Mar 10, 2025 
Business
Qualifying Free Zone Person (QFZP)
What is a Qualifying Free Zone Person?
A QFZP is a business entity established in the UAE Free Zone that meets certain conditions to benefit from a 0% Corporate Tax rate on the Qualifying Income earned from specific Qualifying Activities and transactions. This special regime aims to incentivize business activities within Free Zones while maintaining compliance with border tax laws.
What are the conditions to qualify as a QFZP?
- Free Zone Registration:
- The entity must be incorporated, established, or registered in the Free Zone including a branch of a Non-Resident Person (branch of a foreign entity) or a UAE juridical person that is registered in the Free Zone.
- As per the Law, the term mentioned “Free Zone Person” relates to the juridical person as a whole. This means a Free Zone Person can have its head office in or outside a Free Zone with a branch in a Free Zone. The 0% Corporate Tax rate applies to only the Free Zone Business. The head office outside the Free Zone won’t qualify for the 0% tax, however the branch in the Free Zone will.
- Adequate Substance in the Free Zone:
The free zone entities are considered to have adequate substance for the tax period;
- Undertake the core income generating activities;
- Maintain adequate assets, qualified full time employees and
- Incur operating expenses related to the qualifying income in the Free Zone
Company A (a Free Zone Person) is engaged in the Qualifying Activity of holding of shares and other securities for investment purposes. Investment decisions are madeby the Board of Directors and are executed though a broker. Company A has a small office in a Free Zone but does not have any employees.
Although Company A has no operational substance, the decision-making by the Board of Directors constitutes the core income-generating activities of Company A. Consequently, provided decision-making takes place in the Free Zone (for example, minutes of the board meetings at Company A’s office in the Free Zone), Company A would be considered to meet the adequate substance requirement.
- Derive Qualifying Income:
The Free Zone Entity must earn qualifying income generated from;
- Transactions with the other Free Zone Persons, as long as those persons benefit from the respective transactions and it does not in transactions related to excluded activities.
- Transactions relating to the qualifying activities mentioned by the Federal Decree Law.
- Owning or utilizing a Qualifying Intellectual Property.
- Other incomes, if the Free Zone Person is meeting the de minimis requirements (the minimum requirement).
However, the Free Zone Entity will not be able to count as Qualifying Income and will be entitled to tax at 9% when:
- The income is from the Foreign Permanent Establishment.
- Income from a Domestic Permanent Establishment.
- Income from Immovable Property (except for the commercial property in a Free Zone link to a Free Zone Person).
- Income from an intellectual property which is not considered a Qualifying Intellectual Property.
- Elections of Standard corporate tax rate and rules:
To qualify for the 0% Corporate Tax, the Free Zone Person must not have chosen to be taxed under the standard Corporate Tax rate and rules as mentioned in Article 19 of the Federal Decree-Law No. 47 of 2020. If a Free Zone Person makes this election, it will lose the benefits of the preferential 0% tax rate on Qualifying Income and will be subject to the standard Corporate Tax framework.
- Compliance with Transfer Pricing Rules:
- All transactions conducted by a Free Zone Person with related parties must comply with the arm’s length principle, ensuring that the terms and pricing of such transactions align with those that would apply to similar transactions between independent, unrelated parties in comparable circumstances. This principle is fundamental to preventing profit shifting and ensuring that taxable income is accurately reported.
- Under the Corporate Tax Law, Free Zone Persons must maintain appropriate Transfer Pricing documentation to substantiate that their transactions with related parties adhere to the arm’s length principle. This documentation typically includes:
- Master File: Details about the global operations of the group, its structure, and its transfer pricing policies.
- Local File: Specific information about the Free Zone Person’s transactions with related parties, including pricing methods and analysis to demonstrate compliance with the arm’s length principle.
- Failure to comply with these requirements may result in adjustments to taxable income and potential penalties. Therefore, adherence to these rules is critical to ensure transparency and compliance with the law.
