Navigating Free Zone Corporate Tax: Can You Switch Between QFZP Status and Normal CT Rules?

With the introduction of Corporate Tax (CT) in the UAE, many Free Zone companies are reassessing how to best manage their tax obligations. A common question we hear is:

"Can I alternate between the 0% Free Zone exemption (QFZP status) and the standard Corporate Tax regime to optimise tax losses and overall efficiency?"

The Short Answer: No, You Can't Jump In and Out Freely

While Free Zone Persons (FZPs) may be eligible to apply for 0% Corporate Tax as a Qualifying Free Zone Person (QFZP), this is not a casual annual election.

If your Free Zone company opts out or fails to meet QFZP conditions in any tax period — intentionally or otherwise — the consequence is clear:

You lose QFZP status for that year and the next four tax periods.

This means you cannot simply switch back to the 0% regime in the following year if your circumstances change.

Understanding QFZP: What Is It?

A Qualifying Free Zone Person (QFZP) is a Free Zone entity that meets specific criteria to benefit from a 0% Corporate Tax rate on qualifying income. To attain and maintain QFZP status, a Free Zone Person must:

1. Maintain Adequate Substance in the UAE: Conduct core income-generating activities within the Free Zone, with sufficient assets, qualified employees, and operating expenditures.

2. Derive Qualifying Income: Earn income from eligible activities as defined by the Corporate Tax Law.

3. Not Elect to Be Subject to Standard CT Regime: Refrain from choosing to be taxed under the standard Corporate Tax rules.

4. Comply with Transfer Pricing Rules and Documentation Requirements: Adhere to arm's length principles in transactions and maintain proper documentation.

5. Meet the De Minimis Requirements: Ensure non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is lower.

6. Prepare Audited Financial Statements: Maintain and submit audited financial statements per International Financial Reporting Standards (IFRS).

Why Would You Opt Out of QFZP Status?

Some Free Zone businesses consider opting into normal CT to:

• Utilize Tax Losses Effectively: Standard CT rules may offer more flexibility in offsetting taxable losses. 
• Avoid Restrictions on Dealings with Mainland UAE Customers: Operating under standard CT can facilitate business with mainland clients without jeopardizing tax status. 
• Reduce Compliance Burdens Associated with QFZP Status: Meeting QFZP conditions involves stringent compliance; standard CT may simplify obligations. 

This can make strategic sense, however, making this choice results in a five-year lockout from the 0% regime.

So, What Should You Do?

Strategic Tax Planning Is Essential

Tax planning for Free Zone entities under the UAE CT law requires careful forecasting and scenario analysis. The decision to pursue or forego QFZP status should be made proactively and with full awareness of the long-term effects.

Need guidance on whether to apply for QFZP status or remain fully taxable?

Get in touch with our experts — we’ll help you structure your Free Zone business in a way that aligns with your commercial goals and maximises your tax efficiency.