The United Arab Emirates (UAE) has always been known as a business-friendly destination with a tax-free reputation. However, with the recent introduction of the UAE corporate tax regime, it’s important for businesses to understand how their profits will be taxed—and more importantly, what qualifies as tax-exempt or qualifying income.
In this detailed guide, we’ll explain what qualifying income means under UAE corporate tax law, how it applies to different types of businesses, and how companies can benefit from tax exemptions or reduced rates based on their income classification.
Understanding UAE Corporate Tax Framework
Before diving into qualifying income, it’s essential to understand the corporate tax structure in the UAE.
Corporate Tax Basics
As of June 1, 2023, the UAE implemented a federal corporate tax on business profits, aligning with global tax transparency standards and OECD guidelines.
- Corporate tax rate: 9% on taxable profits exceeding AED 375,000
- Small businesses and startups: Profits up to AED 375,000 are taxed at 0%
- Free zone companies: May continue to enjoy 0% corporate tax on certain income
This brings us to the key term—qualifying income.
What is Qualifying Income in UAE Corporate Tax?
Qualifying income refers to specific types of income earned by free zone companies or certain entities that are exempt from UAE corporate tax under defined conditions.
It is a tax-friendly income that continues to benefit from 0% corporate tax, provided the company meets certain criteria set by the Federal Tax Authority (FTA).
Why Is It Important?
- Helps free zone companies retain their tax advantages
- Reduces the effective tax burden on compliant businesses
- Allows businesses to structure operations for tax efficiency
- Encourages investment and international business in the UAE
If your business earns qualifying income, you may continue to enjoy tax-free status, even under the new corporate tax law.
Who Is Eligible to Earn Qualifying Income?
The concept of qualifying income primarily applies to entities registered in UAE free zones.
To benefit, the business must:
- Be a Qualifying Free Zone Person (QFZP)
- Maintain adequate substance in the UAE
- Derive income from specific qualifying activities
- Not have elected to be subject to regular corporate tax
- Comply with transfer pricing and economic substance rules
Only businesses that meet all these conditions can classify certain earnings as qualifying income.
What is a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person is a free zone company that meets the criteria defined in Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023.
Requirements to Be a QFZP
- Incorporated in a UAE free zone
- Maintains adequate substance in the free zone (physical office, staff, etc.)
- Earns qualifying income as defined by law
- Does not opt out of the free zone corporate tax benefit
- Complies with arm’s length and transfer pricing regulations
Failing to meet any of these criteria could result in the loss of 0% tax eligibility.
Types of Qualifying Income in the UAE
Not all income is treated equally under the UAE corporate tax regime. Only specific types of revenue qualify for the 0% tax rate.
Income from Transactions with Other Free Zone Persons
If you’re doing business within the same or another free zone, and both parties are Qualifying Free Zone Persons, this income may be considered qualifying.
Examples include:
- B2B service contracts between free zone entities
- Wholesale transactions
- Inter-company services
However, transactions with mainland UAE customers are usually non-qualifying, unless they fall into certain exceptions.
Income from Qualifying Activities
The UAE Cabinet defines a list of qualifying activities that, if carried out by a QFZP, may generate qualifying income.
Common Qualifying Activities Include:
- Manufacturing and processing of goods
- Holding of shares and securities
- Reinsurance and fund management
- Logistics and warehousing
- Headquarter or treasury services
- International shipping
- Trading of goods with foreign jurisdictions
If your income comes from these areas, you may be eligible for 0% corporate tax on that portion.
Income from Domestic or Foreign Permanent Establishments
Income that comes from a foreign permanent establishment (PE) may also be treated as qualifying income if the business follows relevant international tax rules and exemptions.
However, domestic PEs in the UAE mainland usually disqualify the entire company from being a QFZP, unless clear separation is maintained.
Income Attributable to Immovable Property in a Free Zone
If you earn rental or property-related income from commercial real estate located in a free zone, that income is qualifying, provided it’s not used for non-qualifying purposes.
However, residential property income or income from property used in mainland UAE business operations is not eligible.
What is Non-Qualifying Income in the UAE?
Non-qualifying income refers to income that does not fall under the qualifying activities or structures, and is thus subject to the standard 9% corporate tax.
Examples of Non-Qualifying Income:
- Income from retail sales to UAE mainland customers
- Profits from non-qualifying activities like consultancy, hospitality, or event management (if not listed as qualifying)
- Service income from mainland unless specifically exempted
- Transactions with non-free zone entities without meeting substance or activity criteria
If non-qualifying income exceeds 5% (or AED 5 million) of the total income, the entire company may lose its QFZP status for that tax period.
