# QFZP status requirements in the UAE: a practical guide for free zone companies

> QFZP status requirements UAE explained: qualifying income, substantive activity, de minimis, audit, and transfer pricing rules.

Source: https://einvoicedirect.ae/free-zones-uae/qfzp-status-requirements-uae  
Last updated: 2026-06-05  
Publisher: EInvoice Direct (Massive FZCO), UAE e-invoicing software.

## What are the QFZP status requirements in the UAE?

QFZP status requirements UAE are the conditions a Qualifying Free Zone Person (QFZP) must meet to access the 0% corporate tax rate on qualifying income. A free zone company must have adequate substance in the UAE, earn qualifying income, stay within the de minimis cap, prepare audited financial statements, follow transfer pricing rules, and not elect for standard 9% taxation.

The rules sit inside Federal Decree-Law 47 of 2022 and its Cabinet and Ministerial Decisions. They apply to companies registered in any of the UAE's free zones or designated zones. Missing any single condition removes QFZP status for that tax period and the next four. This guide walks through each requirement, with figures, examples, and a checklist you can use before your next filing.

For the wider context, see our [UAE Free Zones: Tax, Compliance & E-Invoicing](https://einvoicedirect.ae/free-zones-uae) hub, which links every related topic in one place.

## Who qualifies as a Free Zone Person under UAE corporate tax?

A Free Zone Person is a juridical person incorporated, established, or registered in a UAE free zone. This includes branches of mainland or foreign companies registered in a free zone. Natural persons (individuals) cannot be QFZPs.

Being a Free Zone Person is the entry ticket. It does not, by itself, give you the 0% rate. You become a Qualifying Free Zone Person only when you meet every condition in Article 18 of the corporate tax law and the related Cabinet Decisions.

### Free zone vs designated zone

All UAE free zones count for corporate tax purposes. A designated zone is a narrower VAT concept used for goods. Some QFZP rules, such as those for distribution income, look specifically at whether the activity happens inside a designated zone.

### Mainland branches of free zone companies

A free zone company can have a branch on the mainland. Income earned through that mainland branch is taxed at 9% above AED 375,000, but the free zone parent can still keep QFZP status for its other income. The branch is treated as a domestic permanent establishment. Read more in [QFZP Mainland Business Treatment](https://einvoicedirect.ae/free-zones-uae/qfzp-mainland-business-treatment).

## The six core QFZP conditions

To be a QFZP for a tax period, the Free Zone Person must meet all of the following at the same time.

| # | Condition | What it means in practice |
| --- | --- | --- |
| 1 | Adequate substance in the UAE | Core income-generating activities, assets, employees, and operating expenses are in a free zone |
| 2 | Derives qualifying income | Income comes from listed qualifying activities or transactions with other free zone persons |
| 3 | Has not elected to be taxed at 9% | The company has not opted out of the QFZP regime |
| 4 | Meets transfer pricing rules | Arm's length pricing and transfer pricing documentation under Articles 34 and 55 |
| 5 | Prepares audited financial statements | Audited accounts under IFRS, regardless of revenue |
| 6 | Non-qualifying revenue within the de minimis cap | Below 5% of total revenue or AED 5 million, whichever is lower |

Failing any one of these removes QFZP status for the current tax period and the four following tax periods. The company is then taxed at the standard 9% rate above AED 375,000.

## Condition 1: Adequate substance in a free zone

The substance test, often called the substantial activity test, asks whether the company really operates from its free zone. A registered address and a trade licence are not enough.

### What counts as adequate substance

The Free Zone Person must conduct its core income-generating activities (CIGAs) inside a free zone. It must have:

- Enough qualified full-time employees in the free zone
- Adequate operating expenditure incurred in the free zone
- Adequate physical assets in the free zone

The Federal Tax Authority (FTA) does not publish a fixed headcount or expense figure. What is adequate depends on the nature and scale of the activity. A holding company needs less than a manufacturing plant.

