Free zone qualifying income — three traps in the UAE free-zone tax rules.

The UAE free-zone tax rules — Cabinet Decision 100 of 2023 and Ministerial Decision 229 of 2025 (which replaced MD 265 of 2023) — are being read three different ways by tax teams in the UAE. We unpack the three traps we keep seeing in client positions — and what the consequence is at filing.

1. Substance is tested per activity; income is classified per transaction.

Two different tests are routinely collapsed into one. Adequate substance is assessed at the level of the free-zone person for each qualifying activity: the core income-generating activities must actually be carried out in the zone, with adequate qualified staff, assets and operating expenditure — or outsourced to a related party in the zone under your supervision. Separately, each stream of income is classified as qualifying or non-qualifying, and that classification is effectively a per-transaction question.

This is the most common position error we have re-papered: clients treat both as a once-a-year statement. The substance file has to evidence real activity in the zone, and the income trail has to be tagged at source so qualifying and non-qualifying revenue can be told apart at filing.

“Substance is tested per activity in the zone; income is classified per transaction. Neither survives as a year-end memo.”

2. There is no annual election to be a QFZP.

A free-zone person is automatically a Qualifying Free Zone Person for a tax period whenever it meets the conditions — there is no yearly election to claim the 0% rate. The only election available is the option to opt out and be taxed under the standard 9% regime. What is sticky is failure: breach the conditions in a period and the person loses QFZP status from the start of that tax period and for the four subsequent tax periods. Boards should treat the conditions as binding for the life of the current commercial structure, not something re-chosen each return.

3. Non-qualifying revenue is capped — watch the de minimis.

Qualifying status is not lost the moment a sliver of non-qualifying revenue appears: the de minimis rule allows non-qualifying revenue up to the lower of 5% of total revenue or AED 5 million. Above that ceiling, QFZP status falls away for the period. The excluded activities are now enumerated in Ministerial Decision 229 of 2025, which replaced Ministerial Decision 265 of 2023. In our experience, activities that share a contract, a counterparty or an underlying asset with an excluded activity invite scrutiny — so map them against both the list and your de minimis headroom before signing.