Key takeaways
- A QFZP pays 0% on qualifying income and 9% on everything else, with no AED 375,000 band and no Small Business Relief.
- Non-qualifying revenue must stay within the lower of 5% of total revenue and AED 5 million; at AED 60 million of revenue, the limit is AED 3 million.
- Fail any condition and you lose QFZP status for that tax period and the next four.
- From 2026 tax periods, Designated Zone distributors need an independent auditor's AUP report, or their distribution income stops qualifying.
A free zone licence does not by itself make a company tax-free. The 0% rate belongs to a Qualifying Free Zone Person (QFZP), and that status has to be earned again in every tax period. Three developments make 2026 a year for free zone groups to revisit their position. The qualifying activities were rewritten in 2025 with retroactive effect. Distributors face a new reporting requirement from 2026. And the cost of failing a single condition remains five tax periods at the standard rates.
How a Qualifying Free Zone Person is taxed
A QFZP pays 0% on qualifying income and 9% on all other taxable income (Federal Decree-Law No. 47 of 2022, Art. 3(2)). The AED 375,000 0% band does not apply to its non-qualifying income.
Several reliefs available to mainland companies are closed to it. A QFZP cannot elect Small Business Relief, however small (Ministerial Decision No. 73 of 2023, Art. 3), and it cannot be a member of a Tax Group (Art. 40).
For the largest groups, a further layer applies. Free zone entities of multinational groups with consolidated revenue of EUR 750 million or more, in at least two of the four preceding years, are within the 15% Domestic Minimum Top-up Tax (Cabinet Decision No. 142 of 2024). See global minimum tax.
The six conditions
To be a QFZP for a tax period, a company must meet every one of these (Art. 18; Cabinet Decision No. 100 of 2023; Ministerial Decision No. 229 of 2025, Art. 5):
| Condition | What it means in practice |
|---|---|
| Adequate substance | The activities that earn the income take place in the free zone, with people, premises and spending to match |
| Qualifying income | The company earns income that qualifies under the rules (see the activities below) |
| No opt-out | It has not elected to be taxed at the standard rates |
| Transfer pricing | Related-party dealings are at arm's length (priced as independent parties would) and documented as required (Arts. 34 and 55) |
| De minimis | Non-qualifying revenue stays within the limit |
| Audited financial statements | Required for every QFZP, whatever its revenue (Ministerial Decision No. 84 of 2025) |
Whether a particular income stream qualifies depends on the activity and on who the customer is. Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025 set out the detail, and most of the professional judgement lies there.
The de minimis test, worked through
De minimis is a small tolerance: a QFZP can earn some non-qualifying revenue without losing its status. The limit is 5% of total revenue or AED 5,000,000, whichever is lower (Ministerial Decision No. 229 of 2025, Art. 3).
| Total revenue | 5% of revenue | Fixed cap | Your limit |
|---|---|---|---|
| AED 20m | AED 1m | AED 5m | AED 1m |
| AED 60m | AED 3m | AED 5m | AED 3m |
| AED 100m | AED 5m | AED 5m | AED 5m |
| AED 250m | AED 12.5m | AED 5m | AED 5m |
Up to AED 100 million of revenue, the 5% test sets the limit. Above it, the AED 5 million cap does, so the tolerance shrinks as a proportion of revenue as the business grows.
Consider a free zone company with total revenue of AED 60 million. 5% of that is AED 3 million, which is lower than AED 5 million, so its limit is AED 3 million. Its taxable income is AED 4 million, of which AED 400,000 is non-qualifying.
With non-qualifying revenue of AED 2.8 million, the company is within its limit and remains a QFZP. Its tax is 9% × AED 400,000 = AED 36,000.
With non-qualifying revenue of AED 3.2 million, and total revenue and taxable income unchanged, it breaches the limit and loses QFZP status. All AED 4 million is then taxed at the standard rates: 9% of the AED 3,625,000 above the band, AED 326,250.
