Qualifying Free Zone Person: 0% Income and the De Minimis Test

1. The Free Zone 0% Tax Privilege Is Conditional, Not Automatic

A Free Zone licence alone does not establish entitlement to the 0% Corporate Tax rate. The rate applies to qualifying income only when the business meets the conditions for a Qualifying Free Zone Person (QFZP).

To benefit from the 0% rate on Qualifying Income, an entity must satisfy all criteria to be classified as a Qualifying Free Zone Person (QFZP). The FTA's Free Zone Persons guide explains these conditions and the income categories.

2. The 5 Core Tests of a Qualifying Free Zone Person

To retain QFZP status, a Free Zone entity must:

1. Maintain adequate economic substance in the UAE (adequate employees, assets, and operating expenditures).

2. Derive Qualifying Income under the applicable Cabinet and Ministerial Decisions.

3. Comply with Transfer Pricing rules (arm's length pricing with connected persons).

4. Prepare audited financial statements in accordance with IFRS.

5. Satisfy the De Minimis Requirements regarding non-qualifying revenue.

3. The De Minimis Rule Explained

The FTA guide defines the de minimis threshold as the lower of 5% of total revenue or AED 5,000,000. The calculation has specific exclusions and classifications; not every Mainland transaction is automatically non-qualifying revenue.

If a Free Zone Person fails the QFZP conditions, the FTA guide explains that it ceases to qualify for that tax period and the following four tax periods. Its income is then assessed under the ordinary Corporate Tax rules, rather than an automatic flat 9% on every dirham of profit.