### Outsourcing is allowed

Activities can be outsourced to a related party in a free zone or to a third-party service provider, as long as the QFZP supervises the work and the activity stays in the free zone. Outsourcing to a mainland or foreign provider for a CIGA breaks the substance test.

For a deeper walk-through, see the [QFZP Substantial Activity Test](https://einvoicedirect.ae/free-zones-uae/qfzp-substantial-activity-test).

## Condition 2: Qualifying income

Only qualifying income gets the 0% rate. The list of qualifying activities is set out in Ministerial Decision 265 of 2023 and its updates.

### What is qualifying income

Qualifying income includes:

- Income from transactions with other free zone persons, where the buyer is the beneficial recipient
- Income from a list of qualifying activities, including manufacturing, processing of goods, holding of shares, fund management, wealth and investment management, headquarter services, treasury and financing services to related parties, financing and leasing of aircraft, logistics, and distribution from a designated zone
- Any other income, as long as the de minimis threshold is met

### What is excluded

Income from transactions with natural persons, banking, insurance (with limited exceptions), finance and leasing (outside the listed exceptions), and ownership or exploitation of UAE immovable property outside a free zone is excluded.

The full breakdown is in [QFZP Qualifying Income Rules](https://einvoicedirect.ae/free-zones-uae/qfzp-qualifying-income-rules) and the partner page [QFZP Non Qualifying Income Rules](https://einvoicedirect.ae/free-zones-uae/qfzp-non-qualifying-income-rules).

## Condition 3: No election to be taxed at 9%

A Free Zone Person can choose to opt out of the QFZP regime and pay the standard 9% rate on all taxable income above AED 375,000. The election applies for the current tax period and the four following ones.

Companies sometimes elect out if their non-qualifying income is structurally high, or if compliance costs outweigh the benefit of the 0% rate on a small qualifying base.

## Condition 4: Transfer pricing compliance

Every QFZP must apply the arm's length principle to transactions and arrangements with related parties and connected persons. This is the same rule that applies to mainland companies.

### Documentation thresholds

A QFZP must maintain transfer pricing documentation if it meets one of these thresholds:

- Revenue of AED 200 million or more in the tax period
- Member of a multinational group with consolidated revenue of EUR 750 million or more

Smaller QFZPs still need a transfer pricing disclosure form with their corporate tax return and supporting evidence that pricing is at arm's length.

### Why this matters for the 0% rate

If transfer pricing is not at arm's length, the FTA can adjust the income. If the adjustment moves income from a 0% QFZP bucket to a 9% bucket, or causes a breach of the de minimis cap, QFZP status can be lost.

## Condition 5: Audited financial statements

A QFZP must prepare and maintain audited financial statements under International Financial Reporting Standards (IFRS). There is no revenue threshold. Even a small free zone company must be audited if it wants QFZP status.

The audit must be performed by an auditor registered with the UAE Ministry of Economy. The financial statements must separate qualifying from non-qualifying revenue clearly enough to support the de minimis calculation.

For practical guidance, see [QFZP Audit Requirements](https://einvoicedirect.ae/free-zones-uae/qfzp-audit-requirements).

## Condition 6: The de minimis rule

A QFZP can earn a limited amount of non-qualifying revenue without losing the regime. This is the de minimis rule.

### The two-part test

Non-qualifying revenue must be the lower of:

- 5% of total revenue, or
- AED 5,000,000

If either limit is breached, QFZP status is lost for the current tax period and the next four. Note that this is a revenue test, not a profit test. Even a low-margin trade can push you over.

### Worked example

| Item | Company A | Company B |
| --- | --- | --- |
| Total revenue | AED 20,000,000 | AED 200,000,000 |
| 5% of total revenue | AED 1,000,000 | AED 10,000,000 |
| Lower of 5% or AED 5,000,000 | AED 1,000,000 | AED 5,000,000 |
| Actual non-qualifying revenue | AED 900,000 | AED 4,500,000 |
| QFZP status | Kept | Kept |

Company B has a hard ceiling of AED 5 million, not 5% of AED 200 million, because the rule takes the lower of the two figures. Detailed mechanics are in the [QFZP De Minimis Rule](https://einvoicedirect.ae/free-zones-uae/qfzp-de-minimis-rule).

