In the UAE, they have benefited from these tax breaks for years to attract investment and spur economic growth. The introduction of Corporate Tax at the Federal Decree-Law No. 47 of 2022, effective for financial year beginning after June 1, 2023. These incentives remain available subject to conditions. One key feature of the system is that Qualifying Income Verified, which decides if a Free Zone company qualifies for the 0% Corporate tax rate.
This blog will answer what is qualifying income, how to verify process work for UAE Free Zone companies, examples and what is different than non-qualifying income UAE. The knowledge of these is important for resiliency and maximizing tax benefits within the ambit of Qualifying Income under UAE Corporate Tax.
What is Qualifying Income?
Relevant income of a UAE Qualified Person Relevant Income is defined as the equivalent to applicable income of a Qualifying Free Zone Person (QFZP) which would be recorded and taxed at a Corporate Tax rate of 0%. A QFZP is defined as a Free Zone Person (a legal entity that was formed, established or registered in a UAE Free Zone) that fulfills certain requirements under Article 18 of the Corporate Tax Law.
These conditions include:
- Maintaining adequate presence with employees, assets, and operating expenses for core activities.
- Receiving qualifying income approved under Cabinet Decision 100 of 2023.
- Compliance with transfer pricing regulations and proper financial statement documentation as per IFRS.
- Opting for a 0% tax rate instead of the 9% rate.
- Meeting a de minimis threshold for non-qualifying income (≤ 5% of total revenue or AED 5 million).
• Qualifying income sources include:
- Transactions with other Free Zone Persons (excluding profit from excluded activities).
- Qualifying activities with non-Free Zone Persons, provided they are not excluded activities.
- Income related to qualifying intellectual property using the nexus approach.
- Revenue from the Free Zone real estate sector.
- Other income within the de minimis rule.
Qualifying activities encompass manufacturing, goods processing, logistics, holding shares/securities, ship management, regulated fund management, and trading in qualifying commodities, as per Ministerial Decision 265 of 2023.
Non-Qualifying Income UAE
The 0% rate doesn’t apply to all income generated by a Free Zone company. Non qualifying income UAE includes:
- Excluded Activities Income (e.g. banking, insurance and finance/lease except certain instances of real estate management/construction, or professional services including consulting/accounting).
- Receipts from domestic Permanent Establishment (such as, a branch on the mainland).
- Some Property Transactions (e.g. sales of commercial property to non-Free Zone Persons).
- Income in excess of de minimis or does not otherwise qualify.
If non-QFZP revenue exceeds the de minimis threshold (“DMT”), or if some other requirements of QFZP are not satisfied, a business is disqualified as a QFZP and taxed at 9% on all income for the taxable year in which it fails to qualify plus the following four years.
How Is Qualifying Income Verified for UAE Free Zone Businesses?
The key issue of how qualifying income is substantiated really goes back to strong compliance and documentation. The Federal Tax Authority (FTA) confirms by the following:
Corporate Tax Registration and Filing:
All Free Zone Persons are required to register with the FTA and file an annual return (within 9 months of year-end), stating income segregation.
Audited Financial Statements:
Required for QFZP (in a number of instances, filings since 2025), must be prepared in accordance with IFRS. These are a strong foundation on which to tell qualifying income UAE from non-qualifying.
Supporting Documentation:
Agreements, invoices and receipts to evidence the counterparties (Free Zone vs. non-Free Zone) and nature of transactions.
Material evidence (such as employee records, lease contracts, proofs of expenses).
Transfer pricing documentation, if any (master/local files of related-party transactions).
For IP income: Nexus computations following the R&D spend.
FTA Reviews and Audits:
The FTA may require proof that other evidence is valid. The Free Zone Persons Guide (CTGFZP1 – May 2024) offers examples and explanations to help with the correct classification.
Well qualifying income confirmed procedure reduces the hazards. Companies need to keep good records from day one and seek professional advice for complicated deals.
Importance of Accurate Record-Keeping
To avoid any issues during qualifying income verification, Free Zone companies should:
- Keep track of qualifying and non-qualifying income independently.
- Keep updated agreements and invoices
- Prepare detailed tax computations
- File accurate corporate tax returns
- Good documentation lowers the audit risk and prevents you from losing your tax benefit.
Conclusion
Knowing what Qualifying Income Verified is important for UAE Free Zone companies in their journey of corporation tax. With the right record-standing, aligning business operations with regulations and monitoring non-qualifying income, UAE companies can safely take advantage of Free Zone tax benefits otherwise known as partial and full exemption from corporate tax.
Your Free Zone status under UAE Corporate Tax law can further be safeguarded, if necessary, by seeking professional tax advisory support.
