The 0% Free Zone Rate: Who Qualifies and Who Only Thinks They Do

Cabinet Decision No. 100 of 2023 still defines Qualifying Income as of 24 August 2026. Ministerial Decision No. 229 of 2025 lists Qualifying Activities and Excluded Activities. Fail a condition, or elect ordinary rates under Article 19, and the FTA Free Zone Persons guide plus MD 229 Article 5 take that period and the next four.

Accounting and tax for a UAE company maps Qualifying Income, de minimis, substance, and the audit pack to this company’s invoices. UAE company formation and licensing chooses the legal shape. The shape does not write 0 percent onto the return.

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Does a free zone licence give you 0% Corporate Tax?

The licence shows that a Free Zone Authority recognised the company in a prescribed geographical area. Article 11 of the Law still treats that juridical person as a Resident Person. The FTA guide repeats the point: a Free Zone Person is a Taxable Person. You register, keep records, and file. Corporate Tax registration runs through EmaraTax under FTA Decision No. 3 of 2024; late-application penalties sit in Cabinet Decision No. 75 of 2023. Confirm those clocks on tax.gov.ae. Those clocks do not replace the QFZP tests below.

Ordinary companies sit on Cabinet Decision No. 116 of 2022: 0 percent on taxable income up to AED 375,000 and 9 percent on the excess. A QFZP sits on Article 3(2): 0 percent on Qualifying Income, 9 percent on taxable income that is not Qualifying Income. The FTA guide and bulletin withhold the AED 375,000 band from a QFZP’s non-qualifying slice.

Founders mix three “0 percent” stories: Cabinet 116’s first band, Small Business Relief under Article 21 (a QFZP cannot elect it), and QFZP Qualifying Income.

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What does Article 18 actually require?

Article 18(1) lists five cumulative conditions. The company maintains adequate substance in the State. It derives Qualifying Income as specified by the Cabinet. It has not elected to be subject to Corporate Tax under Article 19. It complies with Articles 34 and 55 (arm’s length pricing and transfer-pricing documentation). It meets any other conditions the Minister prescribes. MD 229 Article 5 adds two Minister conditions in force from 1 June 2023: de minimis, and audited financial statements under Ministerial Decision No. 84 of 2025 (or MD 82 of 2023 for tax periods that commenced before 1 January 2025).

The FTA guide treats a Free Zone Person as a QFZP unless a condition fails or the company elects out. Status is a self-assessment you support in the return. There is no FTA product called a QFZP licence. Article 18(2) ceases QFZP status from the beginning of a Tax Period if any condition fails in that period. MD 229 Article 5(2) and the FTA guide then occupy that period and the subsequent four. Article 18(4) is a different clock: the 0 percent window can last for the remainder of the tax incentive period in the free zone’s own legislation, which the Cabinet may extend, with any one period not exceeding fifty years.

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What is Qualifying Income under Cabinet Decision 100?

Cabinet Decision No. 100 of 2023, effective 1 June 2023, repealed Cabinet Decision No. 55 of 2023 and remains the live Qualifying Income text as of 24 August 2026. KPMG’s August 2025 note on MD 229 and MD 230 states that those ministerial decisions left Cabinet 100 in force. Confirm the PDF on tax.gov.ae or mof.gov.ae before you file.

Article 3 then names four heads: income from transactions with a Free Zone Person, except Excluded Activities; income from Non-Free Zone Persons, but only Qualifying Activities that are not excluded; Qualifying Intellectual Property under the Minister’s nexus formula; and any other income if de minimis is met. Articles 5 to 7 pull PE income, specified immovable property, and non-qualifying IP out of that 0 percent basket even when the invoice looks “free zone.”

Transactions with Free Zone Persons and the Beneficial Recipient test

Cabinet 100 Article 3(2) treats income as derived from a Free Zone Person only where that person is the Beneficial Recipient of the services or Goods. Article 3(3) defines Beneficial Recipient as the person who has the right to use and enjoy the service or Good and has no contractual or legal obligation to supply it to another person. Goods include tangible and intangible property with economic value.

