Introduction:

As UAE Corporate Tax enforcement tightens in 2025, Free Zone businesses are under pressure to prove they meet the conditions for the much-desired 0% tax rate. The Federal Tax Authority (FTA) has clarified that all Free Zone entities are subject to Corporate Tax — but only some can qualify for relief under QFZP (Qualifying Free Zone Person) status.

In this guide, we explain the current tax treatment of Free Zone companies in 2025, including eligibility, the de minimis rule, permanent establishment (PE) treatment, and what happens if you lose QFZP status.

Are Free Zone Entities Subject to UAE Corporate Tax?

Yes. All Free Zone entities fall under Federal Decree-Law No. 47 of 2022, but if they meet specific conditions, they may continue to benefit from a 0% corporate tax rate on qualifying income.

If not, they pay the standard 9% tax on all taxable income.

Reference: Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023

What is a Qualifying Free Zone Person (QFZP) in 2025?

To be treated as a QFZP, a Free Zone company must meet all of the following:

 

1. 1. Maintain adequate economic substance in a Free Zone
      

       

      1. 1. Real office, employees, and operations within the Free Zone

1. 1. Earn qualifying income (defined below)

1. 1. Not elect to be taxed at the 9% standard rate

1. 1. Prepare and maintain audited financial statements

1. 1. Comply with transfer pricing rules and documentation

1. 1. Satisfy the “de minimis” test (if non-qualifying income exists)

Missing any one of these conditions disqualifies you from 0% tax for that financial year.

What Is “Qualifying Income”?

Under UAE tax law, qualifying income includes:

Income Type	Tax Rate
Trading with other Free Zone entities	0%
Exporting goods or services outside the UAE	0%
Passive income from mainland (dividends, interest, capital gains)	0%
Qualifying regulated activities (e.g., fund management, re-export)	0%
Income from mainland UAE active services or retail	9%

What Is the “De Minimis” Rule?

If your company earns non-qualifying income, you must ensure that:

 

• • Non-qualifying revenue is ≤ AED 5 million or 5% of total revenue (whichever is lower)

Otherwise, your entire income becomes subject to 9% tax — even the qualifying portion.

Example:

Total Revenue	Non-Qualifying Revenue	Qualifies?
AED 10 million	AED 400,000 (4%)	✅ Yes
AED 10 million	AED 600,000 (6%)	❌ No

What Happens If You Lose QFZP Status?

 

• • You are taxed at 9% on your entire income for that tax year.

• • You cannot re-qualify for five consecutive years.

• • FTA may also issue penalties for misreporting or improper segregation of income.

Permanent Establishment (PE) Risk:

If your Free Zone entity:

 

• • Has operations outside the Free Zone, or

• • Employs mainland staff regularly for active business,

It may trigger a Permanent Establishment (PE) status — making the PE’s income fully taxable at 9%, regardless of QFZP status.

FTA clarified this in its May 2024 guidance, with growing scrutiny in 2025.

Filing & Reporting Requirements (Even at 0%)

All Free Zone entities must:

 

• • Register for Corporate Tax

• • File an annual tax return

• • Submit a QFZP declaration

• • Maintain audited financials

• • Submit transfer pricing documentation (if applicable)

Deadline: Within 9 months of your financial year-end

Summary Table: Free Zone Tax Rules (2025)

Criteria	Outcome
Meets all QFZP conditions	0% on qualifying income
Fails de minimis rule	9% on all income
Doesn’t maintain audit/records	9% on all income
Performs mainland services	9% on that portion (or full if not segregated)
Triggers Permanent Establishment	9% on PE income

Quick Tips for Free Zone Companies in 2025:

 

• • Segregate non-qualifying income in separate accounts

• • Avoid exceeding the de minimis threshold

• • Ensure real substance in your Free Zone

• • Get your audited financials prepared early

• • Review transfer pricing policies

Final Thoughts:

UAE Free Zone entities can still enjoy 0% tax — but only if they fully comply with FTA rules. In 2025, the focus is on substance, separation, and documentation. Missteps can result in a 9% tax on total income and years of disqualification.

Need Help With QFZP Status or Free Zone Tax Planning?

At Think Biz Management Consultancies, we help you:

 

• • Assess and maintain your QFZP eligibility

• • Prepare audited financials and segregation plans

• • File accurate tax returns and avoid disqualification

Contact us today for expert Free Zone tax compliance support.

 

Contact us today for a free consultation.

Contact number: ‪+971 50 983 0334‬

Email ID: info@alphabets.ae