In this guide
A Qualifying Free Zone Person (QFZP) can apply a 0% corporate tax rate to its qualifying income, but only while it keeps three things intact: adequate economic substance in the free zone, audited financial statements prepared under IFRS, and non-qualifying income within the de minimis limit. That limit is the lower of 5% of total revenue or AED 5 million. Breach it, or fail a core condition, and the entity loses QFZP status and is taxed at 9% on all income for that year and the following four years.
This is general business information and not accounting or tax advice. Tax treatment depends on the facts, current law and official guidance. Consult the Federal Tax Authority and a qualified adviser.
The conditions behind the 0% rate
A free zone licence alone does not deliver a 0% rate. The entity must maintain adequate substance in the zone, meaning core income-generating activities, qualified staff and operating expenditure located there rather than outsourced away. It must also prepare and keep audited financial statements under IFRS every year, regardless of size. These are continuing obligations, not one-time setup steps.
The de minimis rule in practice
The most common way to lose QFZP status is the de minimis rule. Non-qualifying income must not exceed the lower of 5% of total revenue or AED 5 million. A business with AED 40 million of revenue is capped at AED 2 million of non-qualifying income (5%), because that is lower than AED 5 million; a business with AED 200 million of revenue is capped at AED 5 million, because 5% would be higher. Tracking the source of every revenue stream against this ceiling is essential.
| Total revenue | 5% of revenue | AED 5M cap | De minimis limit (lower) |
|---|---|---|---|
| AED 20,000,000 | AED 1,000,000 | AED 5,000,000 | AED 1,000,000 |
| AED 40,000,000 | AED 2,000,000 | AED 5,000,000 | AED 2,000,000 |
| AED 200,000,000 | AED 10,000,000 | AED 5,000,000 | AED 5,000,000 |
What a breach costs
If the entity breaches the de minimis limit or fails another core condition, it does not simply pay tax on the excess. It loses QFZP status entirely, and all of its income, including what would have been qualifying, is taxed at 9% for the current tax period and the next four periods. The penalty is structural and multi-year, which is why monitoring should be continuous rather than annual.
Practical checklist
- Maintained core income-generating activity and staff inside the free zone
- Prepared audited financial statements under IFRS for the year
- Tracked non-qualifying income against the lower of 5% of revenue or AED 5 million
- Documented the basis for classifying income as qualifying or non-qualifying
- Reviewed any mainland or non-qualifying transactions before they were entered
Questions to take into the next discussion
- Is core activity genuinely performed in the free zone, or outsourced elsewhere?
- Are audited IFRS financial statements in place for the period?
- What is the current de minimis limit given this year’s revenue?
- How much non-qualifying income has accrued against that limit so far?
Common mistakes to avoid
- Assuming a free zone licence alone guarantees the 0% rate.
- Skipping audited IFRS accounts because the company is small.
- Tracking non-qualifying income only at year end, after the limit is breached.
- Treating the de minimis cap as a flat AED 5 million without applying the 5% test.
- Underestimating that a breach taxes all income at 9% for five years.
Frequently asked questions
What is the de minimis rule for a Qualifying Free Zone Person?
Non-qualifying income must stay within the lower of 5% of total revenue or AED 5 million. Exceeding that limit causes loss of QFZP status.
What happens if a free zone company loses QFZP status?
All of its income, including income that would have qualified, becomes taxable at 9% for the current tax period and the following four periods.
Do free zone companies need audited accounts?
Yes. Maintaining QFZP status requires audited financial statements prepared under IFRS each year, regardless of company size or revenue.
Related support from Phoneix Global
Phoneix Global helps free zone businesses monitor substance and de minimis exposure before a breach occurs. Review our advisory capability or contact the team. See also our analysis of free zone versus mainland tax and our guide to the AED 375,000 threshold.
