Understanding UAE’s New Free Zone Tax Regulations – MD 229 and 230

The UAE Ministry of Finance’s new Free Zone Tax regulations introduce market-based commodity pricing and new eligibility criteria for structured finance. The rules tighten economic-substance tests and bring transfer-pricing requirements in line with Organization for Economic Co-operation and Development-Base Erosion and Profit Shifting (OECD BEPS) standards to preserve 0 percent tax benefits for Qualifying Free Zone Persons (QFZP) under the Corporate Tax Law.

The Ministry of Finance released Ministerial Decision No. 229 of 2025 (MD 229) and Ministerial Decision No. 230 of 2025 (MD 230) as third-generation regulations for the UAE’s Free Zone tax framework on August 28, 2025. They replace Ministerial Decision No. 265 of 2023 and apply retroactively from June 1, 2023.

Unlike earlier revisions, which clarified limited aspects of the 0 percent corporate tax regime, the new regulations tell how qualifying activities, pricing, and substance are assessed.

Qualifying activities and income for Free Zone Persons

Expanded commodity coverage

The most visible reform concerns the treatment of commodity trading. MD 229 increases the commodities eligible for the 0 percent rate by removing the “raw form” restriction and introducing a market-based pricing test. Now these commodities also qualify:

• Metals, minerals, industrial chemicals, energy and agricultural products, and related by-products; and
• Environmental commodities such as carbon credits and renewable-energy certificates.

To qualify, the commodity must have a quoted market price issued by a Recognized Commodity Exchange Market or a Recognized Price Reporting Agency (PRA).

Associated by-products (secondary materials from production or extraction) are included as well, provided they are not packaged for retail sale and maintain transparent pricing. Related commodities listed in the same GCC Harmonized System chapter as an eligible item may also qualify.

Structured commodity finance

The regulations now also cover structured commodity-finance activities, like prepayment, forfaiting, countertrade, warehouse-receipt finance, export-receivable finance, project finance, Islamic trade finance, and streaming finance, when they are linked to physical trading. Financial derivatives used for hedging commodity risk are also recognized under the new MD 229 rules.

The 51 percent distribution guardrail

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MD 299 now restricts some logistics-linked activities if they do not qualify the criterion. If 51 percent or more of a Free Zone trader’s income derives from warehousing, distribution, or inventory-management functions, the activity stops to qualify. The guardrail distinguishes genuine commodity traders from entities primarily engaged in distribution or logistics services.

Treasury and qualifying-income scope

The scope of “Treasury and financing services to Related Parties” has been expanded to include “Treasury and financing services to Related Parties or for its own account”. Income from cash management, self-investment, and internal financing thus falls under qualifying income.

Distribution activities qualify when goods are imported through a Designated Zone and supplied to a customer who resells, processes, or alters them for resale or to a public-benefit entity. This adjustment supports humanitarian and government supply chains.

Qualifying income categories under Cabinet Decision No. 100 of 2023 remain unchanged:

• Income derived from transactions with other Free Zone Persons (except for excluded activities);
• Income derived from transactions with Non-Free Zone Persons but only for qualifying activities that are not excluded activities;
• Income derived from ownership or exploitation of qualifying intellectual property; and
• Any other income provided the QFZP satisfies the de-minimis requirements.

Excluded activities

Income from certain activities cannot benefit from the 0 percent rate, even if performed in a Free Zone:

• Transactions with natural persons, except shipping, aircraft, and investment-management exemptions;
• Regulated banking, leasing, or insurance (except reinsurance);
• Intellectual-property (IP) exploitation not meeting the qualifying-IP criteria; and
• Ownership or exploitation of immovable property outside Free Zone-to-Free Zone commercial dealings.

Economic-substance conditions

Core-activity requirements

A QFZP must carry out its core income-generating activities (CIGAs) within the Free Zone and maintain adequate assets, staff, and operational expenditure in proportion to its business scale.

Outsourcing rules

CIGAs can be outsourced to related or third parties within the Free Zone if the entity maintains proper supervision on them. Outsourcing may extend to non-related UAE entities or external providers under supervised arrangements for qualifying IP income.

Employee allocation

An employee may not be counted toward multiple CIGAs simultaneously. If a Free Zone entity conducts both manufacturing and treasury activities, each must be supported by dedicated personnel.

