UAE Corporate Tax: what changes at the AED 375,000 threshold
How the 0% and 9% bands work and what to prepare before your first return.
Two rates inside one company
A company registered in a UAE free zone is a Free Zone Person. If it also meets the conditions below, it becomes a Qualifying Free Zone Person, often shortened to QFZP. According to the FTA's information bulletin on Free Zone Persons, a QFZP pays 0% on its Qualifying Income and 9% on everything else.
One detail surprises many owners. A QFZP does not get the 0% band on the first AED 375,000 of profit that mainland companies enjoy. Any taxable income that is not Qualifying Income is taxed at 9% from the first dirham. So the status is valuable, but it is not a simple "free zone means no tax" rule.
The seven conditions
The FTA treats a Free Zone Person as qualifying unless it fails a condition or chooses to leave the regime. The conditions, taken from Article 18 of the Corporate Tax Law and the decisions made under it, are:
| Condition | What it means in practice |
|---|---|
| Adequate substance | The core income-earning work is done in the free zone, with enough staff, premises and spending there for the size of the business. |
| Qualifying Income | The company actually earns income that can carry the 0% rate (see the next section). |
| No election out | It has not chosen to be taxed under the standard rules instead. |
| Arm's length pricing | Dealings with related parties and with its own branches are priced as independent parties would price them. |
| Transfer pricing documentation | It keeps the records that support those prices. |
| Audited financial statements | It has its accounts audited, even if revenue is well below the AED 50 million level that applies to other companies. |
| De minimis test | Non-qualifying revenue stays under the lower of 5% of total revenue or AED 5 million. |
For arm's length pricing in owner-managed groups, see transfer pricing basics for owner-managed UAE companies.
What counts as Qualifying Income
Under Cabinet Decision No. 100 of 2023, income can be Qualifying Income in four ways:
- Sales to other Free Zone Persons who are the ones actually using the goods or services, not passing them on. The decision calls this person the "Beneficial Recipient". Excluded Activities never qualify, even within the free zone.
- Qualifying Activities carried out for anyone, including mainland and overseas customers.
- Income from qualifying intellectual property, worked out under a formula linked to the research and development spending behind it.
- Any other income, as long as the company passes the de minimis test.
Some income is never Qualifying Income, wherever it sits on that list. That includes income of a branch on the mainland or abroad, most income from property, and most income from intellectual property.
Qualifying and Excluded Activities
The current lists are in Ministerial Decision No. 229 of 2025, which replaced Decision No. 265 of 2023 and applies back to 1 June 2023. Qualifying Activities include manufacturing and processing goods, trading qualifying commodities, holding shares for investment, shipping, reinsurance, fund and wealth management, headquarter services and treasury services to related parties, aircraft financing and leasing, distribution in or from a Designated Zone, and logistics. Activities ancillary to these count too.
Two points in the 2025 decision are worth a look. Treasury and financing now also qualify when done for the company's own account. And commodity trading does not qualify for a company that earns 51% or more of its revenue from distribution, warehousing, logistics or inventory management.
Excluded Activities are taxed at 9% even when the customer is in a free zone. The main ones are:
- transactions with individuals, except for shipping, regulated fund or wealth management, and aircraft financing and leasing,
- banking, most insurance, and most finance and leasing, and
- owning or exploiting property, other than commercial property in a free zone let to another Free Zone Person.
The rule on individuals catches many service businesses. A free zone consultancy or trading company selling directly to consumers is earning income from an Excluded Activity on those sales.
The de minimis test, with an example
Article 3 of the 2025 decision sets the limit: non-qualifying revenue in a tax period must not exceed 5% of total revenue or AED 5 million, whichever is lower. Non-qualifying revenue means revenue from Excluded Activities, from non-qualifying activities with mainland or foreign customers, and from free zone customers who are not the Beneficial Recipient. Revenue from branches and certain property and intellectual property income is left out of both sides of the sum.
Illustrative figures only.
| Company A | Company B | |
|---|---|---|
| Total revenue | AED 20m | AED 150m |
| Non-qualifying revenue | AED 0.8m (4%) | AED 6m (4%) |
| Limit: lower of 5% or AED 5m | AED 1m | AED 5m |
| Result | Passes | Fails |
Both companies sit at 4%, yet only one passes. For larger businesses the AED 5 million cap bites first, so the percentage alone can give false comfort.
What happens if you fail
This is the part that makes QFZP status a year-round discipline. A company that fails any condition, at any point in a tax period, loses QFZP status from the start of that period and for the next four periods. The same five-year lock applies to a company that elects to be taxed under the standard rules. During those years all its taxable income is taxed at the normal rates.
One large contract with a mainland customer for a non-qualifying service, or a year without audited accounts, can therefore cost far more than the tax on that contract.
Year-round checklist
- Map your revenue streams to Qualifying Activities, Excluded Activities and other income, and keep the map up to date.
- Check who your customers are: free zone or not, Beneficial Recipient or not, and individual or company.
- Track the de minimis ratio monthly, against both the 5% and the AED 5 million limits.
- Review substance: people, premises and decision-making in the free zone.
- Price related-party dealings at arm's length and keep the documentation.
- Book the audit early, and keep workings that show how Qualifying Income was calculated.
- File on time: the return and any tax are due within nine months of the year-end, and records must be kept for seven years.
If you are planning new contracts or customers that fall outside your Qualifying Activities, test them against the de minimis limit before you sign. Our Corporate Tax return checklist covers the filing side.
This article is general information based on FTA and Ministry of Finance publications current in November 2026. It is not advice for your company. Ask Hassan to review your free zone status or test your revenue against the conditions.
Official sources: FTA: Free Zone Persons information bulletin · Cabinet Decision No. 100 of 2023 · Ministerial Decision No. 229 of 2025 · FTA: Free Zone Persons Corporate Tax guide
