The definition of "fat free" is not really clear. Below, I have mostly quoted various official sources (each listed).
The Canadian Food Inspection Agency states that the definition for fat free is "less than 0.5 g fat per reference amount and per stated serving of food".
The USA Food and Drug Administration mandates that the dairy industry call 2 per cent milk "reduced fat"; 1 per cent milk "lowfat"; and skim milk "fat free."
The USDA policy is to allow a statement about a meat product's or poultry product's fat content that shows the portion of lean. This description is based on the percent of fat by total weight of the product (including water). Percent fat free statements are acceptable if the label also states the product's fat content. For example "95 percent fat free. Contains 5 percent fat."
Listing the percent of fat is important. The consumer may think "95 percent fat free" means that 95 percent of the fat has been removed. By stating the percent of fat, the label indicates that the "95 percent fat free" refers only to the portion of the product that is not fat.
Because percent fat free statements are based on the percentage of fat by total weight, not calories, the consumer may be confused. The chart on page 87 illustrates the difference between "percent fat free" and "percentage of calories from fat."
And the question was asked of the U.S. Food and Drug Administration Center for Food Safety and Applied Nutrition
A Food Labeling Guide September, 1994 (Editorial revisions June, 1999)... May a "Fat Free" claim be made even though the product is essentially 100% fat, for example, a cooking oil spray that has a very small serving size?
The answer follows. Although the food has less than 0.5 grams of fat per reference amount and technically qualifies to make a "fat free" claim, such a claim on a product that is essentially 100% fat would be misleading. Under section 403(a)(1) and 201(n) of the act, the label would have to disclose that the product is 100% fat.
However, the terms "fat free" and "100% fat" or "all fat" are contradictory and would likely confuse consumers. FDA believes a claim such as "for fat free cooking" is more appropriate, so long as it was not made in a misleading manner and the words "fat free" were not highlighted, printed in a more prominent type, or otherwise set off from the rest of the statement.