The 0% corporate tax rate in UAE freezones is real. It is also conditional. A lot of UK founders arrive thinking a freezone company automatically means tax-free profits. It does not, and that mistake can be expensive.
The UAE corporate tax system introduced the idea of a “Qualifying Free Zone Person” (QFZP), a freezone company that meets specific conditions and can then pay 0% on qualifying income. For UAE corporate tax rules and the full rate breakdown, that article covers the essentials. This article focuses on what QFZP status actually requires, what income qualifies, and what can cause you to lose it.
What is a qualifying free zone person?
A Qualifying Free Zone Person is a UAE freezone company or branch that meets the Federal Tax Authority’s (FTA) conditions for the 0% corporate tax rate on qualifying income.
The UAE introduced this rule under Federal Decree-Law No. 47 of 2022, which is the Corporate Tax Law. Later ministerial decisions and FTA guidance added more detail. You do not apply for QFZP status separately. You either meet the conditions or you do not. Each year, your company is checked against the rules when you file your corporate tax return.
If you meet the conditions, qualifying income is taxed at 0%. Non-qualifying income, which is usually income from the UAE mainland, is taxed at 9%.
If you fail any condition, the result is 9% tax on all profits above AED 375,000 for that year. There is no partial pass. One failure removes the 0% benefit for the full year.
The five core QFZP conditions
1. Adequate substance in the UAE
The company must have real economic substance in the UAE. That means enough employees, assets, and operating expenses for the income it earns.
The FTA does not give a fixed headcount or spend threshold. The test is practical. Does the UAE presence make sense for the income level? A freezone company with one employee earning AED 2 million in consulting fees from overseas clients needs to show that the work is really being done from the UAE by UAE-based people with the right skills, using UAE-based assets.
This is where shell company structures fail. A UAE freezone company that only has a registered address, with no real staff and all the work done from the UK, does not have adequate substance. The 0% rate was never meant for that kind of setup, and the FTA guidance makes that clear.
Substance means real activity in the UAE. Employees should be physically present and working in the UAE. Management decisions should happen in the UAE. Assets should be used in the UAE. Expenses should be incurred in the UAE. The level of substance has to match the type and volume of income.
2. Only qualifying income gets the 0% rate
The 0% rate applies only to qualifying income. Not every dirham earned by a QFZP gets that treatment.
Qualifying income generally includes:
Income from transactions with other freezone companies, where those companies are also QFZPs and the income relates to qualifying activities.
Income from transactions with foreign, non-UAE counterparties, including clients, customers, or related parties based outside the UAE.
Certain investment income, including dividends from foreign subsidiaries and gains on foreign shareholdings, where the income relates to the QFZP’s qualifying activities.
Income that does not qualify includes:
Revenue from UAE mainland customers. If a freezone company provides services directly to a UAE mainland business or individual, that income is taxed at 9%.
Income from excluded activities, which are covered below.
Income from a domestic permanent establishment, meaning income tied to a UAE mainland branch or fixed place of business.
The first step is to split your revenue streams into qualifying and non-qualifying income. Many UK founders have both overseas and UAE mainland clients, so part of the income may be taxed at 0% while the mainland portion is taxed at 9%.
3. No domestic permanent establishment
A QFZP cannot have a domestic permanent establishment, or PE, on the UAE mainland. If the freezone company has a branch, office, or fixed place of business on the mainland, the income linked to that PE is taxed at 9%, even if the company otherwise qualifies as a QFZP.
This matters if you are thinking about a dual-structure setup, with a freezone company and a mainland branch for UAE customer access. The mainland branch creates a domestic PE. Its profits are fully taxable. The freezone company can still keep QFZP status on its qualifying income, but the two structures need to stay clearly separate.
4. No excluded activities
The QFZP regime excludes some activities from the 0% benefit altogether, even if the other party is overseas. Excluded activities include:
Transactions with natural persons, with limited exceptions. A freezone company that earns consulting fees from individual clients rather than corporate entities is likely doing excluded activity.
Banking and insurance activities that are not carried out under a UAE Central Bank or Insurance Authority licence.
Ownership and exploitation of intellectual property. This area needs care. Ministerial Decision No. 265 of 2023 set out specific rules for IP income. IP income can qualify for QFZPs, but only if the conditions around creation and substance are met.
Holding real estate, except in certain limited cases.
This is the section where structuring choices matter most. A consulting business that bills corporate clients overseas has a straightforward QFZP position. A business that earns royalties from IP held in a UAE freezone needs a proper review of the IP rules before assuming 0% applies.
