With the enforcement of the UAE Corporate Tax Law effective from June 2023, Free Zone businesses in the UAE are under the spotlight—especially those seeking to qualify for the 0% preferential tax rate. A key concept introduced under this regime is the “Qualifying Free Zone Person” (QFZP). While the UAE remains a competitive low-tax jurisdiction, not all Free Zone businesses are automatically eligible for tax benefits.
In this blog, we take a deep dive into the concept of a Qualifying Free Zone Person under the UAE Corporate Tax framework—its definition, criteria, eligible income, disqualifications, and compliance responsibilities. Understanding this designation is crucial for businesses that want to continue benefiting from the 0% tax rate while remaining fully compliant with the Federal Tax Authority (FTA) requirements.
What Is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a legal entity established in a UAE Free Zone that satisfies the specific conditions set out under Article 18 of Federal Decree-Law No. 47 of 2022 and Cabinet Decision No. 55 of 2023. Such a person is eligible to be taxed at 0% on Qualifying Income, while other income may be taxed at the standard corporate tax rate of 9%.
This preferential regime is designed to maintain the UAE’s attractiveness for international investors and ensure that Free Zones continue serving their intended economic purpose—such as trade, re-export, logistics, and innovation hubs.
Key Conditions to Qualify as a QFZP
To be treated as a Qualifying Free Zone Person, a business must meet the following conditions:
- Incorporated or established in a Free Zone: The entity must be a legal person registered and licensed in a UAE Free Zone.
- Maintain adequate economic substance: The company must have sufficient activities, employees, and premises in the Free Zone to justify its operations.
- Derives Qualifying Income: Only certain types of income qualify for the 0% rate (explained below).
- Not elected to be subject to regular Corporate Tax: If a Free Zone company chooses to be taxed like a mainland business, it forfeits QFZP status.
- Complies with transfer pricing rules: The business must maintain documentation and apply arm’s length pricing for transactions with related parties.
- Audited Financial Statements: Must prepare and maintain audited financials as per regulations.
What Counts as “Qualifying Income”?
Not all income earned by Free Zone businesses is eligible for the 0% tax rate. According to Ministerial Decision No. 139 of 2023, the following types of income are considered “Qualifying” when earned by a QFZP:
- Income from transactions with other Free Zone Persons
- Income from trading of qualifying commodities (e.g., oil, gas, metals) with foreign parties
- Income from the provision of qualifying services to foreign clients
- Income from ownership and exploitation of intellectual property (in specific sectors)
- Income from distribution of goods in or from a Designated Zone
However, income from transactions with the mainland UAE (non-Free Zone entities) is not considered Qualifying unless it involves goods that are physically delivered outside the UAE or in Designated Zones under Customs control.
Important Note on Disqualifications
A Free Zone entity loses its QFZP status for an entire tax period if it fails to meet even one of the qualifying conditions. In such a case, the entity becomes subject to regular corporate tax at 9% on all income from the beginning of that tax period.
This means businesses must be extremely vigilant in maintaining economic substance, reporting, and proper income segregation to retain their QFZP benefits.
PEAK Business Consultancy Services – Your Partner in Compliance
PEAK Business Consultancy Services specializes in helping UAE Free Zone businesses qualify and remain compliant under the UAE Corporate Tax regime. From assessing economic substance to preparing audited financials and filing your returns, our team ensures you maximize tax benefits without risking penalties.
Visit www.peakbcs.com to schedule a consultation with our expert Corporate Tax advisors today.
Transfer Pricing and Documentation for QFZPs
QFZPs must adhere to the UAE’s Transfer Pricing (TP) rules, particularly when dealing with related parties. This includes maintaining a Local File and Master File (where applicable), as well as disclosing controlled transactions in their tax returns.
Failure to apply arm’s length principles may lead to tax adjustments, penalties, or even disqualification from QFZP status. Engaging a qualified consultant can ensure that your TP documentation aligns with OECD standards.
Audit Requirements
All QFZPs must prepare and maintain audited financial statements by a licensed auditor. These financials form the basis of their Corporate Tax returns and support the determination of Qualifying vs. non-Qualifying income.
PEAK BCS can assist in coordinating with licensed audit firms, preparing working papers, and ensuring timely submission of financial reports.
Tax Filing Obligations for QFZPs
- Corporate Tax Registration on the FTA portal
- Annual submission of Corporate Tax Return
- Filing of Transfer Pricing disclosure (Form 34)
- Preparation of audited financials and documentation retention
Even though the tax rate may be 0%, QFZPs are not exempt from filing obligations. Non-compliance may result in penalties or disqualification.
Examples of Businesses That May Qualify
- Technology and software development firms providing services to international clients
- Logistics providers operating within Designated Zones
- Commodity traders dealing in metals, oil, or grain with foreign clients
- Intellectual property holders with international licensing agreements
Conclusion
The UAE’s Corporate Tax regime offers significant advantages for businesses operating within Free Zones—but only if they qualify and comply. Becoming a Qualifying Free Zone Person can lead to substantial tax savings, yet the benefits come with responsibilities.
Whether you’re applying for QFZP status, restructuring your operations to qualify, or simply need help with documentation, PEAK Business Consultancy Services is your trusted partner for Corporate Tax success. Visit www.peakbcs.com to ensure your business thrives under the UAE tax framework.
