Understanding qualifying income for free zone businesses under the UAE corporate tax law
A closer look at the 0% corporate tax benefit and how to maintain QFZP status
To know more about UAQ Free Trade Zone, click here
Free Zones have long played a central role in the UAE’s economic development strategy, offering an attractive environment for domestic and international businesses. These zones offer incentives such as full foreign ownership, simplified licensing procedures, state-of-the-art infrastructure, and access to vibrant business ecosystems.
To maintain the competitiveness of these business hubs, the UAE’s corporate tax framework includes specific provisions that allow Free Zone businesses to benefit from a 0% corporate tax rate under certain conditions.
A key concept within this framework is Qualifying Income. Understanding what counts as Qualifying Income is crucial for Free Zone entities that wish to benefit from the 0% Corporate Tax rate.
What constitutes qualifying income?
To acknowledge the significance of Free Zones, the UAE Corporate Tax regulations allow Free Zone companies and branches that meet specific criteria to benefit from a 0% Corporate Tax rate on designated Qualifying Activities and transactions.
To qualify as a Qualified Free Zone Person (QFZP), a Free Zone Person must fulfil all conditions stipulated in the Corporate Tax Law and its regulations. Failure to meet these conditions will result in the loss of QFZP status, and the entity’s income will then be subject to the standard Corporate Tax rules and rates.
Qualifying income is the lifeline of the 0% tax promise for Free Zone entities, earned from global trade, free zone-to-free zone deals, and strategically structured passive income. In 2025, it’s not just a tax classification; it’s a competitive edge for businesses that know how to play smart. To maximise the 0% tax benefit, businesses must carefully structure transactions, maintain clear books for qualifying vs non-qualifying income, and ensure economic substance within the free zone.Johnson M. George, General Manager, Umm Al Quwain Free Trade Zone
One of the key conditions for maintaining QFZP status is that the Free Zone Person must generate Qualifying Income from one or more of the following sources:
Transactions with other Free Zone Persons, provided that these entities are the Beneficial Recipients of the transactions and that the transactions do not pertain to Excluded Activities.
Transactions related to Qualifying Activities that are not classified as Excluded Activities.
Income derived from the ownership or exploitation of Qualifying Intellectual Property.
Other income, contingent upon the Free Zone Person meeting the de minimis requirements.
While the following sources of income may fall within the above-mentioned categories, they will not be classified as Qualifying Income. Consequently, this income will be included in the assessment of the QFZP’s taxable income, which is subject to the 9% Corporate Tax rate, unless exempted under another provision of the Corporate Tax regulations:
Income derived from a Foreign Permanent Establishment,
Income generated by a Domestic Permanent Establishment,
Income from Immovable Property, excluding commercial property situated in a Free Zone when the income is derived from transactions with a Free Zone Person, and
Income resulting from the ownership or exploitation of intellectual property, except for Qualifying Income associated with Qualifying Intellectual Property.
The Corporate Tax Law therefore provides that a QFZP can benefit from a 0% corporate tax rate on their qualifying income. In contrast, any income that does not qualify is subject to the standard corporate tax rate of 9%.
Deriving qualifying income
However, a Free Zone Person that does not generate any qualifying income during a tax period — due to not yet commencing revenue-generating activities — will not be disqualified from QFZP status, provided they do not derive any non-qualifying revenue and adhere to all other stipulations outlined in the Corporate Tax Law.
For instance, consider a Free Zone Person engaged in activities within a Free Zone that have the potential to yield qualifying income but have not yet begun to generate revenue.
Take, for example, Company F, a QFZP incorporated on January 1, 2024, in a Free Zone with the objective of manufacturing environmentally friendly products, which qualifies as a qualifying activity. Company F operates on a Gregorian calendar year for its tax periods.
Throughout the 2024 and 2025 tax periods, Company F remains in the preparatory phase, focusing on purchasing equipment, hiring staff, and finalising product development. During this time, the company does not earn any qualifying income, as its manufacturing activities are not yet fully operational. Consequently, no revenue is generated during the 2024 and 2025 tax periods, despite the company incurring various expenditures.
In this scenario, the absence of qualifying income for the 2024 and 2025 tax periods does not automatically disqualify Company F from maintaining its QFZP status, given that no revenue has been generated and business operations have not commenced.
As a result, Company F can retain its QFZP status for the 2024 and 2025 tax periods, positioning itself to potentially generate qualifying income.
Sameer Mishra is a senior journalist based in the UAE
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