Qualifying Free Zone Person Under UAE Corporate Tax Law

UAE corporate tax law gives Free Zone businesses a clear route to keep a 0% position on qualifying income, but only if the file stays clean. UAE corporate tax law also makes it easy to lose that status if income lines, substance proof, and reporting discipline do not match.

A Qualifying Free Zone Person (QFZP) is not a “free pass”. It is a tested position. Regulators and auditors look for a simple story, the business is doing qualifying activity, earning qualifying income, keeping proper evidence, and reporting correctly.

This guide breaks down how QFZP works in practical terms, what checks decide the status, and what controls help keep it safe.

What Is a Qualifying Free Zone Person in Simple Terms

A Qualifying Free Zone Person is a Free Zone entity that meets conditions set under the corporate tax framework. If the conditions stay satisfied, qualifying income can be taxed at 0%, while non-qualifying income may be taxed at the standard rate.

The core point is this: QFZP status is not automatic just because a company sits in a Free Zone. The status depends on actions, income type, and documentation.

The Key Conditions That Decide QFZP Status

For a Free Zone business to stay a QFZP, the compliance file must show consistency across records, approvals, and financial statements.

These are the practical conditions that usually decide the outcome:

• The business earns qualifying income as defined in the rules
• The business maintains adequate substance in the Free Zone
• The business prepares audited financial statements (as required)
• The business follows transfer pricing rules for related party dealings
• The business does not elect to be taxed at the normal corporate tax regime
• The business avoids excluded activities or stays within allowed limits

A single weak area can invite deeper review, even if the rest looks fine.

Qualifying Income Explained Without Legal Complexity

Qualifying income is not “all income earned by a Free Zone business”. It is income that fits into accepted categories and passes the activity filters.

In day-to-day operations, qualifying income checks often come down to two questions:

1. Who is the customer or counterparty?
2. What service or product is being supplied?

If the business sells to parties inside the Free Zone ecosystem or to overseas markets (in permitted cases), the position tends to be easier to defend. If the business sells into the UAE mainland market, the position needs extra caution and clean separation.

This is also where the term free zone corporate tax becomes practical. The tax outcome is linked to the income source and the nature of the activity, not the company label.

Qualifying Activities and Excluded Activities

A Free Zone business can do many things, but only certain activities qualify under the QFZP track. Some activities are fully excluded, and even a small slice of revenue in an excluded area can create problems.

A simple way to control this risk is to keep an “activity map” inside the finance folder:

• What the licence allows
• What the business actually invoices for
• What the contracts describe
• What revenue lines show in the accounting system

If these four items do not match, a QFZP defence becomes hard.

The De Minimis Rule That Triggers “Hidden” Risk

Many businesses accidentally move into risky territory due to small mainland invoices, mixed revenue lines, or service scope creep.

This is where the de minimis concept matters. If non-qualifying revenue stays within the allowed threshold, QFZP status may still hold. If it crosses the threshold, the business may lose the QFZP position for the period. This can change the full tax outcome.

The most common reason this happens is poor revenue tagging. Revenue gets booked under one general ledger head, and the team tries to split it later during return preparation. That usually increases queries.

Substance Requirements That Auditors Actually Check

Substance is not a buzzword. In review work, it usually means the business can prove real operations in the Free Zone.

Typical proof items include:

• Office lease or flexi desk agreement where allowed
• Staff or outsourced operations agreements
• Management decisions recorded in the UAE
• Cost base that matches the activity size
• Operational documents that explain how services are delivered

A high-revenue entity with near-zero operating costs is a common red flag. It does not always mean the file is wrong, but it does invite questions.

Why Audited Financial Statements Matter More Now

Audited financial statements support credibility. They also force discipline around classification, revenue breakdown, and related party clarity.

A QFZP file gets weaker when:

• Revenue is not split between qualifying and non-qualifying lines
• Expense allocations are unclear
• Related party balances sit in suspense
• Large year-end journals appear with thin support

Audit readiness is less about “perfect accounting” and more about a clean trail.

Transfer Pricing and Related Party Discipline

Free Zone businesses often deal with group entities, shareholders, or connected parties. That is normal.

The risk begins when prices, margins, or funding terms look informal.

Even simple cases can create issues, such as:

• Management fees without service evidence
• Intercompany loans without agreements
• Mark-ups applied randomly across months
• Cost recharges booked as “miscellaneous income”

Transfer pricing discipline is not only for large groups. It is a control tool that shows the business knows why the transaction exists and how the price was decided.

This is also where corporation tax becomes real for decision makers. Related party pricing can change taxable profit. If it cannot be explained, the exposure increases.

Common Mistakes That Break the QFZP Story

Many QFZP issues are not “fraud”. They are basic bookkeeping mistakes that snowball into a tax problem.

Here are patterns that repeatedly cause trouble. The following issues are fixable, but fixes work best when done early in the year, not at filing time.

• Mainland revenue is mixed into one sales account with no tagging
• Income is described broadly in invoices, making the activity hard to classify
• No separation in books between qualifying and non-qualifying streams
• Related party transactions posted without agreements or proof packs
• Year-end adjustments used to “reshape” revenue classification
• Substance proof is missing, even though the revenue is significant

A Practical QFZP Control Checklist for Finance Teams

This checklist keeps the QFZP position easier to defend during review and filing:

• Keep separate revenue heads for qualifying and non-qualifying income
• Tag every invoice with customer type and activity type
• Maintain a monthly file for substance proof (lease, payroll, ops evidence)
• Keep agreements for all related party transactions in one folder
• Reconcile revenue classification monthly, not at year end
• Ensure audited financial statements reflect the split and logic clearly

How Arnifi Supports QFZP Compliance

Arnifi helps Free Zone businesses structure accounts so QFZP conditions stay provable, not assumed. This includes revenue tagging, activity mapping, audit-ready reporting packs, and related party documentation that aligns with corporate tax expectations. With a clean monthly control routine, tax filings stay stable, queries reduce, and the 0% position becomes easier to protect.

FAQs

1) Is every Free Zone company automatically a Qualifying Free Zone Person?

No. The status depends on meeting conditions like qualifying income, substance, audited financial statements, and correct treatment of related party transactions.

2) Can a Free Zone business earn both qualifying and non-qualifying income?

Yes. Many businesses do. The key is correct separation in accounting and staying within the allowed thresholds where applicable.

3) What usually causes QFZP status to get questioned?

Mixed revenue lines, missing proof packs, unclear invoices, and informal related party entries are common triggers.

4) Does a QFZP still need transfer pricing documentation?

Yes, especially for connected party transactions. Arm’s length pricing support keeps the file consistent and defensible.

5) What is the fastest way to keep the QFZP file clean all year?

Monthly tagging, monthly reconciliations, and one organised evidence folder per major activity keep year-end work simple.