QFZP Mistakes We See in Free Zone Audits (and How to Fix Them)

UAE CORPORATE TAX · FREE ZONES · NOVEMBER 2026

The 0% Corporate Tax rate for free zone companies is valuable, but it is conditional. A company keeps it only while it stays a Qualifying Free Zone Person (QFZP), and one failed condition costs it the status for five tax periods. Most companies that lose it don't decide to. They slip on something small that nobody was watching. These are the mistakes that come up most often when we review free zone companies, and what to do about each one.

What is at stake

A QFZP pays 0% on qualifying income and 9% on taxable income that isn't qualifying. To stay a QFZP, a free zone company has to meet every condition, every tax period:

• maintain adequate substance in the free zone;
• earn qualifying income;
• keep non-qualifying revenue within the de minimis limit;
• not elect to be taxed at the standard rates;
• follow the arm's length rules and transfer pricing documentation requirements;
• prepare audited financial statements.

Fail one, and the company stops being a QFZP from the start of that tax period and for the following four. For a company with AED 3 million of taxable profit, that is roughly AED 236,000 of Corporate Tax a year, for five years.

1. Counting mainland service income as qualifying

This is the mistake we see most. A free zone consultancy, marketing agency or IT company takes on a few clients on the UAE mainland and treats the fees like the rest of its income. But income from mainland customers is qualifying only if it comes from a qualifying activity, such as distributing goods in or from a Designated Zone to customers who resell them. Most consulting, management and professional fees from mainland clients are non-qualifying.

How to fix it: tag every customer as free zone, mainland or overseas in your accounting system, and review mainland contracts before you sign them. If mainland work is growing, it may make sense to put it through a separate mainland entity.

2. Selling to individuals

Transactions with natural persons are an excluded activity, apart from limited exceptions in the ministerial decision on qualifying and excluded activities. A free zone company selling online to consumers, or providing services to individuals, usually earns non-qualifying income on those sales, wherever the customer is based.

How to fix it: check whether your customers are businesses or individuals. If B2C sales are a real part of the business, model the tax both ways before year-end. Electing out of the QFZP regime, or restructuring, can be cheaper than failing the test.

3. Getting the de minimis test wrong

A QFZP can earn some non-qualifying revenue, but it must not exceed the lower of 5% of total revenue or AED 5 million in the tax period. Revenue from domestic and foreign permanent establishments, certain free zone property income and qualifying intellectual property is disregarded in the test (though some of it is still taxed at 9%). The usual errors:

• checking only once the year has ended, when nothing can be changed;
• using invoiced amounts instead of revenue recognised under IFRS;
• leaving disregarded revenue in the totals, or wrongly taking qualifying revenue out;
• forgetting that for larger groups the AED 5 million cap, not the 5%, is the binding limit.

Revenue for the test (AED)	Non-qualifying limit (AED)
2,000,000	100,000
12,000,000	600,000
300,000,000	5,000,000

How to fix it: track the test every quarter, not once a year. Our free QFZP de minimis checker shows your headroom in seconds.

4. Too little substance in the free zone

A QFZP must carry out its core income-generating activities in the free zone, with adequate assets, enough qualified full-time staff and adequate operating costs for the income it earns. A flexi-desk licence with no staff, and the real work done from the mainland or abroad, is the classic risk. Outsourcing is allowed, but only to a provider in the free zone and under the company's own supervision.

How to fix it: write down who does the core work, where, and on what costs. If the answer doesn't match the free zone, fix the arrangement before the next tax period starts.

5. Related-party pricing with no support

Many free zone companies sit in groups with mainland sister companies or owners who charge management fees. Every transaction with related parties and connected persons must be at arm's length, and a QFZP must meet the transfer pricing documentation rules. Prices set "because it's all our money" are one of the fastest ways to fail a condition, and they can also move profit into the 0% company in a way the FTA can adjust.

How to fix it: put intercompany agreements in place, support the prices with a benchmark, and check whether you need to file the transfer pricing disclosure form. See our transfer pricing service.

6. No audited financial statements

Every QFZP must prepare and maintain audited financial statements, whatever its revenue, under Ministerial Decision No. 84 of 2025. Companies still get caught by assuming the AED 50 million audit threshold applies to them, or by leaving the audit until the return is due.

How to fix it: plan the audit from the start of the year, keep IFRS-compliant books every month, and book your auditor early. Our audit support prepares the file so the audit runs on time.

7. Not splitting income and costs

A QFZP with both qualifying and non-qualifying income pays 9% on the non-qualifying part. To calculate it, income and the related expenses have to be allocated between the two on a reasonable, documented basis. Companies that run one undivided set of books end up guessing at year-end, and guesses don't survive an FTA review.

How to fix it: set up your chart of accounts or cost centres so income and directly related costs are recorded by stream as they happen.

8. Ignoring the 2025 rule changes

Ministerial Decision No. 229 of 2025 replaced the earlier list of qualifying and excluded activities, with effect from 1 June 2023. It widened qualifying commodities (including industrial chemicals, by-products and environmental commodities such as carbon credits, where a quoted price exists), extended treasury services to a company's own account, and set out when distribution from a Designated Zone qualifies. Because it applies back to 2023, positions taken in earlier returns may now be wrong, in either direction.

How to fix it: re-test your activities against the new list. If an earlier return is affected, a Voluntary Disclosure may be needed, or may let you claim relief you missed.

9. Mixing up QFZP and Small Business Relief

Small Business Relief is not available to a QFZP. Some small free zone companies treat the two as interchangeable, or claim both. For a free zone company with revenue of AED 3 million or less, the right answer may actually be to not be a QFZP and claim Small Business Relief instead. That is a choice to model, not to assume. Our Small Business Relief guide explains the trade-offs.

A quick self-check

Question	If the answer is "no" or "not sure"
Do you know which customers are mainland, free zone, overseas or individuals?	Tag them now; it drives every other test
Have you checked the de minimis test this quarter?	Run the de minimis checker
Is the core work done by staff in the free zone?	Document it, or fix the arrangement before the next period
Are related-party prices supported and documented?	Benchmark and put agreements in place
Is your audit planned for this year?	Book it now
Have you re-tested against Ministerial Decision No. 229 of 2025?	Review earlier returns too

Our QFZP Advisory reviews all of this in one engagement: income streams, contracts, substance, transfer pricing and the de minimis test, with a clear answer on whether you qualify and what to change. For the full rules, read QFZP explained.

General information based on UAE Corporate Tax law and FTA guidance as of November 2026, not tax advice. QFZP status depends on your facts; take advice before relying on it.