- Audited Financial Statements:
A Free Zone Person is required to prepare and maintain audited Financial Statements annually, regardless of revenue. These audited financial statements are essential for verifying the eligibility for the 0% Corporate Tax rate and demonstrating adherence to accounting and tax obligations.
- De Minimis Revenue:
- The de minimis revenue requirements are met if a Free Zone Person’s non-qualifying Revenue does not exceed the lower of AED 5,000,000 or 5% of its total Revenue.
- Non-qualifying Income includes:
- Income from excluded activities.
- Non-qualifying activities with non-free zone persons.
- Transactions with the Free Zone Persons who are not the Beneficial Recipient of the goods or services.
- Revenue exclusions in De Minimis Revenue calculation:
- Revenue from a Domestic Permanent Establishment, taxed at 9%, is excluded. For instance; AED 2,000,000 from a Domestic Permanent Establishment out of AED 10,000,000 total Revenue reduces the calculation base to AED 8,000,000.
- Income from Excluded Activities linked to a Domestic Permanent Establishment is not counted as non-qualifying Revenue.
Tax Implications for QFZPs
- If a Free Zone Person qualifies as a QFZP and meets all conditions (including de minimis requirements), it is taxed as follows:
- 0% on the Qualifying Income.
- 9% on Taxable Income that is not Qualifying Income.
- A QFZP cannot benefit from the AED 375,000 threshold for the 0% standard Corporate Tax rate and is fully taxed at 9% on non-Qualifying Income.
- For non-Qualifying Income, the standard Corporate Tax rules (e.g., Foreign Permanent Establishment exemptions) apply, but Small Business Relief, Group Relief, Business Restructuring Relief, Tax Loss Transfers, and the Tax Group regime are not available.
Losing or Electing Out of QFZP Status
- Failure to Meet Conditions; if a QFZP fails any of the eligibility conditions (e.g., exceeding the de minimis threshold), it loses its status starting from the relevant tax period and for the subsequent four tax periods.
- Election to Exit QFZP Regime; businesses can opt out of the QFZP regime, choosing instead to be taxed under standard Corporate Tax rules. This election is effective for five tax periods.
Practical Example
- A Free Zone manufacturing company deriving all its income from qualifying activities remains a QFZP and enjoys a 0% tax rate.
- The same company engages in non-qualifying activities (e.g., transactions with non-Free Zone persons for non-designated services), it must ensure non-qualifying income does not breach the de minimis threshold to maintain its QFZP status.
Benefits of QFZP Status
Qualifying Free Zone Person (QFZP) status provides significant tax advantages, primarily through a 0% Corporate Tax rate on Qualifying Income, making Free Zones highly appealing for businesses. These benefits include:
- Tax Savings: Businesses can significantly reduce their tax burden on income derived from Qualifying Activities, enhancing profitability.
- Attractiveness for Investment: The 0% rate incentivizes businesses to establish or expand operations within Free Zones.
- Global Competitiveness: Businesses operating in Free Zones can position themselves as cost-effective and tax-efficient, strengthening their competitive edge in international markets.
Failing to elect QFZP status in the first tax year can have several negative consequences:
- Higher Tax Burden: The business will be subject to the standard Corporate Tax rate, including the 9% rate on taxable income exceeding AED 375,000, without the benefit of the 0% rate on Qualifying Income.
- Loss of Tax Savings: The opportunity to reduce tax liability on Qualifying Income is forfeited, increasing operational costs.
- Ineligibility for QFZP Benefits: The inability to qualify for specific Free Zone advantages, such as exemptions on Qualifying Income, could reduce the overall attractiveness of operating in a Free Zone.
- If a Qualifying Free Zone Person (QFZP) fails to meet the eligibility criteria in any Tax Period, it will lose its QFZP status from the start of that Tax Period. Additionally, the business will be disqualified from regaining QFZP status for the next four Tax Periods.
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