| Activity Type | Qualifying (Yes/No) | Key Requirement |
|---|---|---|
| Manufacturing or Processing in Free Zone | Yes | Substance (staff, assets), DO NOT include repair |
| Trading of Qualifying Commodities (Exchange, Raw Form) | Yes | Must be on recognized exchange, raw form only |
| Holding Shares/Securities (>12mo) | Yes | Not speculative/frequent trading |
| Ships – Ownership/Management/Operation (Int’l) | Yes | Not for leisure/local transport |
| Fund/Wealth Management (UAE Authority Regulated) | Yes | Must have regulatory approval |
| Distribution from Designated Zone (not to end-users) | Yes | Must control title, in/from Designated Zone |
| Aircraft Financing/Leasing | Yes | All aircraft components included |
| Treasury, HQ, Related Party Services | Yes | Real intra-group operational substance required |
| Ancillary Activity (Closely Related Only) | Yes | Must not be independent; minor or necessary only |
| Banking, Insurance (except reinsurance), Mainland Retail | No | Always excluded |
| IP Income (Unless Nexus & Tracked) | No/Yes | Only if strict economic substance & tracking present |
| Property Income (unless Free Zone to FZP/Commercial) | No/Yes | Most excluded unless specific Free Zone-to-Free Zone Person/Property context |
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 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:
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%.
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.
| Activity Category | Tax Rate | Description / Key Requirements |
|---|---|---|
| Manufacturing of goods or materials | 0% | Creating, producing, assembling products in Free Zone |
| Processing of goods or materials | 0% | Preparing, treating, converting goods for sale/export |
| Trading of Qualifying Commodities | 0% | Physical trading (on exchanges) of certain listed commodities in their raw form |
| Holding of shares and other securities for investment | 0% | Share/securities held ≥12 months for investment |
| Ownership, management, operation of Ships | 0% | Int’l transport, tugging, dredging, lease of ships |
| Reinsurance services | 0% | Taking insurance risks under regulated contracts |
| Fund management services | 0% | Portfolio/risk management under UAE regulatory authority |
| Wealth and investment management services | 0% | Advisory, planning, management under UAE regulation |
| Headquarter services to Related Parties | 0% | Group-level operational/admin services to related entities |
| Treasury and financing services to Related Parties | 0% | Intra-group financing, cash management, risk advisory |
| Financing and leasing of Aircraft | 0% | Ownership, lease/sale of aircraft, engines, components |
| Distribution of goods/materials in/from a Designated Zone | 0% | Warehouse/distribution center in a Designated Zone, not to end users. |
| Logistics services | 0% | Warehousing, transport, freight, customs, inventory, packing, delivery (no title held) |
| Ancillary activities | 0% | Only if necessary for or minor/closely connected to a Qualifying Activity |
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.
| Activity | Qualifying? | Notes |
|---|---|---|
| Manufacturing in Free Zone | ✓ | Must show substance, proper process, and not be mere repair |
| Trading physical commodities (metal, agri, oil) via exchange | ✓ | “Qualifying Commodities” only, must be raw form |
| Holding shares for >12 months for investment | ✓ | Not for speculative trading |
| Logistics (storage, freight, customs, packing) | ✓ | If core income-generating, not support, in Free Zone |
| Distribution from Designated Zone (not end-user sales) | ✓ | Customers are resellers/processors, not end users |
| Fund/Wealth Mgmt (UAE regulated) | ✓ | Must be regulated by competent UAE authority |
| Financing and leasing aircraft | ✓ | Includes engines/components |
| Services to Related Parties (HQ, treasury) | ✓ | Must be genuine intra-group activity |
| Reinsurance services | ✓ | Only reinsurance, not retail insurance |
| Ancillary to above | ✓ | Only if necessary/minor, not independent or surplus investment |
| Banking activities | ✗ | Regulated banking always excluded |
| Insurance (standard/retail) | ✗ | Except reinsurance/captive in HQ context |
| Retail, e-commerce to public | ✗ | Usually not qualifying unless structured to meet Designated Zone/related rules |
| Income from immovable property (except allowed cases) | ✗ | Commercial property transactions w/ FZP may qualify; others generally excluded |
| IP royalties (exceptional and tracked only) | ✗/✓ | Highly regulated; only some IP income with strict tracking/economic nexus allowed |
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.
Ancillary activities tied to any of these are also excluded—no matter their apparent size or function.
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
Example:
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 qualify only if:
Surplus funds invested without connection to qualifying activities do not count as ancillary and are usually considered non-qualifying.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.