As the UAE starts its federal corporate tax, free zone businesses want to understand their status and tax duties. One key designation in the new tax system is the Qualifying Free Zone Person (QFZP). This category can offer big tax benefits if certain criteria are met.
In this blog, we explain what it means to be a Qualifying Free Zone Person in the UAE. We also cover the eligibility requirements and how businesses can keep this status under the UAE Corporate Tax Law.
What Is a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person (QFZP) is a legal entity in a UAE Free Zone. It enjoys a 0% corporate tax rate on qualifying income if it meets specific rules. While the general corporate tax rate is 9% for UAE businesses exceeding AED 375,000 in annual profits, QFZPs enjoy preferential treatment to encourage continued investment and activity in free zones.
Key Conditions to Qualify as a QFZP
To be recognized as a Qualifying Free Zone Person under UAE Corporate Tax Law, a business must satisfy all of the following conditions:
- Maintain Proper Accounting Records
Audited financial statements may be required to support the business’s QFZP status. - Incorporated or Registered in a Free Zone
The entity must be legally established in one of the UAE’s recognized Free Zones. - Maintain Adequate Economic Substance
The business must show that it has important income-generating activities in the Free Zone. It should have enough assets, employees, and operations in the UAE. - Derive Qualifying Income
Only certain types of income qualify for the 0% rate. This includes income from transactions with other Free Zone people or from specific regulated activities. - Not Elect to be Taxable
The company must not opt out of the QFZP regime by choosing to be subject to standard corporate tax. - Comply with Transfer Pricing and Documentation Requirements
The entity must meet all arm’s length and documentation rules for transactions with related parties.
What Is Considered Qualifying Income?
The UAE Ministry of Finance has clarified that the following income streams may qualify for the 0% tax rate for QFZPs:
- Income from transactions with other Free Zone Persons (excluding excluded activities)
- Income from international trade where the recipient is outside the UAE
- Certain regulated financial and distribution activities
- Qualifying capital gains and dividends
However, income earned from non-free zone UAE mainland entities (unless specifically exempted) will not be considered qualifying and will be taxed at the regular 9% rate.
What Happens If a QFZP Fails to Meet Conditions?
If a Free Zone entity fails to meet even one of the conditions for a Qualifying Free Zone Person, it will lose the 0% tax benefit for the entire tax period, and all income will be taxed at 9%.
This makes it essential to proactively assess compliance throughout the year and maintain accurate records.
Why a QFZP Assessment Is Crucial for Free Zone Businesses
Given the complexity and strict requirements of the QFZP regime, free zone companies should consider a detailed Corporate Tax Impact Assessment to:
- Verify their eligibility for QFZP status
- Ensure proper transfer pricing documentation
- Identify qualifying vs non-qualifying income
- Implement necessary restructuring if needed
This assessment helps mitigate risk, avoid unexpected tax bills, and strategically position the business under the new law.
Get Expert Help on QFZP Compliance
At SGA World, our tax consultants specialize in UAE Free Zone regulations and Qualifying Free Zone Person (QFZP) compliance. From classification to documentation and reporting, we guide businesses in Dubai, Abu Dhabi, and across the UAE to maintain their tax-efficient status.
Ready to determine if your business qualifies as a QFZP?
Contact SGA World for a customized Corporate Tax Assessment today.
