Most free zone owners know they need to qualify for the 0% corporate tax rate. Far fewer know how easily they can lose it. The usual culprit is not fraud or a big mainland contract. It is a small stream of sales to individuals, or a modest amount of mainland work, that quietly crosses the de minimis line. Breach it and the damage is not one bad year.
- 0% applies only to qualifying income. Other income is taxed at 9%.
- De minimis limit: the lower of 5% of total revenue or AED 5 million in non-qualifying revenue.
- Sales to individuals (natural persons) are generally non-qualifying, which catches B2C and online sellers.
- Breach the limit and you can lose QFZP status for that year and the following four years.
What counts as qualifying income
A Qualifying Free Zone Person (QFZP) must also meet the other conditions: real substance, audited accounts, transfer pricing compliance and no election for standard taxation. Within that, qualifying income broadly means:
- Transactions with other free zone persons, where they are the real beneficiary of the goods or services.
- Income from the qualifying activities listed in the current ministerial decision, such as certain manufacturing, processing, trading of qualifying commodities, holding of shares, headquarter and treasury services, and logistics.
- Qualifying intellectual property income.
What is excluded
| Excluded or risky income | Why it matters |
|---|---|
| Banking, insurance and regulated finance | Excluded activities, taxed at 9% |
| UAE property ownership or exploitation | Excluded, with a narrow carve-out for free zone commercial property let to free zone persons |
| Transactions with natural persons | Generally excluded, which hits B2C platforms and consumer sales |
| Mainland customers outside qualifying activities | Non-qualifying revenue that counts toward the de minimis cap |
The de minimis maths, with examples
| Total revenue | Non-qualifying revenue | Limit (lower of 5% or AED 5M) | Result |
|---|---|---|---|
| AED 4M | AED 150,000 | AED 200,000 | Within limit |
| AED 4M | AED 250,000 | AED 200,000 | Breach, status at risk |
| AED 120M | AED 4.9M | AED 5M (cap) | Within limit |
| AED 120M | AED 5.5M | AED 5M (cap) | Breach, even though only 4.6% |
Notice the second and fourth rows. A small company can breach at AED 250,000, and a large one breaches the AED 5 million cap while still under 5%. Both limbs apply, and you must stay within each.
The real cost of a breach
Under the corporate tax rules, a company that fails the QFZP conditions or exceeds the de minimis limit ceases to be a QFZP for that tax period and the next four. Several guides mention only the single year, so confirm with your adviser. Non-qualifying income is taxed at 9%, and several practitioner guides say the AED 375,000 allowance does not soften that for a QFZP. For a business with AED 3 million of profit, that is roughly AED 270,000 a year at 9% instead of 0%, repeated over the lock-out period.
What to do this month
- Split your revenue monthly into qualifying and non-qualifying, not just at year end.
- Tag every customer as free zone person, mainland business or individual.
- Set an internal alarm at 70% of your limit.
- If you need mainland clients, consider a separate mainland route. See our guide to the free zone mainland permit.
Related reading: do you actually qualify for 0%, how ESR was replaced by the substance test, free zone audit requirements and transfer pricing.
FAQ
Do all free zone companies pay 0%? No. Only QFZPs, and only on qualifying income.
Is a different free zone better for tax? The rate rules are the same across free zones, so choose on activity, cost and banking, see our free zone cost comparison.
Read the primary rules on the Federal Tax Authority and Ministry of Finance sites. Unsure how your revenue splits? Ask BizDaddy for a pre-year-end check.