The FTA guide’s conduit problem is practical. If the named counterparty is an agent, nominee, or group company that must pass the service or goods through, the Beneficial Recipient is the third party. If that third party is a mainland company or a natural person, you lack a Free Zone Person transaction for Article 3(1)(a). The guide allows a written purchaser statement, unless you have reason to believe it is wrong, for example because goods ship to someone else.

Professional services that are not Qualifying Activities can still produce Qualifying Income when the client is a Free Zone Person who is the Beneficial Recipient and the work is not an Excluded Activity. The FTA’s example is a free zone law firm serving other free zone juridical persons. The same firm invoicing mainland clients books non-qualifying Revenue unless another Cabinet 100 head applies.

Qualifying Activities with Non-Free Zone Persons, and the IP carve-out

Sales to a mainland company, a foreign company, or any other Non-Free Zone Person take 0 percent only if the work is a Qualifying Activity and is not an Excluded Activity. A general trading or consultancy line on the zone licence does not rewrite MD 229.

Qualifying Intellectual Property in Cabinet 100 is patents, copyrighted software, and rights functionally equivalent to a patent that are legally protected through a similar approval process. Trademarks and other marketing IP sit outside that set. MD 229 Article 4 applies a nexus fraction (Qualifying Expenditures, with a 30 percent uplift capped at Overall Expenditures, over Overall Expenditures, times Overall Income). Related-party R&D bought outside the UAE is outside Qualifying Expenditure. Income above the fraction, and income from other IP, is taxed at 9 percent.

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Which activities qualify and which are excluded?

Ministerial Decision No. 229 of 2025, issued 28 August 2025 and effective 1 June 2023, repeals Ministerial Decision No. 265 of 2023. The FTA guide still cites MD 265 in its glossary. Test 2026 invoices against MD 229. MoF issued MD 230 of 2025 the same day on Recognised Price Reporting Agencies; that text matters if you claim trading of Qualifying Commodities.

Article 2(1) of MD 229 is a closed list, plus ancillary work that is necessary to a listed head or so minor that it is not a separate activity. Manufacturing, processing, commodities trading, twelve-month investment holding, international ships, regulated reinsurance, regulated fund and wealth management, Related Party headquarters, treasury for Related Parties or own account, aircraft financing and leasing, designated-zone distribution, and logistics sit on that list. Read the full clauses before you treat a licence activity code as a match.

Qualifying Activities founders actually run

Manufacturing and processing cover production, improvement, assembly, preparation, treatment, and conversion. They fit a plant that makes or converts goods in the zone. They fail a company that invoices “manufacturing support” from a desk while the line sits on the mainland.

Trading of Qualifying Commodities is physical trading of listed metals, minerals, industrial chemicals, energy and agriculture commodities and associated by-products (not retail-packaged products), plus environmental commodities such as carbon credits where a Quoted Price exists, plus the hedging and structured finance MD 229 names. Article 2(3)(c) withdraws that head if distribution, warehousing, logistics, or inventory management is 51 percent or more of Revenue. Dual-source that line to MD 229 and a 2025 KPMG or PwC note if a board will rely on it.

Designated-zone distribution requires import through that Designated Zone and supply to a customer who resells, processes, or alters for sale or resale, or to a public benefit entity. Logistics is storage and transport on behalf of another Person without taking title.

Excluded Activities that close the 0 percent file

MD 229 Article 2(2) treats as Excluded Activities: transactions with natural persons, except ships, fund management, wealth and investment management, and aircraft financing and leasing; banking under Federal Decree-Law No. 14 of 2018; insurance (without prejudice to reinsurance and captive insurance inside headquarters); finance and leasing (without prejudice to the saved heads); ownership or exploitation of immovable property, other than Commercial Property in a Free Zone transacted with a Free Zone Person; and ancillary work tied to those exclusions.

Retail, consumer apps, and most B2C professional work sit in transactions with natural persons. Invoices to individuals for subscriptions, clinic visits, or retail brokerage are Excluded Activity revenue. If that slice exceeds de minimis, QFZP status fails for five periods. Crypto platforms that onboard natural persons inherit the same head unless one of the four exceptions applies.

Cabinet 100 Article 6 taxes, at 9 percent, Commercial Property in a Free Zone transacted with a Non-Free Zone Person, and non-commercial immovable property transacted with anyone. A villa rented to a natural person is an excluded property line. An office in the zone leased to another Free Zone Person can still be Qualifying Income if the other tests hold.

