Qualifying Activities for Free Zone Persons in the UAE

Quick Summary Table: Qualifying Activity Checklist (2025)

What is a Qualifying Free Zone Person (QFZP)?

Main Requirements for QFZP Status

• Incorporation in a recognized Free Zone
• Adequate substance (real business presence: employees, assets, operating expenditure) in the Free Zone or Designated Zone
• Deriving qualifying income as defined by law
• No election into the standard tax regime
• Arm’s length transactions and full transfer pricing documentation
• Annual audited financial statements
• Meeting de minimis thresholds: Non-qualifying income ≤ AED 5 million or 5% of total revenue (whichever is lower)

Immediate loss: Failure to maintain any requirement means instant loss of QFZP status, triggering the 9% tax rate and a 4-year lock-out from the regime.

Qualifying Income is the Foundation for the 0% Tax Rate

“Qualifying income” is the heart of the regime. It is the income generated from activities and transactions that entitle a Free Zone Person to 0% corporate tax. To benefit, the income must:

• Arise from transactions with other Free Zone Persons (not involving Excluded Activities)
• Be generated from transactions with Non-Free Zone Persons only when delivering Qualifying Activities
• Result from the ownership or exploitation of Qualifying Intellectual Property
• Any other income, only if the de minimis requirements are satisfied

Excluded: Any income from Foreign or Domestic Permanent Establishments, certain IP exploitation, immovable property (except specific allowed cases), or from “Excluded Activities” is treated as non-qualifying and taxed at 9%.

What Are Qualifying Activities?

Ministerial Decision No. 265/2023 lays out an explicit, closed list of activities considered “Qualifying Activities” for Free Zone tax purposes. Income from these activities may be eligible for 0% tax status if all other conditions are met.

Complete List of Qualifying Activities for 2025

Special rules and definitions apply to ensure each activity actually qualifies and is not merely support, or ancillary to another, or falls into excluded territory.

Important Points of Each Category

• Manufacturing/Processing must involve real creation, transformation, or assembly (e.g., packing as part of production counts; standalone repair does not).
• Trading of Qualifying Commodities includes only physical trading of listed commodities (e.g., metals, minerals, energy, agriculture) on recognized exchanges in their raw form, plus associated risk-hedging derivatives.
• Holding shares/securities means for long-term investment only, not speculative trading.
• Ships must be used for international transport or similar specified operations, not leisure or hotel use.
• Fund/Wealth Management and similar financial activities must be strictly regulated by an appropriate UAE authority.
• Distribution in/from Designated Zones requires import through, holding of title in, and relocation via a specified Designated Zone facility, to resellers/processors—not end users.
• Logistics and Ancillary Activities are qualifying only if inseparable from the main listed Qualifying Activity.

Qualifying vs Excluded Activities

Excluded Activities and De Minimis Thresholds: Keeping Your QFZP Status

Excluded Activities are specifically listed business activities, or closely related ancillary activities, which never qualify for the 0% corporate tax, even if performed in a Free Zone. Income from these activities automatically triggers 9% tax, and if revenue from such sources is too high, a Free Zone Person will lose QFZP status entirely.

List of Excluded Activities

• Transactions with natural persons (i.e., individuals/unincorporated businesses)
  • Exceptions: Ownership/operation of ships, regulated fund/wealth management, aircraft financing/leasing where allowed
• Banking activities
• Insurance (excluding reinsurance and permitted captive)
• Finance and leasing activities not specifically qualified
• Ownership or exploitation of immovable property
  • Exception: Commercial property located in Free Zone, if transactions are with other Free Zone Persons
• Ownership or exploitation of intellectual property assets
  • Exception: Only qualifying “nexus” IP with strict tracking

Ancillary activities tied to any of these are also excluded—no matter their apparent size or function.

The De Minimis Threshold

To encourage normal business breadth without penalty, a QFZP can have some “non-qualifying revenue” but only up to the lower of AED 5 million or 5% of total revenue per tax period. Go over this limit, and QFZP status is lost from the start of that year until four years afterward.

Calculating De Minimis

1. Add all revenue from Excluded Activities.
2. Add all revenue from non-qualifying activities with Non-Free Zone Persons.
3. Add all transactions with Free Zone Persons not considered beneficial recipients.
4. Exclude revenue from Domestic/Foreign Permanent Establishments and certain property.
5. Compare to total period revenue (again, excluding the income types above).
6. If result ≤ AED 5M and ≤ 5%, de minimis is satisfied.

Example:

• Total period revenue = AED 12M
• Non-qualifying revenue = AED 400k
• 5% of 12M = AED 600k
• 400k < 600k and 400k < 5M → Pass (QFZP status retained)

Core Income-Generating vs Ancillary Activities

CIGAs are the substantive, value-driving operations that define your Qualifying Activity (for example, assembling goods for “manufacturing,” actual asset management for “fund management”). They must be operationally present and performed in the Free Zone, demonstrating real substance; real employees, real assets, real expenditures.

While some functions (like R&D, payroll, or warehousing) can be outsourced, meaningful supervision, documentation, and oversight by the QFZP are required. Control and documentation are critical to prove that the core activity remains in the Free Zone and substance requirements stand.

Ancillary Activities: When Are They “Qualifying”?

Ancillary activities qualify only if:

• They are necessary for the main Qualifying Activity (for example, assembly-line testing as part of manufacturing)
• They make a minor contribution and are so closely related to the main activity that they should not be viewed as separate (e.g., post-sale support for manufactured goods)

Surplus funds invested without connection to qualifying activities do not count as ancillary and are usually considered non-qualifying.

