Ministerial Decision No. 229 of 2025 replaced MD 265 of 2023 as the governing instrument on qualifying and excluded activities. What makes it unusual is that it applies from 1 June 2023, not from its issue date. Every QFZP that filed its first return under MD 265 filed under an instrument that has since been retroactively replaced.

The consequence cuts both ways, which is why the review matters regardless of which direction your business sits in.

• More favourable in places. The expanded qualifying list now includes industrial chemicals, environmental commodities such as carbon credits and renewable energy certificates, and certain treasury and financing services for own account. Businesses that treated those as non-qualifying and paid 9% may have overpaid, and a voluntary disclosure can recover it.
• Tighter in others. MD 229 hardened the guardrail on distribution and logistics. A QFZP earning 51% or more of its revenue from distribution, warehousing, logistics or inventory management cannot treat commodity trading as a qualifying activity.

Excluded activities are a separate category from non-qualifying income, and that distinction is the one businesses most often miss. Non-qualifying income can be managed within the de minimis limit; excluded activity income cannot, because the activity itself has to come out of the entity. Banking, insurance, finance and leasing to non-free-zone persons sit here, as does immovable property outside a free zone.

My standard process now includes a two-pass classification review at the start of every second period. The current year assessed against MD 229, and the first-period position re-tested against it. Where the classification changes, a voluntary disclosure follows. The FTA’s comparative analytics will surface undocumented differences between the two periods, and explaining them afterwards costs more than documenting them now.

A technology services client with an IFZA licence, software implementation and managed services, dealing mostly with other free zone entities and overseas clients. Revenue in the AED 1.5 to 2 million range. He had registered for CT, understood the QFZP framework existed, and had correctly worked out that his income looked qualifying. On classification, he was right.

Substance was the problem. He was working from his apartment in Abu Dhabi, not from IFZA premises or any physical free zone office. The address on the licence was a virtual office arrangement, the kind many registrants use. No employees in the zone, no dedicated space used regularly, and every core income-generating activity happening on the mainland.

When I explained the substance condition, his first response was to point at the licence. That is the instinct I meet almost universally. The business is in a free zone, the licence says so, the 0% rate is a free zone benefit, and the logic feels watertight.

Filing a QFZP return in those circumstances would have been a claim that could not be supported under review. The FTA cross-references the CT return against the VAT registration address, the bank account location and the EmaraTax profile, and all three pointed to mainland Abu Dhabi.

My advice was to file as a standard taxable person for the first period and pay 9% on taxable income above AED 375,000. Substance would be addressed for future periods, either by building genuine free zone presence or restructuring to reflect where the activity actually happens. The immediate tax impact was modest. Getting it right was not, because on AED 1.8 million of revenue at a 40% margin, five years of lockout is a materially different number.

A technology services firm in an Abu Dhabi free zone, revenue around AED 12 to 14 million. Predominantly qualifying income from free zone and overseas clients, with a growing mainland client base.

I built a dashboard showing the qualifying and non-qualifying split, updated monthly with every invoice. In the second half of the tax year, with three mainland contracts in advanced negotiation, the projected year-end position showed non-qualifying revenue landing at 5.7%. Above the line.

Two of the three contracts were restructured, invoiced to the clients’ free zone subsidiaries rather than their mainland parents. That worked because the delivery genuinely went to the free zone entity and the commercial relationship could honestly be structured that way. The third was sized to keep the total position within threshold across every revenue scenario. The client established a mainland branch the following quarter, and mainland work now flows through it.

The point is not the restructuring. It is that the problem was visible in September, when it could still be solved, rather than in December once the invoices were raised and the classification locked.

The QFZP framework is universal. The failure modes are not.

• Technology and professional services. The substance pattern. People are mobile, working from client offices, home, or wherever is convenient, and the free zone address is registration rather than operational location.
• Trading and commodities. The 51% revenue test under MD 229, common in building materials and industrial goods where trading and logistics revenue mix. Distribution activities are qualifying only when the counterparty is another free zone person or an overseas party.
• Financial services and holding structures. Usually the clearest qualifying profile, since fund management, wealth and investment management, and treasury for own account qualify regardless of counterparty. The risk is the excluded activities line: finance and leasing to non-free-zone persons is categorically excluded.
• Real estate investment. Ownership or exploitation of immovable property outside a free zone is an excluded activity. Structures set up before CT existed, when the free zone and mainland property distinction was tax-irrelevant, are the acute cases.

On that last one, the problem is not fixable inside the free zone. The asset has to move, and the only question is whether it moves proactively or after the position has already been challenged.

The CT Law lets a free zone person voluntarily elect the standard 9% regime instead of QFZP, and there are legitimate reasons to do it, such as significant accumulated losses worth carrying forward.