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How does de minimis actually fail?

MD 229 Article 3, implementing Cabinet 100 Article 4, is met where non-qualifying Revenue in the Tax Period does not exceed the lower of 5 percent of total Revenue or AED 5,000,000. Dual-source that sentence to MD 229 and FTA guide section 3.2.8. Five percent of AED 80 million is AED 4 million. Five percent of AED 2 million is AED 100,000. Small companies trip the percentage. Large companies trip the dirham cap.

Non-qualifying Revenue, after Cabinet 100 Article 4(3) exclusions, includes Excluded Activities, non-qualifying activities with a Non-Free Zone Person, and transactions with a Free Zone Person who is not the Beneficial Recipient. Total Revenue drops PE revenue, specified property lines, and IP other than Qualifying IP income. The FTA’s example: AED 10 million of which AED 2 million is a Domestic PE gives de minimis total Revenue of AED 8 million.

The guide’s chair example is the one boards skip. Company F’s only 2024 revenue is AED 100 from selling an office chair to an employee. Non-qualifying Revenue is 100 percent of total Revenue. De minimis fails. QFZP fails for 2024 and the four subsequent periods. A small B2C invoice on a wholesale book can do the same if it pushes the fraction over 5 percent. A de minimis breach ends QFZP status for the period. All taxable income then sits on Cabinet 116, including the AED 375,000 band you did not have as a QFZP, and you stay off QFZP for four more periods even if next year’s invoices are clean.

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What does adequate substance look like?

Cabinet 100 Article 8 and FTA guide section 6 require core income-generating activities in a Free Zone, or in a Designated Zone for designated-zone distribution, plus adequate assets, qualified full-time employees, and operating expenditure in that place for each activity. Those CIGA are the functions that drive business value, not exclusively support. A flexi-desk with a brass plate and no people in the zone is the profile the guide is written to catch. “Adequate” is not a published headcount table. The test is whether people, assets, and spend in the zone can perform the CIGA that produce Qualifying Income.

Assets, people, and expenditure in the zone

Full-time qualified employees in the zone must be enough to perform each CIGA. Seconding the commercial team to a mainland coworking space while the licence sits in a free zone is how substance and a Domestic PE arrive together. Operating expenditure has to sit with the activity: rent, payroll, and systems in the zone for the functions that earn Qualifying Income, not a recharge from a foreign parent with no supervision file.

The FTA’s distribution example is geographic. Core income-generating activities for designated-zone distribution must be performed in a Designated Zone. Performing them in a free zone that is not on the VAT Designated Zone list (Cabinet Decision No. 59 of 2017, as a zone that is also a CT Free Zone) fails the substance test for that activity even if the trade licence looks similar.

Outsourcing, supervision, and what stays in-house

Supervision means the QFZP can direct and control the outsourced CIGA. A contract with a zone service company that “does everything” without your managers reviewing output is a weak file. Related-party services still need Article 34 pricing. If the outsourced people sit on the mainland, you have left Cabinet 100 Article 8(2)’s geography, unless the work is IP R&D under Article 8(3).

Substance fits a company that locates the people who negotiate, make, hold, or move the qualifying work inside the prescribed area, and can show assets and spend that match. It fails a nominee office, a visa quota with no job, or a mainland sales floor that is the real CIGA.

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When does a mainland presence put income on 9%?

Cabinet 100 defines a Domestic Permanent Establishment as a place of Business or other form of presence of a QFZP outside the Free Zone in the State. Article 5 taxes income attributable to a Domestic PE and to a Foreign PE at 9 percent under Article 3(2)(b), treating the establishment as a separate Related Party. Arm’s length attribution applies. Cabinet 100 Article 3(4) applies Article 14 of the Law with two substitutions: “Qualifying Free Zone Person” for “Non-Resident Person,” and “geographical areas outside the Free Zones in the State” for “State.”

The FTA guide maps two common shapes. A free zone parent with a mainland branch: the branch is a Domestic PE. A UAE mainland company with a registered free zone branch: the mainland head office is the Domestic PE and the free zone branch is the Free Zone Business. In both shapes, 0 percent attaches only to Qualifying Income of the Free Zone Business. A dependent agent who habitually concludes contracts on the mainland can create the same PE without a branch licence.