Examples of Qualifying Activities

Manufacturing:

Company R, registered in a Free Zone, produces custom furniture and sells to import/export companies in the EU and GCC. All manufacturing, quality checks, and product packaging happen in the Free Zone. Income from these activities, and from after-sales warranty service, is treated as qualifying revenue. Ancillary sales (for example, of production scrap) are considered Qualifying if minor and related.

Logistics:

ABC Logistics FZCO runs a JAFZA warehouse and provides warehousing and third-party logistics to other Free Zone companies only. They have no mainland or individual clients. All staff and operational activities are in the Free Zone, audited statements are up to date, and transfer pricing compliance is observed. As all revenue is from Qualifying Activities, and there is no excluded income, QFZP status is assured at 0% tax.

Holding Company:

XYZ Investments FZ-LLC is a holding company in DMCC owning shares in group companies based in Asia and Africa. Shares are held continuously for five years. Investment income, dividends, sale proceeds, derived solely from these shares is qualifying income (not speculation).

Distribution from Designated Zone:

A company in Dubai CommerCity (a Designated Zone) stores digital products and merchandise imported through its DCZ warehouse and sells B2B to resellers in Africa, Europe, or to other Free Zone clients. All distribution operations are performed within or from the Designated Zone, and customers are not end users.

Case Example Where QFZP Status Is Lost

ABC Medical Devices FZ-LLC, a JAFZA distributor, sells directly to mainland hospitals and individuals, generating non-qualifying revenue exceeding the 5%/AED 5M limit. As a result, it automatically loses QFZP status for that tax year and the next four years, and pays corporate tax at 9% on all taxable income during this period.

How to Secure and Maintain QFZP Status

1. Incorporate/ Register in a recognized Free Zone, and maintain up-to-date trade licenses and regulatory certificates.
2. Assess and evidence adequate substance: lease agreements, payroll, staff lists, asset registers, and OPEX ledgers must support core activities.
3. Maintain audited financial statements every year, regardless of revenue size.
4. Determine and document qualifying vs. non-qualifying activities and income: revenue classification memo, general ledger, and supporting contracts.
5. Monitor de minimis compliance continuously; late deals can tip the balance.
6. Stay on top of transfer pricing rules for all related-party and connected-person transactions, including local files and master files if thresholds are met.
7. Do not opt into the standard tax regime unless you wish to lose Free Zone tax benefits (Board resolution and CT return required).
8. Prepare for audits and reporting: Revenue segregation, supporting evidence, and arm’s length documentation are increasingly scrutinized.
9. Regularly review Free Zone and FTA updates: Ministerial and Cabinet Decisions are often updated, and Free Zone rules evolve every year.

FAQs About Qualifying Activities for Free Zone Persons

What is a Qualifying Free Zone Person (QFZP) in the UAE?

A QFZP is a business entity (company, branch, or legal person) registered in a UAE Free Zone, performing specific “Qualifying Activities,” and meeting all substance, compliance, and revenue tests, allowing it to benefit from the 0% corporate tax rate on qualifying income.

Which business activities qualify for 0% Free Zone corporate tax in 2025?

Manufacturing, processing goods, trading qualifying commodities, holding shares for investment, ships’ management, reinsurance, regulated fund/wealth management, headquarter and treasury services to related parties, aircraft financing/leasing, distribution from Designated Zones, and logistics services. Ancillary/support activities may also qualify if closely linked to a main qualifying activity.

What are the “excluded activities” that lead to losing the 0% tax benefit?

Excluded activities include transactions with individuals, regulated banking and insurance, finance and leasing (unless specified), property rental/sale (unless narrow allowed cases), and income from certain IP exploitation. Revenue from these triggers the 9% tax rate and can cause you to lose QFZP status if above threshold.

What is the “de minimis rule” in UAE Free Zone corporate tax?

A QFZP loses its tax advantage if non-qualifying income exceeds either AED 5 million or 5% of total revenue in any period. Proper segregation, documentation, and ongoing tracking is vital to remain under the threshold.

Can I regain QFZP status after losing it?

No; after a breach, your business is ineligible for QFZP status for four consecutive years following the year of loss, even if compliance is restored.

If I have a mainland branch, will all my Free Zone income be taxed at 9%?

No; only income attributable to your Domestic Permanent Establishment (mainland branch) is taxed at 9%. However, this can push your non-qualifying revenue above the de minimis threshold, risking loss of QFZP.

Final Words About Qualifying Activities for Free Zone Persons

As a tax and compliance consultant with first-hand experience helping hundreds of entrepreneurs and multinationals set up and maintain Free Zone businesses in the UAE, I cannot overstate the importance of understanding and strictly adhering to QFZP requirements.

The tax benefits are substantial, but so are the risks, especially now that the FTA has enhanced its digital monitoring, enforcement, and audit capacity. Many businesses assume that “Free Zone” equals “tax free,” only to be surprised with assessments, penalties, or a sudden transition to the 9% regime due to minor oversights like a one-off mainland transaction or an incorrectly classified revenue stream.

UAE Free Zones continue to provide world-class opportunities, especially for international trading, logistics, technology, and investment holding businesses. But with opportunity comes the need for discipline, mastering QFZP compliance is the surest way to leverage the UAE’s potential, now and well into the future.

For further clarity on your specific setup, or if you are planning to expand Free Zone business operations in 2025, consult a professional specializing in UAE tax law compliance to ensure both optimal tax savings and peace of mind.