UAE Free Zone Tax Regulations 3rd generation: substance requirements

Adequate substance: the new standard

The third generation of regulations (MD 229/2025 + MD 231/2025) defines adequate substance through a combined qualitative and quantitative test.

Quantitative criteria

• Adequate FTEs: the entity must have qualified personnel proportional to activity complexity. No fixed number, but internal guidance suggests minimum:
• Trading: 2 commercial FTEs + 1 administrative.
• Passive holding: 1 director + 1 compliance officer.
• IP holding: 3 demonstrable technical FTEs.
• OPEX: operating expenses directly related to qualifying income generation.
• Physical assets: own office or lease ≥ 12 months.

Qualitative criteria

• Core Income Generating Activities (CIGAs) performed in the free zone.
• Strategic decisions made and documented in UAE.
• Outsourcing permitted ONLY if:

1. Provider is in the same free zone, or
2. It is a related QFZP entity, or
3. Under verifiable arm's length.

What the FTA is requesting in reviews

• Employment contracts with job descriptions aligned to CIGAs.
• Committee logs with minutes (not just signed acts).
• Photographic/digital evidence of real office use.
• Banking traceability of operating expenses.

Immediate action

LatAm group QFZP entities must prepare an auditable substance file before year-end 2025: contracts, org chart, minutes, lease and reconciliation of OPEX vs qualifying income.