Revenue attributable to the PE drops out of de minimis and is taxed at 9 percent if you attribute it. Founders who run Dubai sales from a mainland desk and book 100 percent as Qualifying Income fail the PE split and, often, substance.

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Who only thinks they qualify?

The honest question is which activity and counterparty mix this company invoices, and whether those invoices still meet Article 18 after MD 229. A free zone logo on the letterhead leaves that test for the invoices. Three profiles below use the same fact order so you can compare them: the MD 229 head, the counterparties on the invoices, where core income-generating activities sit, when the profile fits, and when it fails. Read them as a map of application, not as a ranking of zones. Confirm the live Ministerial text in the week you file before you treat any profile as already decided.

Manufacturing, processing, distribution, logistics

MD 229 head: manufacturing, processing, designated-zone distribution, or logistics without title. Counterparties: Free Zone Persons who are Beneficial Recipients can support Qualifying Income off the qualifying list if the work is not excluded; Non-Free Zone Persons need a Qualifying Activity; natural persons are excluded on these heads. Substance: CIGA in the Free Zone; distribution CIGA in a Designated Zone with import through that zone.

Fits a plant or warehouse selling to resellers or other juridical persons, with B2C and mainland PE inside de minimis or attributed. Fails UAE retail, title-taking labelled as logistics, distribution from a free zone that is not a Designated Zone, or a 51 percent logistics mix if you also want the Qualifying Commodities head.

Holding, headquarters, and treasury

MD 229 head: twelve-month investment holding, headquarter services to Related Parties, treasury and financing to Related Parties or for own account. Counterparties: Related Parties and own-account treasury; third-party lending is finance and leasing unless another saved head applies. Substance: CIGA, people, and spend in the Free Zone.

Fits a zone holdco or group HQ with holding periods, HQ contracts, and Article 34 files. Fails operating sales booked through the holdco, a one-month share flip treated as a qualifying holding, or unregulated credit to third parties under a treasury activity code.

Services, consumer counterparties, and digital-asset models

MD 229 head: many professional services sit off the Qualifying Activity list and produce Qualifying Income only on Free Zone Person Beneficial Recipient transactions that are not excluded. Natural persons are excluded; digital-asset platforms that onboard individuals sit in that exclusion. Substance: CIGA in the Free Zone; a mainland client-success team is PE risk.

Fits a B2B free-zone firm serving other free zone companies that use the service themselves, with de minimis room, an audit, and a TP file. Fails a consumer app, a clinic, a retail brokerage, a VASP onboarding residents as natural persons, or a nominee “free zone client.” Crypto compliance in 2026 adds no fifth Qualifying Activity.

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What happens if you fail or elect out?

MD 229 Article 5(2): fail any Article 18 or MD 229 condition at any time during a Tax Period and you cease to be a QFZP from the beginning of that period and for the subsequent four Tax Periods. The FTA guide’s Company H: fail de minimis in calendar 2024, off QFZP from 1 January 2024 through 31 December 2028. After those periods you test again. Fail again and a new five-period block starts.

Article 19 lets you elect into ordinary Article 3(1) rates from the start of the current period or the next. The FTA guide times the election to the Tax Return due date (nine months after period-end under Article 53). The election occupies five periods. You might elect because you want Small Business Relief, Tax Grouping, or Qualifying Group Relief, none of which a QFZP can use. Model both schedules before you tick the box.

The instruments describe five Tax Periods: the year of fail or election and four subsequent years. These texts do not reopen prior years in which you validly met the tests. The cost is forward: you sit on Cabinet 116, or on Small Business Relief if you can elect, while you wait. Understated Qualifying Income on a filed return is a separate problem under the Tax Procedures law.

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Why the AED 375,000 band and Small Business Relief do not rescue a QFZP

Cabinet 116’s AED 375,000 band is ordinary taxable income. A QFZP with AED 200,000 of non-qualifying taxable income pays 9 percent on AED 200,000 (AED 18,000). An ordinary person with AED 200,000 of taxable income pays nil on that band. A “stay under 375k” plan as a QFZP uses the wrong schedule.