What most businesses do not know is that this election is irrevocable for five consecutive tax periods. The version I want every finance team aware of is not the strategic one but the administrative one. Someone ticks the wrong box in the Elections section of the EmaraTax return, not as a decision but as an error. There is no mechanism to reverse an election made by mistake rather than deliberately.

A business that was properly QFZP at 0% ends up in the standard regime for five years because of a checkbox. The protection is a deliberate pre-filing review of the Elections section, which matters more for a QFZP than for any mainland business.

MD 84 of 2025 made audited financial statements mandatory for every QFZP regardless of revenue, for periods beginning on or after 1 January 2025. That requirement is now reasonably well understood. What the audit needs to contain is not.

Having audited accounts is not sufficient. They need to show the segregation between qualifying and non-qualifying income in a form that lets the de minimis calculation be independently verified. When I review first audits, the accounts present total revenue, income, expenses and profit correctly, but never map revenue against the qualifying activities framework or reference MD 229 in the notes. The CT return then reports a qualifying income figure from an advisor’s working paper rather than from the accounts, and the FTA’s cross-referencing finds a split it cannot trace.

The cause is a coordination gap. The auditor is satisfying IFRS presentation requirements. The CT advisor is preparing a return from the accounts. For mid-market businesses those are usually different firms, and nobody owns the overlap.

My practice before every QFZP audit is to give the appointed auditor the income classification analysis. Each revenue stream mapped against the qualifying activities framework, the de minimis calculation, and the presentation format the accounts should use. Agreed before fieldwork, not after. The qualifying income figure then flows directly from the audited accounts into the return, and the cross-reference finds consistency rather than a gap.

There is a timing consequence too. For a December year end, the audit needs to start in January or February, with fieldwork through March and final accounts by June. Anything not started by April is compressing the timeline uncomfortably.

Before the substance documentation, before de minimis tracking, before the annual review: make sure every invoice is coded correctly when it is raised, not reclassified later.

The de minimis calculation is a percentage of what is already in the accounts. That was determined at the front end, when the deal was agreed and the invoice generated. A mainland client invoice from March does not become qualifying income in December because someone realises the ratio is tight. The classification locked when the invoice was raised.

Which means the most important QFZP compliance conversation is not with the accountant at year end. It is with whoever agrees deals and raises invoices, at the start of every engagement. Is the counterparty a free zone entity, an overseas party, or mainland? If mainland, does the activity qualify under MD 229 regardless of counterparty, or only for free zone and overseas counterparties?

Every de minimis breach in my experience was caused by invoices going to the wrong entity because nobody asked the question at the right moment. Not by anyone abandoning the framework deliberately.

The FTA’s QFZP audit programme is moving from awareness to enforcement. With a full population of first-period returns in hand, it can compare year one against year two and cross-reference income classification against VAT return data. The approach is risk-based, prioritising inconsistent classifications and unusual de minimis positions.

E-invoicing makes classification visible in real time. The pilot begins July 2026 for businesses above AED 50 million, mandatory from January 2027. Every invoice will be transmitted at issuance, including counterparty type, which is the foundation of QFZP classification. A threshold breach currently found in December becomes visible in October.

The second-period MD 229 review is now urgent. Most first-period returns were filed under MD 265. The second period must be prepared under MD 229, and undocumented inconsistencies between the two will appear in the FTA‘s comparative analytics without explanation.

I should be straight about one limit on my own experience. I have not yet received a formal FTA audit notification specifically challenging a QFZP position, because the CT audit programme is still building toward the volume where most practitioners have that experience. What I describe above comes from the regulatory framework, from FTA guidance, and from what the market is beginning to see in 2026. Not from having defended a QFZP position in a completed audit.

The most common and most costly mistake I see is treating QFZP as something established once. Businesses pass an eligibility assessment, elect QFZP in the first return, then re-elect each year because that is what was done last year. The conditions never get re-tested against the current year’s facts.

QFZP is not a licence. It is a conditions test satisfied period by period, and a failure in any single period triggers the five-year consequence regardless of how clean the prior ones were.

The drift is rarely dramatic. A new mainland client comes in through a referral and does not feel significant enough to flag. A team member stops commuting to the free zone office because the client work is on site. The business takes on work sitting in an excluded category without anyone recognising it, and by year end one or more conditions have quietly moved out of compliance.

What makes this expensive is that it is invisible. No FTA notification tells you substance has weakened or the ratio is trending up. In my experience the exposure sits in the filing history until an audit surfaces it, and by then the five-year consequence applies to periods already filed and closed.

If you are not certain your position holds this period, that uncertainty is worth resolving now rather than after a return is locked in. Book a free consultation with AH Chartered Accountants in Abu Dhabi.