm's length. Intercompany transactions with mainland group entities can also generate qualifying income for the free zone entity, subject to transfer pricing rules.

Keep Reading

• Free Zone Qualifying Income Guide
• Free Zone vs Mainland Tax Differences
• DIFC Accounting Standards
• Browse Corporate Tax Consultants on FindCPA