An extra AED 400,000 of non-qualifying revenue costs AED 290,250 of tax in the first year alone, and the status stays lost for four further periods. The test is a cliff, not a slope. Non-qualifying revenue needs to be tracked during the year, not discovered at year end.
Qualifying and excluded activities
Ministerial Decision No. 229 of 2025 lists 13 qualifying activities, plus activities ancillary to them:
- manufacturing;
- processing;
- trading Qualifying Commodities;
- holding shares and other securities for investment (12-month holding);
- owning, managing and operating ships;
- reinsurance;
- fund management;
- regulated wealth and investment management;
- headquarter services to related parties;
- treasury and financing services to related parties or for its own account;
- financing and leasing aircraft;
- distributing goods in or from a Designated Zone;
- logistics services.
Excluded activities include transactions with natural persons (except for ships, fund management, wealth management and aircraft), banking, insurance (other than reinsurance and captive insurance provided as headquarter services), regulated finance and leasing (with carve-outs), and most immovable property (free zone commercial property dealt with free zone persons is the exception), along with activities ancillary to these.
What changed in 2025
Ministerial Decision No. 229 of 2025, issued on 28 August 2025, repealed Ministerial Decision No. 265 of 2023 and applies retroactively from 1 June 2023. Four changes stand out.
For commodities, the old "raw form" requirement has gone. A Quoted Price test replaces it: the commodity must be priced on a recognised exchange or by a recognised price-reporting agency, and Ministerial Decision No. 230 of 2025 lists the recognised agencies. Environmental commodities, such as carbon credits and renewable energy certificates, now count. Treasury and financing now covers activity on the company's own account, not only for related parties. And Designated Zone distribution now also covers supplies to public benefit entities.
Because the decision reaches back to 1 June 2023, it is worth checking how the FY2024 return treated these income streams, and how the FY2025 return, due by 30 September 2026 for calendar-year companies, treats them. A tax health check is a sensible starting point.
What changed in 2026: the distributor AUP
The Federal Tax Authority (FTA) has added a requirement for tax periods starting on or after 1 January 2026, in FTA Decision No. 6 of 2026 (issued on 2 June 2026 and published on 14 July 2026).
A QFZP that distributes goods in or from a Designated Zone now needs an agreed-upon procedures (AUP) report from an independent auditor, prepared under ISRS 4400, the international standard for such engagements. In an AUP, the auditor carries out specified checks and reports what it found. The report is due within 30 days after the corporate tax return deadline. Without it, the distribution activity does not count as qualifying.
For a calendar-year QFZP, the first report covers FY2026: the return is due by 30 September 2027, and the AUP report within 30 days after that. The report comes in addition to the audited financial statements, so its scope should be agreed with the auditor before the year closes. It is also worth confirming that the zone in question is a Designated Zone, because the activity depends on it.
Losing the status: five tax periods
Failing any condition costs QFZP status from the start of that tax period and for the next four, five periods in all (Art. 18(2); Ministerial Decision No. 229 of 2025, Art. 5(2)). A calendar-year company that fails in FY2026 is taxed at the standard rates for FY2026 to FY2030. Because the loss runs from the start of the period, a breach in December reprices the whole year.
A 2026 checklist for free zone groups
- Map every revenue stream to a qualifying activity, an excluded activity or neither.
- Track non-qualifying revenue against the de minimis limit every month.
- For distributors, confirm Designated Zone status and appoint the auditor for the AUP report.
- Review substance: people, premises and spending in the free zone.
- Price related-party dealings at arm's length, especially with mainland group companies taxed at 9%.
- Book the audit early, since every QFZP needs audited financial statements.
- Test the position with the free zone checker.
How ebs can help
ebs Chartered Accountants is an FTA Registered Tax Agency (TAN 30022834). We map your income streams against Ministerial Decision No. 229 of 2025, monitor the de minimis position during the year, and prepare and file the return. See free zone corporate tax or book a free first consultation.
This article is general information as at 18 September 2026, not advice on your specific circumstances. Tax rules change; check the current position before acting.