The QFZP 5-Condition TestWhat Qualifies, What Doesn’t.

1. What the QFZP regime actually does

QFZP (Qualifying Free Zone Person) is the UAE Corporate Tax regime that lets Free Zone companies tax qualifying income at 0% under Article 18 of Federal Decree-Law 47 of 2022, with the detailed mechanics in Cabinet Decision 100 of 2023 and Ministerial Decisions 139 and 265 of 2023. It’s the main reason international groups still favour Free Zone subsidiaries after the 9% CT regime came in — the right income type, properly structured, still carries zero UAE tax.

But QFZP isn’t a tick-box election. It’s a five-condition test, re-assessed every tax period. Miss any one condition and the whole QFZP falls away for that period: all income (qualifying and non-qualifying alike) is taxed at the standard 9% rate above the AED 375,000 threshold. Non-qualifying revenue above the de minimis is worse still — a 5-year loss of QFZP.

2. The 5 conditions at a glance

Each condition is a binary pass/fail on the annual return. Here is the summary we use when scoping a QFZP file:

3. Condition 1 — Adequate substance (the CIGA test)

You need real substance in the UAE Free Zone. Under Article 7 of Cabinet Decision 100/2023, the FTA tests for:

• Core Income-Generating Activities (CIGA) actually performed in the Free Zone — the key value-adding steps of the business, not back-office support.
• Qualified full-time staff physically located in the Free Zone (UAE residency visas, local payroll, not family on paper).
• Physical office premises in the Free Zone appropriate to the activity — a hot-desk is unlikely to be adequate for a trading entity.
• Operating expenditure proportionate to the scale and nature of the activities — a company reporting AED 50m qualifying revenue with AED 80k of OpEx will not pass.

Outsourcing: what’s allowed

CIGA may be outsourced only to a related party in the same Free Zone, or to a third party in the UAE, and only where the QFZP has adequate supervision of the outsourced activity. Outsourcing CIGA to a related party in a different country — or even to a related party on the UAE mainland — will fail. The point of the substance test is that the Free Zone sees the value creation, not just the invoicing.

Staff count benchmarks we see in FTA review

The CT Law doesn’t prescribe a minimum headcount, but FTA letters we’ve seen on live files ask for:

• Headcount by role, with UAE residency visa numbers and start dates;
• Monthly payroll (WPS) records tied back to the audited accounts;
• Office tenancy agreement, Ejari/Free Zone equivalent, DEWA/electricity bills;
• Board minutes showing where decisions were taken;
• Photographs of staff at the office in some cases.

A UAE Free Zone sub run from Mumbai or London with no UAE staff is not going to pass CIGA. The “mind and management” test matters here almost as much as the physical presence test.

4. Condition 2 — Qualifying income only

Only qualifying income gets the 0% rate. Everything else is non-qualifying and is subject to both the standard 9% rate and the de minimis cap. The qualifying activities list is set by Ministerial Decision 139 of 2023 and refined by Ministerial Decision 265 of 2023.

Qualifying activities (per MD 265/2023)

• Manufacturing and processing of goods
• Trading of qualifying commodities on recognised exchanges
• Wholesale distribution of goods or materials in or from a Designated Zone to foreign or in-UAE business customers (not retail / B2C)
• Holding of shares and other securities for investment (12-month holding; participation test interplay)
• Ownership, management and operation of ships
• Reinsurance services, regulated
• Fund management and wealth / investment management services, regulated
• Headquarter services to foreign related parties (strategic management, administration)
• Treasury and financing services to foreign related parties
• Financing and leasing of aircraft, engines, components
• Logistics services
• Qualifying IP income (on a modified-nexus basis)
• Any activity ancillary to a qualifying activity

Excluded activities (always non-qualifying)

• Transactions with natural persons, except in a narrow set (ship ownership, aircraft financing, fund management, regulated wealth management)
• Banking, insurance (other than reinsurance), financing and leasing — where regulated and not within the carved-in categories above
• Income from UAE immovable property (always taxed at 9%, even where the owner is a Free Zone Person)
• UAE mainland-source income from retail / B2C activity
• Income attributable to a domestic or foreign Permanent Establishment of the QFZP outside the Free Zone

5. The de minimis — and the 5-year cliff edge

Non-qualifying revenue is permitted up to the lower of 5% of total revenue or AED 5,000,000. Breach that line and QFZP is lost in full — not just for the overshoot, and not just for the current year.

Worked example — de minimis passes

Free Zone manufacturing company, AED 20,000,000 total revenue:

• Qualifying revenue (wholesale distribution of its own manufactured goods to European distributors): AED 18,800,000
• Non-qualifying revenue (consulting services to a UAE mainland corporate customer): AED 1,200,000
• De minimis cap = lower of (5% × 20,000,000 = AED 1,000,000) or AED 5,000,000 = AED 1,000,000

Non-qualifying revenue of AED 1,200,000 is above the AED 1,000,000 cap — so QFZP fails. All AED 20m is now subject to 9% CT above the AED 375k threshold, and QFZP is also lost for the next four tax periods.