## How qualifying and non-qualifying income are taxed

The 0% rate applies only to qualifying income. Non-qualifying income (within the de minimis cap) is taxed at 9% without the AED 375,000 small business threshold. The small business relief, available to mainland companies with revenue up to AED 3 million through 2026, is not available to QFZPs.

| Type of income | QFZP rate | Notes |
| --- | --- | --- |
| Qualifying income | 0% | No AED 375,000 threshold needed |
| Non-qualifying income (within de minimis) | 9% | No AED 375,000 threshold available |
| Income from mainland branch (domestic PE) | 9% | Above AED 375,000 |
| Income from foreign permanent establishment | 9% | Above AED 375,000, foreign PE exemption may apply |
| Income from UAE immovable property outside free zone | 9% | Above AED 375,000 |

## Filing obligations for a QFZP

A QFZP must register for corporate tax with the FTA, file a corporate tax return within 9 months of the end of its financial year, and pay any tax due by the same deadline. The return must split qualifying and non-qualifying income.

VAT obligations are separate. A QFZP that crosses the AED 375,000 taxable supplies threshold must register for VAT and file returns within 28 days of each tax period. Designated zone rules can change how VAT applies to goods, but they do not change the corporate tax position.

### E-invoicing under the UAE Peppol model

The UAE is rolling out a Peppol 5-corner Decentralized Continuous Transaction Control and Exchange (DCTCE) model. Free zone companies are not exempt. Phase 1 covers businesses with revenue of AED 50 million or more: appointment of an accredited service provider (ASP) by October 30, 2026, with mandatory go-live on January 1, 2027. Smaller companies follow on July 1, 2027, and government entities on October 1, 2027. Format is PINT AE.

## Common ways QFZP status is lost

### Breaching the de minimis cap

The most frequent cause. A single large mainland sale to an individual customer can take a smaller company over its AED 1 million cap.

### Failing the substance test

Empty offices, contracted-out core activities to mainland providers, and a single shared employee across many entities are red flags.

### Skipping the audit

Some small free zone companies historically did not audit. Without audited IFRS statements, QFZP status is lost for five tax periods.

### Transfer pricing errors

Selling at cost to a related mainland company, or charging high management fees with no benchmarking, can trigger adjustments that flip income into a 9% bucket.

## QFZP eligibility checklist

Run through this before each tax period closes.

- Is the entity a juridical person registered in a UAE free zone?
- Are core income-generating activities performed in the free zone?
- Are employees, premises, and operating expenses adequate for the activity?
- Is income from qualifying activities or other free zone persons?
- Is non-qualifying revenue below the lower of 5% or AED 5 million?
- Have you avoided electing for the 9% rate?
- Is transfer pricing documented and at arm's length?
- Are audited IFRS financial statements ready?
- Have qualifying and non-qualifying revenue been tracked separately in the books?
- Is the corporate tax return on track for filing within 9 months of year end?

## How QFZP rules sit alongside other UAE tax rules

QFZP status only deals with corporate tax. It does not change VAT, customs, or e-invoicing duties. A QFZP can still be required to register for VAT at the AED 375,000 threshold, charge 5% VAT on standard-rated supplies, and issue Peppol-compliant electronic invoices once the e-invoicing mandate applies.

For multinationals, the new Domestic Minimum Top-up Tax (DMTT) at 15% applies from January 2025 to groups with consolidated revenue of EUR 750 million or more. QFZPs in such groups can still claim the 0% rate at entity level, but the group may owe top-up tax to bring the effective rate to 15%.

