What it means
A free-zone company invoices three customers: another free-zone company, a mainland manufacturer and an individual, and the income classification can differ for each, even if the products and invoices look similar. Begin with the legal category and the actual counterparty, not just the seller's registered address.
Cabinet Decision No 100 of 2023 covers transactions with free-zone persons, except excluded activities, and the other free-zone person must be the beneficial recipient of the goods or services, so a pass-through buyer may not satisfy that condition merely because its licence lists a free-zone address. Transactions with non-free-zone persons can qualify where the income comes from a specified Qualifying Activity that is not excluded, and Ministerial Decision No 229 of 2025 lists these activities, with definitions.
A term such as 'trading' on a licence is not enough to prove the transaction fits. Manufacturing and processing are on the activities list, along with logistics, designated-zone distribution under specific conditions and several other categories, and the details matter because distribution is not just any sale from a warehouse and the 2026 FTA decision adds a report for a defined group of distributors.
The ministerial decision also lists Excluded Activities, and many transactions with natural persons are excluded, although there are exceptions for certain qualifying activities. Banking, insurance, some financing and immovable-property transactions also require special treatment.
Income from qualifying intellectual property has a separate calculation under Cabinet Decision No 100 and Ministerial Decision No 229, so a software company should not assume all licence fees receive 0% and needs the right IP category, qualifying expenditure records and a calculation under the applicable formula. Cabinet Decision No 100 allows certain other income if the QFZP meets the de minimis requirements, and the 2025 ministerial decision caps non-qualifying revenue at the lower of 5% of relevant total revenue or AED 5 million in a tax period.
The test concerns revenue, not a 5% allowance for taxable profit. Not every receipt enters the calculation in the same way, since the Cabinet decision excludes specified permanent-establishment, immovable-property and intellectual-property revenue from its numerator and denominator, so each category should be reviewed before calculating the percentage.
For example, if relevant revenue is AED 10 million and non-qualifying revenue is AED 300,000, the latter is 3%, which passes the numerical 5% comparison and is below AED 5 million. It does not prove other QFZP conditions or that every income stream has a 0% rate.
Do not confuse revenue with taxable income, since revenue is the gross inflow used for the threshold calculation while corporate tax is determined using the applicable taxable-income rules, and applying a 9% rate directly to an invoice amount can give a false tax estimate. QFZP status itself requires adequate substance, transfer-pricing compliance and audited accounts, among other conditions, so Qualifying Income is only one part of the status test, and if a condition fails the consequences can extend into later tax periods under the 2025 decision.
Keep documentation for the counterparty's status and beneficial-receiver position where relevant. For an owner, qualifying income is a classification supported by facts and current law, so map transactions into legally defined buckets, calculate the de minimis test correctly and use an adviser for mixed or borderline cases before claiming 0%.
In practice
Real-world examples.
Example
A free-zone supplier checks whether another free-zone buyer is the beneficial recipient and whether the activity is excluded before classifying the income. It asks the buyer for confirmation of end use. The file records the answer.
Example
A qualifying logistics provider examines its mainland client's service contract against the 2025 activity rules, rather than rejecting the income solely because of location. The service fits a listed activity and is not excluded. The income is classified as qualifying.
Example
A business with AED 10 million relevant revenue and AED 300,000 non-qualifying revenue calculates a 3% share, then reviews all other conditions. The ratio passes, but the adviser still checks substance and audited accounts. The 0% rate is claimed only after the full review.
Formula
Calculation
Illustrative de minimis share = non-qualifying revenue / relevant total revenue x 100. AED 300,000 / AED 10 million = 3%; exclusions and the AED 5 million absolute ceiling still matter. This is not a calculation of tax payable.
Worked example. A fictional free-zone firm has AED 10 million of relevant revenue, mapped contract by contract.
- AED 7.0 million is from free-zone customers that are beneficial recipients, treated as qualifying.
- AED 2.7 million is from a mainland logistics contract that fits a qualifying activity, treated as qualifying.
- AED 0.3 million is from consumer sales, treated as non-qualifying.
- The total is 7.0 + 2.7 + 0.3 = AED 10.0 million, and the de minimis share is 0.3 / 10.0 x 100 = 3%, below the 5% comparison and the AED 5 million ceiling.Case study
Seen in the real world.
This entirely fictional example concerns Sand Dune Tech FZ-LLC, an invented free-zone firm. It classified all customer invoices as qualifying because the seller's own address was in a free zone. A later review found consumer subscriptions, mainland service contracts and IP licences with different legal tests. The firm mapped each contract to the current rules and kept supporting records before filing.
The case does not decide whether any actual software income qualifies or prove QFZP status. In the invented figures, consumer subscriptions were AED 400,000 of AED 8 million relevant revenue, a 5% share that sat exactly at the percentage limit, so any further non-qualifying income would have put the firm over it. The firm also found AED 1.5 million of licence fees that needed a separate IP calculation. It addressed both points with its adviser before filing.
Watch out
Common mistakes.
- Calling all free-zone turnover Qualifying Income without checking activity, customer and exclusions.
- Treating the de minimis rule as a simple 5% allowance on profit or all gross receipts.
- Using superseded activity lists or applying 9% directly to a non-qualifying invoice amount.
Questions
People also ask.
What is qualifying income?
It is income of a QFZP that meets the legal categories for the 0% corporate-tax rate.
Where are the rules?
Cabinet Decision No. 100 of 2023 and current ministerial activity decisions, alongside the corporate-tax law and relevant FTA rules.
What about other income?
Some non-qualifying taxable income is subject to 9%, but the treatment depends on the category and whether QFZP status is retained.
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