QFZP qualifying income rules explained for UAE free zones

What are QFZP qualifying income rules?

QFZP qualifying income rules define which revenue streams of a Qualifying Free Zone Person (QFZP) can be taxed at 0% under UAE corporate tax. Qualifying income covers transactions with other free zone persons and a defined list of qualifying activities. Income outside that list is taxed at 9%, subject to a de minimis allowance.

The rules sit inside Federal Decree-Law 47 of 2022 and the related cabinet and ministerial decisions on free zones. They decide whether a free zone company keeps its 0% rate or loses it for five tax periods. For a full map of free zone tax topics, start with our UAE Free Zones: Tax, Compliance and E-Invoicing hub.

This article walks through the qualifying income categories, the activities that qualify for 0%, the excluded activities, the de minimis threshold, and worked examples so finance teams can classify revenue with confidence.

How qualifying income fits inside UAE corporate tax

UAE corporate tax applies a 0% rate up to AED 375,000 of taxable income and 9% above that for most businesses. A QFZP is different. A QFZP pays 0% on its qualifying income and 9% on its non-qualifying income, with no AED 375,000 band on the non-qualifying part.

To be a QFZP, a free zone company must meet several conditions, including adequate substance, audited financial statements, transfer pricing compliance, and the de minimis test. Read the full checklist in our guide to QFZP Status Requirements UAE.

Qualifying income is the gateway condition. If a free zone company earns too much non-qualifying revenue, it fails the de minimis test and loses QFZP status for the current tax period and the next four.

The three buckets of QFZP income

The Ministry of Finance splits a QFZP's revenue into three buckets:

• Qualifying income taxed at 0%.
• Non-qualifying income taxed at 9% (within the de minimis cap).
• Excluded income that is never eligible for 0%, regardless of the counterparty.

Every invoice a free zone company issues should map to one of these three buckets. That mapping is the heart of QFZP compliance.

What counts as QFZP qualifying income?

Qualifying income comes from three sources under the free zone corporate tax rules.

1. Transactions with other free zone persons

Income from another free zone person is qualifying if that person is the beneficial recipient of the goods or services. The other party must use the supply for its own free zone business, not pass it through to a mainland buyer. Excluded activities are still excluded, even between two free zone persons.

2. Transactions from qualifying activities

Income from a defined list of qualifying activities is qualifying income, even when the customer is a non-free zone person, including mainland UAE or overseas customers. The activity itself drives the 0% treatment.

3. Ancillary income

Income that is ancillary to a qualifying activity or a transaction with a free zone person also qualifies. Ancillary means the activity serves no independent function and is a necessary part of the main supply.

The list of qualifying activities

The cabinet has set out specific qualifying activities. The table below summarises the main categories.

Distribution only qualifies when carried out in or from a designated zone, and when goods enter the UAE through that zone or are not imported into the UAE mainland by the QFZP. The activity test is strict, so confirm your zone status in writing.

Recognised commodities and exchanges

Qualifying commodity trading covers raw form metals, minerals, energy, and agricultural commodities traded on a recognised commodities exchange. Derivatives used to hedge those commodities can also qualify. Trading in finished consumer goods does not fall inside this category.

Excluded activities that never qualify

Some activities are excluded by law. Income from them is non-qualifying, even when both parties sit inside the same free zone. The main excluded activities are:

• Transactions with natural persons, except certain shipping, aircraft, fund, wealth and investment management services.
• Banking activities subject to regulation.
• Insurance activities, except reinsurance and certain captive insurance.
• Finance and leasing activities, except those listed as qualifying.
• Ownership or exploitation of UAE immovable property, except commercial property in a free zone leased to other free zone persons.
• Ownership or exploitation of intellectual property, except qualifying income calculated under the OECD modified nexus approach.

Income from these activities is always taxed at 9% and counts toward the non-qualifying revenue cap. For the full mechanics, see our breakdown of QFZP Non Qualifying Income Rules.

The de minimis rule for non-qualifying revenue

A QFZP can earn some non-qualifying revenue without losing status. The de minimis rule allows non-qualifying revenue up to the lower of:

• 5% of total revenue, or
• AED 5,000,000.