The full picture of how these rules interact is mapped in the [UAE Free Zones: Tax, Compliance & E-Invoicing](https://einvoicedirect.ae/free-zones-uae) hub.

## Where to read the rules directly

The primary sources are the UAE corporate tax law and Cabinet Decisions. You can read them on the [UAE Ministry of Finance](https://mof.gov.ae) site and the [UAE Federal Tax Authority](https://tax.gov.ae) portal. For e-invoicing specifics, the [UAE MoF e-invoicing portal](https://einvoicing.mof.gov.ae) publishes the latest timeline and PINT AE specifications.

## Bringing QFZP compliance and e-invoicing together

Keeping QFZP status means clean books, separated revenue streams, and audit-ready records. The same discipline supports the upcoming Peppol e-invoicing mandate. If you want a UAE e-invoicing solution that handles PINT AE formatting and includes an accredited ASP at no extra charge, [get UAE e-invoicing pricing](https://einvoicedirect.ae/for-businesses#contact) from EInvoice Direct and we will map the rollout to your free zone setup.

## Frequently asked questions

### What are the main QFZP status requirements in the UAE?

A Qualifying Free Zone Person must be registered in a UAE free zone, have adequate substance there, earn qualifying income, keep non-qualifying revenue under the de minimis cap, prepare audited IFRS financial statements, comply with transfer pricing rules, and not elect for the 9% corporate tax rate. All six conditions apply at the same time for each tax period.

### What is the de minimis threshold for a QFZP?

Non-qualifying revenue must stay below the lower of 5% of total revenue or AED 5,000,000. If either limit is breached, QFZP status is lost for the current tax period and the four following ones. The test looks at revenue, not profit, so even low-margin sales count toward the cap.

### Do free zone companies need audited accounts for QFZP status?

Yes. Every QFZP must prepare audited financial statements under International Financial Reporting Standards (IFRS), regardless of revenue size. The auditor must be registered with the UAE Ministry of Economy. The accounts must clearly separate qualifying and non-qualifying revenue so the de minimis test can be applied. Without an audit, the company falls back to the 9% corporate tax rate.

### Can a QFZP do business with mainland companies?

Yes, but income from mainland customers is usually non-qualifying unless it falls within a listed qualifying activity. Such income is taxed at 9% and counts toward the de minimis cap. If the QFZP operates through a mainland branch, the branch is a domestic permanent establishment and is taxed at 9% above AED 375,000, while the free zone parent can keep its 0% rate on qualifying income.

### Is the AED 375,000 small business threshold available to a QFZP?

No. The 0% rate up to AED 375,000 of taxable income applies to mainland companies and to free zone companies that are not QFZPs. A QFZP gets 0% on qualifying income with no threshold, but pays 9% on any non-qualifying income from the first dirham. Small business relief for revenue up to AED 3 million through 2026 is also not available to QFZPs.

### What happens if a free zone company loses QFZP status?

Loss of QFZP status applies for the tax period of the breach and the four following tax periods. During that time, the company is taxed as a standard taxable person at 9% on income above AED 375,000. After the five-year window, the company can apply the QFZP conditions again from the start of a new tax period if all requirements are met.

### Does QFZP status affect VAT or e-invoicing obligations?

No. QFZP rules sit inside corporate tax law only. VAT registration is still required once taxable supplies exceed AED 375,000, with returns filed within 28 days of each period. E-invoicing under the UAE Peppol DCTCE model applies to free zone companies too, with Phase 1 go-live on January 1, 2027 for businesses with revenue of AED 50 million or more.

### Do QFZPs need transfer pricing documentation?

All QFZPs must price related-party transactions at arm's length and complete the transfer pricing disclosure form with the corporate tax return. Full master file and local file documentation is required if revenue reaches AED 200 million in the tax period, or if the QFZP belongs to a multinational group with consolidated revenue of EUR 750 million or more.


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This content is informational and is not tax, legal, or financial advice.
For UAE e-invoicing pricing, see https://einvoicedirect.ae/for-businesses#contact