6. The 5-year loss of QFZP status

Under Article 7(2) of Cabinet Decision 100/2023, failing any of the five conditions — including the de minimis — disqualifies the Free Zone Person from QFZP for the current tax period and the next four tax periods. Five years at the standard 9% rate on all income above AED 375k.

This is the single most expensive mistake we see on QFZP files. A one-off AED 300,000 non-qualifying contract taken on the margin can cost millions of UAE CT over the five-year lock-out. The planning point is to:

1. Model the de minimis monthly, not annually — so you see breaches coming before they close out.
2. Route non-qualifying contracts through a mainland sister (taxed at 9%, but doesn’t taint the Free Zone 0%).
3. Where the Free Zone entity has to take non-qualifying work, re-price it to keep revenue below the cap.

7. Modified-nexus for IP income

IP income in a Free Zone tech company runs on the modified-nexus approach set by Articles 7 and 8 of MD 265/2023, mirroring OECD BEPS Action 5. Only qualifying IP assets (patents, copyrighted software, functionally equivalent IP) qualify — trademarks and other marketing-related IP are always excluded.

Within qualifying IP, the proportion of income that gets 0% is the nexus fraction:

Qualifying IP income = Overall IP income × [(Qualifying expenditures × 1.30) ÷ Overall expenditures]

Where qualifying expenditures are the QFZP’s own R&D spend on the asset (including unrelated-party outsourced R&D), and overall expenditures also pick up related-party outsourcing and acquisition cost. The 30% uplift partially compensates for related-party R&D but doesn’t fully restore it.

In practice this means a Free Zone software company that develops its code in-house in the Free Zone can run most of its royalty / licence income at 0%. A Free Zone IP holding company that bought the IP from a related overseas parent and licences it out gets very little qualifying IP income — the nexus fraction collapses to near-zero.

8. Condition 3 — Transfer pricing

Every related-party transaction must be at arm’s length under Articles 34 to 36 of the CT Decree-Law, with contemporaneous documentation. For QFZPs above the AED 200m UAE revenue threshold or where the group is above the EUR 750m / AED 3.15bn CbCR line, full OECD Chapter V documentation (Master File + Local File) is required.

Non-arm’s length pricing is a QFZP killer: artificial transfer of profit into the Free Zone to maximise the 0% rate is exactly what the TP conditions are designed to catch. See our UAE Transfer Pricing Documentation guide.

9. Condition 4 — Audited IFRS financial statements

Under Ministerial Decision 82 of 2023, audited accounts are not optional for a QFZP regardless of company size, group status or dormancy. A small UAE Free Zone sub with AED 2m revenue claiming QFZP still needs full IFRS audited financial statements by a UAE Ministry of Economy-licensed auditor.

Two practical points we flag early on QFZP files:

• IFRS for SMEs is not acceptable for QFZP — it has to be full IFRS. This affects revenue recognition (IFRS 15), leases (IFRS 16), financial instruments (IFRS 9) and, from 2026, insurance contracts (IFRS 17) if relevant.
• The audit has to be complete at return filing. A “draft, pending audit” set of accounts is not a QFZP-qualifying set.

For international groups, this often means engaging a Dubai audit firm as component auditor working to the group’s audit team. We prepare the accounts to audit-ready IFRS and introduce you to a UAE-licensed auditor — we don’t audit ourselves.

10. Condition 5 — No election out

Under Article 19 of the Decree-Law, you can elect out of QFZP and be taxed as a standard taxable person. The election is binding for the current tax period and the next four tax periods — the same 5-year lock as the de minimis cliff. There is no re-electing in year 2 or 3.

Election out is usually taken because the compliance cost outweighs the 0% benefit — for example, the group has moved to pure mainland operations and no longer has qualifying income, or Pillar Two has already neutralised the group economic benefit. Before electing out, model the 5-year position: if qualifying income is likely to return, locking in 9% for five years is costly.

11. How we approach QFZP on live files

Three practical phases:

1. Pre-election scoping (week 1–2): 5-condition test against your actual facts, qualifying activity analysis, de minimis modelling over the 5-year horizon, substance plan with headcount and OpEx benchmarks, modified-nexus walkthrough for any IP income.
2. Election mechanics (year 1 return): Clean QFZP position on the first CT return, with contemporaneous documentation for each of the five conditions, TP disclosure form, audit scope letter.
3. Annual re-test (every tax period): QFZP is tested every period, not once. We do an annual walk-through of each condition and refresh the de minimis model against the live contract pipeline.

Book a 20-minute Discovery Call to walk through your QFZP position. We’ll send a written fixed-fee quote within two business days.

Frequently asked QFZP questions