5. Audited financial statements
Every QFZP must prepare audited financial statements for each tax period. This is mandatory. Smaller companies do not get an exemption.
The audit requirement is stricter than what many UK founders expect for a company of similar size. In the UK, companies with turnover under £10.2 million can sometimes avoid a statutory audit. In the UAE, QFZP status requires an audit regardless of size.
The audit gives you the evidence that supports the 0% claim. Without it, the QFZP position is hard to defend if the FTA asks questions.
What disqualifies you, and when
If you fail any one of the conditions above, you lose QFZP status for that tax year. The result is not a partial loss of the 0% benefit. It is 9% tax on all profits above AED 375,000 for the full year.
Common disqualifying events:
Taking on UAE mainland clients directly. This creates non-qualifying income. If that income pushes mainland revenue above the de minimis threshold, which is AED 375,000 or 5% of total revenue, whichever is lower, QFZP status is lost for the year.
Reducing UAE substance below what the income supports. That can happen if you let staff go, move from a real office to a flexi-desk while revenue grows, or move key decision-makers back to the UK.
Failing to complete the audit. Late or missing audited accounts mean the QFZP position is not properly supported.
Earning excluded income above the de minimis threshold. If even a small share of income comes from individual clients rather than corporate ones, check whether it breaches the threshold.
The de minimis rule matters. A QFZP can earn some non-qualifying or excluded income without losing status, as long as it stays below AED 375,000 and below 5% of total revenue in that tax year. It is a narrow buffer, though. Once you go over it, the full 9% rate applies.
The connected persons rules
Transactions between a QFZP and its related parties, also called connected persons, must meet the arm’s length standard. The FTA’s transfer pricing rules apply.
This matters for UK founders who run group structures, such as a UK parent company, a UAE freezone subsidiary, and intercompany transactions between them. If the UAE freezone company charges the UK parent for services, or the UK parent charges management fees to the UAE company, those transactions need to be priced at arm’s length and backed by transfer pricing documentation.
Artificially pushing income into the freezone company to claim 0%, or artificially pushing it out, is the kind of arrangement the FTA’s transfer pricing rules are meant to catch. The arm’s length standard applies to the pricing of transactions and to the split of profits between related entities.
What this means for UK founders setting up in freezones
If your business is genuinely international, with overseas clients and real work done from the UAE, and you have employees or you are the main operator based in the UAE, you have a credible QFZP position. The 0% rate may be available, and the structure can be set up to support it.
If your business mainly serves the UAE mainland, the 0% rate does not apply to that income, no matter how the freezone is set up. For the freezone vs mainland decision, including trading rights, banking, and office requirements, that article covers the comparison in full.
If your business involves IP, financial services, or individual clients rather than corporate counterparties, get specialist advice before you assume QFZP status applies. The rules in those areas are more complex than the headlines suggest.
How we help
QFZP status is not automatic, and it is not permanent. It needs to be checked before company setup, monitored during each tax year, and reported correctly in every annual corporate tax return.
If you are setting up a UAE freezone company, our UAE company formation service includes structure analysis so you can see whether your business model supports a defensible QFZP position before you commit. Once you are operating, our UAE corporate tax compliance service handles the annual CT return, audit coordination, and FTA correspondence so your 0% position stays in order.
Frequently asked questions
Do I need to apply for QFZP status?
No. There is no application or approval process. Your company either meets the conditions or it does not. QFZP status is shown through your corporate tax return filing, supported by audited accounts and the FTA’s review of your substance and income profile.
Can I lose QFZP status for just one year and regain it the next?
Yes. QFZP status is checked year by year. If you fail a condition in one year, you pay 9% for that year. If you meet all the conditions the next year, you go back to 0% on qualifying income. There is no permanent ban for one bad year, but there is also no carry-back of the 0% benefit for the year you lost it.
What’s the de minimis threshold exactly?
Non-qualifying income and excluded activity income must stay below the lower of AED 375,000 or 5% of total revenue. If either threshold is breached, QFZP status is lost for that year.
Does a flexi-desk arrangement support QFZP substance requirements?
It depends on the income level and the type of business. For a solo founder who earns modest consulting income and works from the UAE in person, a flexi-desk may be defensible. For a company earning AED 2 million plus from overseas staff with only nominal UAE presence, it is unlikely to meet the substance test. The real issue is whether the substance matches the income.
Can a UAE freezone company hold UK company shares and get 0% on dividends?
Dividends from foreign subsidiaries can be qualifying income for a QFZP. But the substance conditions and the holding structure still matter. This is an area where you should get specific advice before you structure anything.