A qualifying free zone person pays 0% corporate tax only on qualifying income. Public summaries list qualifying activities such as manufacturing, processing, trading of qualifying commodities, holding shares and shipping, and excluded activities such as dealing with natural persons, regulated banking and insurance and most immovable property. Non-qualifying revenue must stay within the de minimis limit.
The idea
A free zone company is not automatically at 0%. To be a qualifying free zone person, it must meet several conditions, earn qualifying income and avoid excluded activities. Income that is not qualifying is taxed at the standard rate. This guide covers the activity lists and the de minimis test. For the wider set of conditions, read qualifying free zone persons explained.
Qualifying activities
Summaries of the Ministerial Decision on qualifying activities and excluded activities list these as qualifying:
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of qualifying commodities, such as metals, energy and agricultural products traded on regulated commodity markets.
- Holding shares and other securities for investment purposes.
- Ownership, management and operation of ships.
- Reinsurance, fund management and wealth and investment management, where regulated.
- Headquarter services, treasury and financing services to related parties.
- Logistics services and distribution in or from a designated zone.
The exact list and the conditions attached to each item are in the Ministerial Decision. Summaries disagree on the decision number, with some citing Ministerial Decision No. 139 of 2023 and others No. 265 of 2023, so confirm which version is current on the Ministry of Finance website.
Excluded activities
| Excluded activity | Note |
|---|---|
| Transactions with natural persons | Subject to exceptions for some activities such as shipping and fund management |
| Regulated banking, finance and leasing | Where regulated |
| Insurance | Other than qualifying reinsurance |
| Ownership or exploitation of immovable property | Except certain commercial property transactions with free zone persons |
| Ownership or exploitation of intellectual property | Treated as excluded in several summaries; check qualifying IP conditions |
The de minimis test
Summaries describe the test as: non-qualifying revenue must not exceed the lower of 5% of total revenue and AED 5 million in the tax period. If it exceeds that limit, the business loses the 0% treatment and all its income is taxed at the standard rate. Some revenue, such as revenue attributable to a permanent establishment, is treated separately. Run the test with real numbers each year, not at the end of the year.
If you fail a condition
Summaries report that a free zone person that fails any condition ceases to be a qualifying free zone person from the start of that tax period and for the following four tax periods. The consequence is serious, which is why a pre-year-end check is worth the effort. Audited statements are also a condition; see audited accounts and the corporate tax position and free zone audit requirements.
Mainland sales
Sales to customers on the UAE mainland, or to natural persons, are the usual source of non-qualifying income. See free zone to mainland consequences. Separate your revenue streams in the ledger so you can run the de minimis test and show each line to the FTA.
A quarterly check
- Tag each revenue line as qualifying or non-qualifying.
- Calculate non-qualifying revenue against 5% of total and AED 5 million.
- Check for any excluded activity creeping into the mix.
- Confirm substance, audit and transfer pricing requirements are met.
- Record the result with working papers.
A worked example
A free zone trading company has total revenue of AED 40 million. Of this, AED 1.5 million is from a mainland customer in a non-qualifying activity. The de minimis test uses the lower of 5% of total revenue (AED 2 million) and AED 5 million, so the limit is AED 2 million. Non-qualifying revenue of AED 1.5 million is within the limit and the 0% status survives, provided other conditions are met. If that revenue were AED 2.5 million, the company would exceed the limit and the benefit would be lost. The figures are illustrations; the exact test and the classification of the revenue depend on the decisions.
Substance and other conditions
The activity lists are only one part. A qualifying free zone person must also maintain adequate substance in the free zone, keep audited financial statements, comply with transfer pricing rules and not elect to be taxed under the standard regime. A company that earns qualifying income but fails substance can still lose the benefit. See transfer pricing benchmarking.
Evidence to keep
- Contracts and invoices that show the nature of each revenue line.
- Customer lists showing whether each customer is a free zone person, a mainland business or an individual.
- Manufacturing or processing records for the production activities.
- The working for the de minimis test each period.
Frequently asked questions
Public summaries list manufacturing, processing, trading of qualifying commodities, holding shares, shipping and certain regulated financial and logistics activities, subject to the decision.
Transactions with natural persons, regulated banking and insurance, most immovable property and, in several summaries, intellectual property income.
Non-qualifying revenue must not exceed the lower of 5% of total revenue and AED 5 million in the period, according to summaries.
Summaries report loss of qualifying status for that period and the next four.
Sources cite both. Check the Ministry of Finance website for the current decision.
Audited financial statements are among the conditions for a qualifying free zone person.