What is the De Minimis Rule?
To support minor revenue leakages, the UAE corporate tax law includes a de minimis threshold.
De Minimis Condition Explained
A QFZP can still be eligible for the 0% tax rate if its non-qualifying income:
- Does not exceed 5% of total income, or
- Is less than AED 5 million (whichever is lower)
If a company crosses this limit, it loses its tax-free status for that financial year and is taxed on total income at 9%.
How to Calculate Qualifying vs. Non-Qualifying Income
To determine corporate tax liability, companies must segregate qualifying and non-qualifying income in their financial reporting.
Key Guidelines for Segregation
- Maintain separate books for qualifying activities
- Clearly allocate direct and indirect costs
- Use transfer pricing rules for intra-group transactions
- Conduct annual audits and disclosures as per FTA requirements
Using professional tax advisors or accounting firms is highly recommended to avoid compliance errors.
Free Zone Businesses: Corporate Tax Scenarios
Let’s explore a few practical cases:
Scenario 1: Trading Company in JAFZA
- Imports and re-exports electronics to GCC countries
- No transactions with mainland UAE
- Meets substance and activity test
Scenario 2: IT Consultancy Firm in Dubai Silicon Oasis
- Serves UAE mainland clients
- Offers digital marketing and strategy consulting
- No physical separation between free zone and mainland services
Scenario 3: Logistics Company in Sharjah Free Zone
- Provides warehouse storage to other free zone companies
- Handles international freight forwarding
- No UAE mainland activities
Importance of Maintaining Substance in UAE Free Zones
To benefit from qualifying income exemptions, companies must demonstrate adequate economic substance in the UAE.
Substance Requirements Include:
- Having a real office in the free zone
- Hiring full-time employees
- Managing operations locally
- Making core income-generating decisions in the UAE
Failure to prove substance could result in FTA denying QFZP status, leading to 9% tax on all income.
Transfer Pricing & Arm’s Length Principle
All related party transactions must follow the arm’s length principle. This means:
- Prices and terms should match those used between unrelated parties
- Proper documentation and transfer pricing reports must be maintained
- Adjustments may be made by tax authorities if income shifting is detected
This is especially relevant for multinational free zone entities operating in both UAE and overseas markets.
How to File Corporate Tax for Qualifying Income
Free zone companies with qualifying income still need to register for corporate tax and file returns, even if their tax rate is 0%.
Filing Process Includes:
- Registering with the Federal Tax Authority (FTA)
- Filing annual Corporate Tax Return
- Submitting Audited Financial Statements (if required)
- Preparing Transfer Pricing Disclosures
- Keeping records for 7 years
Timely and accurate filing ensures continued eligibility for the 0% tax rate on qualifying income.
Conclusion
As the UAE corporate tax landscape evolves, understanding qualifying income is no longer just an accounting issue—it’s a business survival strategy. Whether you’re a free zone company, multinational group, or startup, correctly classifying and segregating your income can mean the difference between paying 0% or 9% tax.
Make sure your company:
- Identifies whether it’s a Qualifying Free Zone Person
- Monitors the type of income it earns
- Follows transfer pricing and substance rules
- Keeps detailed financial records
Working with tax professionals and staying informed is crucial to making the most of the UAE’s business-friendly tax regime while staying fully compliant.
If you’re not sure whether your income qualifies, it’s time to consult an expert and secure your tax advantages before it’s too late.
FAQs
What is qualifying income under UAE corporate tax?
Qualifying income refers to specific types of income earned by free zone businesses that are eligible for the 0% corporate tax rate, such as income from other free zone entities, international trade, and approved qualifying activities.
Who is eligible for qualifying income benefits?
Only a Qualifying Free Zone Person (QFZP)—a free zone entity that meets substance, activity, and compliance conditions—is eligible for tax-free treatment of qualifying income.
Is income from UAE mainland considered qualifying income?
No. In most cases, mainland income is non-qualifying and subject to 9% tax, unless it falls under limited exceptions with proper separation.
What happens if a company earns both qualifying and non-qualifying income?
The company must segregate both income streams and ensure that non-qualifying income stays below 5% or AED 5 million to maintain tax-free status.
Can I voluntarily opt out of qualifying income tax benefits?
Yes, a free zone entity can elect to be subject to regular corporate tax, especially if its primary business is with mainland UAE.
Is qualifying income taxed at 0% automatically?
No. You must register, file returns, and prove compliance with all FTA and MOF regulations to maintain 0% tax on qualifying income.