Small Business Relief is a separate path under Article 21 and Ministerial Decision No. 73 of 2023, extended by Ministerial Decision No. 131 of 2026 to tax periods ending on or before 31 December 2029. A QFZP cannot elect it. VAT still uses a different AED 375,000. Three numbers, three tests.

MD 84 of 2025 requires audited financial statements from every QFZP for periods commencing on or after 1 January 2025, with no revenue floor. Ordinary taxable persons who are not in a Tax Group audit when Revenue exceeds AED 50 million. Articles 34 and 55 still apply. Related-party charges without a file fail a QFZP condition.

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How do you test this company before the return?

Start from invoices, not from the licence PDF. Tag each revenue line by counterparty type, Beneficial Recipient, MD 229 head, place of CIGA, and any PE attribution. Compute non-qualifying Revenue and total Revenue the way Cabinet 100 Article 4 instructs. Compare the result to 5 percent and to AED 5 million. Then treat substance, the auditor engagement, and transfer-pricing files as on/off switches. One fail turns the whole period ordinary. Accounting and tax is the work of that split, the QFZP audit pack, and the return nine months after period-end. Commercial advisory fees sit outside any government tariff here and are not a Medici quote.

What you can evidence this week

Put Beneficial Recipient language in the contracts. Map staff and rent so CIGA sit in the Free Zone or Designated Zone. Engage an auditor if you will claim QFZP for a period from 1 January 2025. Keep transfer-pricing files for Related Parties and for PE attribution. Write down the Article 19 choice: stay on QFZP, or elect ordinary rates and wait five periods to return. If the invoice mix cannot meet de minimis, file the period as an ordinary Free Zone Person, or elect Small Business Relief if you are eligible. Cabinet 100 does not create a zone-issued QFZP certificate.

What this test leaves to other maps

Zone choice is a formation filter. VAT is a separate register. Domestic Minimum Top-up Tax for an in-scope MNE (Cabinet Decision No. 142 of 2024) is a third layer. QFZP 0 percent on Qualifying Income leaves the GloBE effective-tax-rate test unanswered. Confirm the live FTA and MoF PDFs in the week you file. The May 2024 guide is the longest official narrative; MD 229 and MD 84 overwrite the activity list and the audit citation.

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FAQ

Is every UAE free zone company a Qualifying Free Zone Person?

The FTA treats a Free Zone Person as a QFZP unless a condition fails or the company elects ordinary rates under Article 19. Meeting Article 18, Cabinet Decision 100, MD 229, and the audit rule is still a facts test.

Do transactions with other free zone companies always get 0%?

Cabinet 100 requires the other Free Zone Person to be the Beneficial Recipient, and the income must not come from an Excluded Activity. A nominee that must pass the goods or service to a mainland company fails Article 3(1)(a).

What is the de minimis limit for a QFZP?

Non-qualifying Revenue must not exceed the lower of 5 percent of total Revenue or AED 5 million in the Tax Period (MD 229 Article 3; Cabinet 100 Article 4). PE revenue and some property and IP lines drop out of the fraction and are taxed at 9 percent. Crossing the cap ends QFZP status for five periods.

How long do you lose QFZP status after a fail?

From the beginning of the Tax Period of the fail or the Article 19 election, plus the next four Tax Periods. A calendar-year fail in 2024 runs through 31 December 2028 in the FTA’s example.

Must a QFZP have audited financial statements if revenue is small?

Yes. MD 84 of 2025 requires audited financial statements from a QFZP with no revenue floor for tax periods commencing on or after 1 January 2025. MD 82 of 2023 continues that QFZP audit line for earlier periods.

Can a QFZP use the 0% band on the first AED 375,000?

The FTA guide and bulletin withhold that band from a QFZP. Cabinet Decision 116 writes it for persons on the ordinary schedule. Non-qualifying taxable income of a QFZP is at 9 percent from the first dirham.

Does adequate substance mean a flexi-desk is enough?

Cabinet 100 Article 8 requires CIGA, adequate assets, qualified full-time employees, and operating expenditure in the Free Zone or Designated Zone for each activity. A desk with no people performing CIGA is the fact pattern the FTA guide uses to fail substance.