If non-qualifying revenue exceeds that cap, the company loses QFZP status for the current tax period and the next four. The 9% rate then applies to all taxable income, with no AED 375,000 band. The full calculation method is in our guide to the QFZP De Minimis Rule.

Revenue that sits outside the de minimis test

Some revenue is ignored when calculating the de minimis ratio:

• Income attributable to a domestic or foreign permanent establishment of the QFZP.
• Income from immovable property in a free zone that is taxed at 9%.
• Income from intellectual property that is non-qualifying.

Excluding these items prevents them from pushing a company past the threshold while still taxing them at 9%.

Substance, audits and other conditions

Qualifying income only delivers the 0% rate when the wider QFZP conditions are met. The main supporting conditions are:

Adequate substance in the free zone

The company must perform its core income-generating activities in a free zone, with adequate assets, qualified employees and operating expenditure. Outsourcing within the free zone or to a related party in the UAE is allowed when the QFZP supervises the outsourced work. Our QFZP Substantial Activity Test guide explains how to document this.

Audited financial statements

Every QFZP must prepare audited financial statements under IFRS, regardless of revenue size. The audit covers both qualifying and non-qualifying income streams. See QFZP Audit Requirements for scope and timing.

Transfer pricing compliance

Transactions with related parties and connected persons must be at arm's length and supported by transfer pricing documentation when thresholds are met.

No election out

A free zone company can elect to be taxed at standard corporate tax rates instead of as a QFZP. That election applies for the current tax period and the next four.

Worked examples

Example 1: Logistics company in a designated zone

A logistics provider in a designated zone earns AED 40 million from warehousing and freight forwarding for mainland and overseas customers. Logistics is a qualifying activity, so the AED 40 million is qualifying income taxed at 0%, provided substance and audit conditions are met.

Example 2: Free zone trader selling to mainland consumers

A free zone trading company sells finished consumer electronics to mainland retailers. The activity is not on the qualifying list and the customer is a non-free zone person. The full revenue is non-qualifying. If it exceeds the lower of 5% of total revenue or AED 5,000,000, the company loses QFZP status for five tax periods. Mainland sales mechanics are covered in QFZP Mainland Business Treatment.

Example 3: Manufacturer with small mainland service line

A free zone manufacturer earns AED 80 million from manufacturing exports and AED 2 million from minor consulting to mainland clients. Manufacturing income is qualifying. The AED 2 million consulting is non-qualifying but sits under the AED 5 million and 5% caps, so QFZP status is preserved. The AED 2 million is taxed at 9%.

How to apply the rules in practice

To classify revenue correctly, finance teams should:

1. Map each customer to free zone person, mainland person, or natural person.
2. Map each invoice line to a qualifying activity, excluded activity, or other activity.
3. Track non-qualifying revenue against the AED 5 million and 5% caps each tax period.
4. Keep contracts, beneficial recipient declarations and substance evidence on file.
5. Reconcile classifications with the audited financial statements.

An accurate invoice trail matters even more once UAE e-invoicing goes live, with the Peppol 5-corner Decentralized Continuous Transaction Control and Exchange (DCTCE) model and the PINT AE format. Phase 1 mandatory go-live is January 1, 2027 for businesses with revenue above AED 50 million, with appointment of an accredited service provider (ASP) by October 30, 2026. Penalties under Cabinet Decision 106 of 2025 run from AED 2,500 to AED 50,000 per violation. Connect the classification logic to your e-invoicing data and you reduce audit risk on both fronts.

Official sources

Always validate borderline cases against the primary sources:

• UAE Ministry of Finance for cabinet decisions and ministerial decisions on free zones.
• UAE Federal Tax Authority for corporate tax guides and clarifications.

You can also revisit our UAE free zone tax and compliance hub for related topics, including substance, audit and mainland treatment.

Put the rules into a working compliance setup

QFZP qualifying income rules only help if your invoicing, accounting and audit trail support them. EInvoice Direct is UAE e-invoicing software from Massive FZCO that includes an accredited ASP at no extra charge, so free zone companies can issue PINT AE invoices and tag qualifying versus non-qualifying revenue from day one. To get UAE e-invoicing pricing, send us your details and we will reply with a tailored quote.