Qualifying Free Zone Person Under UAE’s Corporate Tax Law

The corporate tax law that started in the UAE in 2023 set a 9 percent rate on taxable profits above AED 375,000 for most businesses, while small profits stayed at 0 percent.

Free zones were never going to sit outside this system. Instead, the law created the idea of a “Qualifying Free Zone Person” that can keep a 0 percent rate on qualifying income and pay 9 percent on non-qualifying income.

For groups based in Dubai, tax laws in Dubai now shape which entities they use and how profit flows through the group

Snapshot Of New Tax Laws in Dubai

Federal Decree-Law No. 47 of 2022 introduced a nationwide corporate tax that applies to mainland and free zone entities.

Most activities now sit inside this law, including banking, distribution, holding companies and many service lines. Free zone entities remain taxable persons, but a subset can qualify for a 0 percent rate on certain income.

These new tax laws in Dubai sit beside existing VAT and excise rules, plus future top-up taxes linked to global minimum tax. For free zone boards, the question is no longer “Is tax due” but “Which activities fall at 0 percent and which at 9 percent” for each entity and year.

Free Zone Person and Qualifying Free Zone Person

The law starts with a wide definition of a “Free Zone Person.” Any juridical person incorporated or registered in a UAE free zone falls into this bucket, including companies and branches.

A “Qualifying Free Zone Person” (QFZP) is a narrower club. It covers free zone entities that maintain adequate substance in a free zone, earn “Qualifying Income”, do not elect to pay tax at the normal 9 percent rate and meet transfer pricing and other record conditions.

If any QFZP condition fails in a tax period, the entity normally loses its 0 percent status. It becomes taxable at 9 percent for that year and future years, subject to detailed relief rules.

Core Conditions to Qualify for The 0 Percent Rate

The main QFZP conditions can be viewed as a short control list:

Adequate substance in a free zone

The entity must have enough staff, assets and expenditure in a free zone to run its activities in practice, not only on paper.

Qualifying Income focus

Most income needs to fall inside “Qualifying Income” as defined in Cabinet Decision No. 55 of 2023 and later guidance. Only a small share is allowed as non-qualifying income under a de minimis rule.

No election for the standard tax

The entity must not have filed an election to be taxed at the normal 9 percent rate which is allowed for certain strategic reasons.

Transfer pricing and arm’s length standards

The entity must keep transfer pricing documentation and show that related party dealings follow arm’s length pricing, supported by reports where required.

These points look simple on paper, but they pull together legal form, economic substance and pricing models, so each free zone group often needs a tailored map.

What Counts as Qualifying Income

Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 265 of 2023 describe “Qualifying Income” in detail.

Typical examples include:

• Income from transactions with other free zone persons in connection with certain qualifying activities
• Income from activities in designated geographic areas such as specific ports 
• Income from holding and managing shares in subsidiary companies that meet set tests.

Income from dealings with mainland customers can still qualify in limited cases. This applies where the activity is explicitly listed as a qualifying activity and no excluded activity features in the chain.

Many service lines for mainland clients fall outside qualifying income. So, the portion of profit linked to those services will usually face the 9 percent rate.

The de minimis rule gives some breathing space. If non-qualifying income stays within a low percentage of total revenue and below an absolute dirham cap, the entity can still keep QFZP status.

Impact on Tax In Dubai for Foreigners and Cross-Border Groups

Foreign headquartered groups often use Dubai free zones as holding or service hubs. For such structures, the law has a direct impact on Tax in Dubai for foreigners who own local entities or branches.

The headline 0 percent promise only holds where the entity passes QFZP tests and the home country recognises the UAE regime as compliant with global minimum tax standards. The Ministry of Finance has signalled that the free zone framework is designed to remain aligned with OECD Base Erosion and Profit Shifting work, including Pillar Two.

Investors who move to the UAE as individuals face separate personal tax questions. At the moment the UAE does not charge a federal personal income tax on salary or most investment income. However, foreign home countries may still tax worldwide income depending on residence and treaty rules.

This makes Tax laws in Dubai for foreigners a mix of UAE corporate rules and home country rules rather than a pure local topic.

Role of Tax Law Firms In Dubai and Specialist Advisers

Interpreting QFZP tests involves legal drafting, accounting numbers and business plans. That is why many boards lean on tax law firms in Dubai and specialist corporate tax advisers for design and reviews.

Arnifi’s UAE tax team often steps in at the planning stage. The work usually starts with a simple entity matrix that shows each free zone company, its licences, real activities and intra-group links. 

That matrix then feeds into an analysis of QFZP status, qualifying income share and de minimis tests, plus a roadmap for contracts and transfer pricing.

Practical Design Questions for Free Zone Groups

Before filing the first corporate tax return, boards can ask a small set of practical questions that link law to operations:

• Which entities in the group sit in free zones and still carry real operations there, instead of historic registrations only?
• For each such entity, what share of revenue comes from qualifying activities and what share comes from other services or trading routes?
• How group policies on pricing, royalties or cost allocations affect the arm’s length position for those free zone entities.
• Where records such as board minutes, service contracts and substance evidence are stored in case the Federal Tax Authority requests proof.

Final Thoughts

The QFZP regime keeps Dubai’s free zones attractive. But the conditions are now tightly defined and closely linked to real substance, detailed income tests and transfer pricing rules. Those who treat the 0 percent rate as automatic risk a hard landing once the Federal Tax Authority reviews records. 

Arnifi’s accounting and bookkeeping services in UAE create complex text into clear maps and control lists. This way, boards can focus on genuine business growth while staying aligned with current tax laws in Dubai.

FAQs

Q1. What is a Qualifying Free Zone Person in the UAE corporate tax system?

A Qualifying Free Zone Person is a free zone entity that meets substance conditions inside a free zone. It earns mainly qualifying income, complies with transfer pricing rules and does not elect the standard 9 percent rate. When these points are met, it can apply a 0 percent rate on qualifying income.

Q2. Does every free zone company in Dubai get a 0 percent corporate tax rate?

No. Every free zone company is a taxable person, but only entities that meet all QFZP conditions can apply the 0 percent rate on qualifying income. Others pay corporate tax at 9 percent on taxable profits above AED 375,000, in line with the main law.

Q3. How do the new rules affect foreign investors who own Dubai free zone entities?

Foreign investors must consider UAE corporate tax on free zone entities plus home country rules on worldwide income and controlled foreign companies.

Q4. What happens if a Qualifying Free Zone Person breaches the de minimis rule?

If non-qualifying income exceeds de minimis limits, the entity normally loses QFZP status and becomes subject to the standard 9 percent rate for that period and future periods. Later guidance may offer limited relief in some cases.

Q5. Why involve advisers such as Arnifi and tax law firms in Dubai?

Advisers help map real activities against QFZP tests and design contracts and transfer pricing that match the law. They also monitor de minimis thresholds and prepare documentation that the Federal Tax Authority expects during reviews or audits.