De-minimis threshold

QFZP can accommodate incidental non-qualifying income if it does not exceed the lower of AED 5 million (US$1.3 million) or 5 percent of total revenue. It covers income from excluded activities, income from activities that are not qualifying activities where the counterparty is a non-Free Zone person, and transactions with Free Zone persons who are not the beneficial recipient of the relevant services or goods.

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Certain revenue categories are excluded from both the numerator (non-qualifying revenue) and denominator (total revenue) of the de-minimis calculation, like revenue attributable to domestic permanent establishments, foreign permanent establishments, non-commercial immovable property in Free Zones, and commercial immovable property transactions with non-Free Zone persons. The carve-out prevents domestic PE income (already taxed at 9 percent) from distorting the de-minimis test.

Audit and reporting obligations

Audited financial statements

Article 5 of MD 229 has been updated to specify that a QFZP must prepare audited financial statements in accordance with Ministerial Decision No. 84 of 2025. Under MD 84, effective for tax periods commencing on or after January 1, 2025, requires:

• Tax groups must file audited special-purpose financial statements regardless of revenue; and
• Standalone entities must maintain audited accounts if revenue exceeds AED 50 million (US$13.6 million) or if claiming QFZP benefits.

Transfer-pricing compliance

All QFZPs must comply with arm’s-length pricing rules under Articles 34-35 of the Corporate Tax Law and Ministerial Decision No. 97 of 2023. They need to adhere to related-party schedules when transactions exceed AED 40 million (US$10.8 million) and submit itemized disclosures for categories above AED 4 million (US$1 million).

For large businesses, those with UAE turnover above AED 200 million (US$54.4 million) or part of a multinational group exceeding AED 3.15 billion (US$857.7 million) in consolidated revenue, both Master File and Local File documents would be required. Non-compliance risks disqualification from the Free Zone regime and reclassification as a standard 9 percent taxpayer.

Voluntary opt-out option

Firms may voluntarily elect to leave the QFZP regime and be taxed under the standard 9 percent corporate rate on income above AED 375,000 (US$102,110). But, once this election is made, the entity cannot re-enter the QFZP regime for at least five tax periods.

Market-based pricing and recognized agencies

A second regulation, MD 230, establishes the list of Recognized Price Reporting Agencies (PRAs) whose quoted prices confirm eligibility for commodity trading. The designated PRAs are S&P Global (Platts and Fertecon), Argus Media, ICIS, OPIS, RIM Intelligence, CRU Group, Quantum Commodity Intelligence, Fastmarkets, General Index, ICE, MONTEL, Spark Commodities, and Expana.

A quoted price now refers to the published price of a qualifying or related commodity from any listed exchange or PRA. It replaces the earlier subjective “raw form” test with measurable, verifiable benchmarks as per the international trading practice.

Effects on commodity traders

The removal of the “raw form” restriction opens up a lot of opportunities for businesses trading refined products, processed commodities, industrial chemicals, and by-products. For example, fertilizer traders dealing in urea (HS Code 3102) can now qualify because benchmarks exist on Platts and Argus, steel billet traders storing goods in Free Zones qualify provided logistics revenue remains below 51 percent and carbon credit traders are already covered as agencies like MONTEL and Expana are named in MD 230.

Traders must, however, prove that quoted prices are sourced from recognized agencies. Absence of such evidence may result in disqualification from the 0 percent rate.

Transfer-pricing dimension

PRA-based pricing serves as both a benchmarking tool and a compliance challenge for intra-group commodity trades. The transfer pricing file must explain which PRA price was chosen and how adjustments were made for quality, timing, delivery terms, or other factors. Without this document, the Federal Tax Authority could argue that the related party price is not at arm’s length and lead to potential loss of QFZP status.

Impact on Free Zone businesses

The new regulations reward Free Zone companies that demonstrate genuine operational presence and transparent way of functioning. Businesses previously excluded can now potentially access the 0 percent rate with proper documents and pricing evidence. The clarification on treasury services for own account resolves uncertainty about passive investment income for treasury centers.

The retroactive application from June 1, 2023, allows businesses to reclaim benefits they may have foregone under the more restrictive earlier rules.

At the same time, companies that rely on hybrid logistics-trading models must segregate distribution income to stay below the 51 percent guardrail. Whether one sticks to transfer-pricing transparency and continuous financial audits will determine one’s long-term eligibility for Free Zone benefits.

(US$1 = AED 3.67)

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