Corporate Tax

UAE Corporate Tax for Free Zone Companies

2025-09-05 · 4 min read · By Aureus Worldwide

The promise of "0% tax" draws thousands of businesses into UAE free zones, but under the corporate tax regime that 0% is conditional, not guaranteed. A free zone company sits squarely within Federal Decree-Law No. 47 on Corporate Tax, must register and file, and only enjoys 0% on its qualifying income if it meets the Qualifying Free Zone Person (QFZP) conditions. Misreading this is one of the most expensive mistakes a free zone owner can make. This guide explains how corporate tax actually applies to free zone companies and what it takes to keep the 0% benefit.

First: free zone companies are not exempt

A common misconception is that free zone companies are outside corporate tax. They are not. Every free zone company must register for corporate tax and file an annual return, just like a mainland company. Registration is administrative and entirely separate from the rate that applies, see our corporate tax registration guide. The QFZP regime then determines whether your income is taxed at 0% or the standard rates.

The standard rates as a baseline

If a free zone company is not a QFZP, or elects out, it is taxed under the standard regime:

This baseline matters because it is the fallback whenever the 0% qualifying-income benefit does not apply.

What is a Qualifying Free Zone Person?

A QFZP is a free zone entity that meets all of the following broad conditions:

• Earns qualifying income as defined by the rules
• Maintains adequate substance in the UAE, real people, premises and activity
• Complies with transfer pricing rules and documentation
• Prepares audited financial statements
• Keeps non-qualifying revenue within the de minimis limit
• Does not elect into the standard regime

Meet them all and qualifying income is taxed at 0%; fall short on any and you risk the standard rates. Our dedicated QFZP guide goes deeper on each condition.

Qualifying vs non-qualifying income

Broadly, qualifying income tends to include transactions with other free zone persons and certain qualifying activities, while income from excluded activities or from mainland customers is often non-qualifying. The precise definitions are detailed and have been refined since the regime began, so this is an area to confirm carefully with the FTA rather than assume. Non-qualifying income above the de minimis threshold is taxed at the standard rates.

The de minimis test

The rules allow a limited amount of non-qualifying revenue without losing QFZP status. If your non-qualifying revenue stays within the permitted threshold, set as a small percentage of total revenue or a capped amount, whichever applies, you keep the 0% benefit on qualifying income. Exceed it and you can lose QFZP status for the period. Because the figures are set by the FTA and may change, confirm the current de minimis limits before relying on them.

Substance is non-negotiable

The 0% rate rewards genuine economic activity in the free zone. That means people actually performing the core income-generating activities in the UAE, premises appropriate to the business, and real decision-making and expenditure taking place locally. A letterbox company will not qualify. Substance also intersects with ESR reporting obligations that many free zone entities must meet.

Transfer pricing applies too

A point that surprises many free zone owners: the QFZP regime requires compliance with transfer pricing rules. Transactions with related parties must be priced on an arm's-length basis and supported by documentation, preventing profit from being artificially shifted into the 0% bracket. If your free zone company transacts with group companies or connected parties, build transfer pricing in from the start.

Should you elect into the standard regime?

Not every free zone company benefits from chasing QFZP status. If most of your income is non-qualifying, or the cost of meeting the conditions outweighs the benefit, electing into the standard regime, 0% up to AED 375,000, 9% above, can be the smarter, simpler choice. Smaller free zone businesses may also consider Small Business Relief where they qualify (a revenue-threshold-based, time-limited relief). This is a strategic decision based on your income mix and structure.

The records the regime demands

To claim and defend 0%, you generally need audited financial statements, records separating qualifying from non-qualifying income, evidence of substance, transfer pricing documentation, and proof that non-qualifying revenue stayed within the de minimis limit. Maintaining these year-round, not at filing time, is what separates a clean 0% position from an exposed one.

The free zone regime has been clarified repeatedly since launch. Do not rely on older guidance, confirm the current definitions, thresholds and conditions with the FTA before making decisions.

How Aureus Worldwide helps

Aureus Worldwide assesses whether your free zone company meets the QFZP conditions, separates qualifying from non-qualifying income, and maintains the substance, accounting and corporate tax records the regime requires. We handle registration, computation and filing, and we always direct you to confirm changeable specifics, including the de minimis limits, with the FTA. We can also arrange the required audit through our licensed partners. To get your free zone tax position right, contact us.

Talk to our chartered accountants →