Qualifying Income Assessment
Qualifying Free Zone Person: Testing the 0% Rate Before You Rely On It
Free zone founders tend to arrive with the same sentence: we are in a free zone, so we pay nothing. The law does not say that. It grants 0% on qualifying income to a Qualifying Free Zone Person, and every word in that phrase is a condition you have to prove.
- Revenue split into qualifying and non-qualifying, line by line
- De minimis threshold calculated on your real numbers
- Substance and activity tested against the licence
- A written conclusion you can put in the file
Dubai-based corporate tax support for UAE mainland, free zone and group structures.
Last reviewed against current FTA guidance.
Quick Answer
A QFZP assessment tests whether a UAE free zone company genuinely meets the conditions for the 0% corporate tax rate: it must carry on a qualifying activity, maintain adequate substance in the zone, satisfy transfer pricing requirements, prepare audited financial statements, and keep non-qualifying revenue below the de minimis threshold, which is the lower of 5% of total revenue or AED 5 million. Failing any condition costs the 0% rate for that tax period and the four that follow.
Where the Revenue Actually Comes From
This is the part clients underestimate. Qualifying income is not defined by who you are; it is defined by what the income is and who paid it. Income from transactions with other free zone persons who are the beneficial recipient can qualify. Income from a listed qualifying activity can qualify regardless of the customer. Everything else is non-qualifying and gets measured against the de minimis limit.
So the assessment starts with the sales ledger, customer by customer.
- Customer type: free zone person, mainland, or overseas
- Whether the free zone customer is the beneficial recipient
- Whether the activity sits on the qualifying activities list
- Excluded activities, which never qualify
- Income attributable to a domestic or foreign permanent establishment
The De Minimis Arithmetic
Non-qualifying revenue is allowed, but only a little of it. The threshold is the lower of 5% of total revenue or AED 5 million, which means a company turning over AED 20 million has an allowance of AED 1 million, not AED 5 million. Cross it and QFZP status is gone for that period and the next four.
Companies rarely fail this on purpose. They fail because nobody was measuring during the year, and by the time the auditor asks it is already December.
- 5% of total revenue, or AED 5 million, whichever is lower
- Revenue from a permanent establishment is excluded from the test
- Measured for the tax period, not per invoice
- Track it monthly, not at year end
- One breach costs five periods
Substance Is Not a Mailbox
Adequate substance means the core income-generating activities happen in the free zone, with enough people, assets and operating expenditure to make that credible. Outsourcing is possible within the zone, provided you can show real supervision.
A flexi-desk, a licence and a manager who lives abroad is not adequate substance for a company invoicing millions. That gap is visible from the outside, which is why it is worth closing before anyone asks.
- Core income-generating activities performed in the zone
- Headcount, premises and operating expenditure that match the revenue
- Outsourcing within the zone with documented supervision
- Board and management decisions evidenced where they are said to happen
- Substance tested per activity, not for the entity as a whole
The Two Conditions People Forget
Audited financial statements are not optional for a QFZP. Size does not matter here: a free zone company claiming the 0% rate needs audited statements whatever its revenue. Companies that skipped the audit to save a few thousand dirhams have lost a 0% claim worth far more.
The second is transfer pricing. A QFZP has to meet the arm's length standard and keep documentation for related-party and connected-person dealings. Group recharges with no agreement behind them are the usual weak point.
- Audited financial statements, regardless of revenue
- Arm's length pricing on all related-party dealings
- Transfer pricing documentation retained and available
- Connected-person payments tested for market value
- Election not to be a QFZP, where that is the better answer
When 9% Is the Better Outcome
Not every free zone company should chase the 0% rate. If most of your customers are on the mainland, the qualifying share will be small, the compliance cost is real, and the de minimis limit sits over you all year like a tripwire.
A company can elect not to be treated as a QFZP. Paying 9% on a profit that was going to be modest anyway, with no five-year cliff attached, is sometimes the cheaper and calmer answer. We say so when the numbers say so.
- Mainland-heavy revenue rarely supports a QFZP claim
- Small Business Relief is not available to a QFZP claimant
- Audit and documentation cost has to be earned back
- The five-period consequence changes the risk calculation
- Electing out is a formal choice, made in the return
What Exiloz Delivers
You get a written assessment: the revenue analysis, the de minimis calculation, the substance position, the gaps, and a conclusion that says qualifies, does not qualify, or qualifies only if these three things are fixed by a stated date.
It is written to be read by your auditor and, if it ever comes to it, by the FTA.
- Revenue analysed and classified with the workings shown
- De minimis computed on your figures for the period
- Gap list with a fix and a deadline against each item
- A file note your auditor can rely on
Does a free zone licence mean 0% corporate tax?
No. The 0% rate applies to the qualifying income of a Qualifying Free Zone Person. The licence is one input. Qualifying activity, substance, transfer pricing, audited accounts and the de minimis test all have to hold as well.
What is the de minimis threshold?
Non-qualifying revenue must stay below the lower of 5% of total revenue or AED 5 million. On AED 20 million of revenue the allowance is AED 1 million, because 5% is the lower figure.
What happens if we breach it?
The company stops being a Qualifying Free Zone Person for that tax period and the four following periods, and pays 9% on taxable income above AED 375,000 throughout.
Do we need audited financial statements?
Yes, if you are claiming QFZP status. That requirement applies regardless of revenue, which catches out smaller free zone companies that have never been audited.
Can we sell to mainland customers?
You can. Whether that income qualifies depends on the activity. Income from a qualifying activity can qualify whoever the customer is; otherwise mainland revenue is usually non-qualifying and counts against the de minimis limit.
Can a free zone company claim Small Business Relief instead?
Not while claiming QFZP status. A business under AED 3 million in revenue should compare the two before assuming the free zone route is better.
How long does an assessment take?
Usually two to three weeks. Most of that is the revenue analysis, which needs the sales ledger and enough customer detail to classify each stream.
Will you tell us if we do not qualify?
Yes, plainly, and we will show the workings. An assessment that only ever says yes is worth nothing to you when the FTA reads it.
Can you fix the gaps you find?
The common ones, yes: transfer pricing documentation, intercompany agreements, revenue tracking, and coordinating the audit. Each is scoped and quoted separately.
The rest of what we do
Licence, visas, bank account, books and the first tax return: handled by the same team, so the structure has to survive its first year.
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Corporate Tax Filing
Returns, elections and the qualifying income analysis behind them.
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Accounting & Bookkeeping
Books kept audit-ready from month one, not reconstructed at year end.
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Audit Preparation
Schedules, reconciliations and the evidence your auditor will ask for.
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Payroll & WPS
Payroll, WPS files and end-of-service calculated correctly.
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Tax Residency Certificate
Day-count position verified and the FTA document pack assembled.
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Customs Registration
Client code and Mirsal registration, before your first shipment, not after.
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ICV Certification
Score modelled and improved before the audit, not explained afterwards.
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UAE Free Zones
All 37 zones compared by emirate, with the founding law and what each is really for.
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Is Your 0% Claim Actually Safe?
We test the QFZP conditions against your revenue, your substance and your documents, and put the conclusion in writing. Send the licence and last year's sales ledger.
