A free zone licence does not automatically mean zero Corporate Tax. Under UAE law, a free zone company can pay 0% on its qualifying income only if it is a Qualifying Free Zone Person and keeps meeting every condition throughout the year. If it fails even one, it can lose the 0% rate for five tax periods.
This guide explains the conditions, the rates, which activities qualify and the mistakes that cost free zone companies their 0% status.
Free Zone Person vs Qualifying Free Zone Person
A Free Zone Person is a company or other juridical person incorporated, established or registered in a UAE free zone. A Qualifying Free Zone Person is a Free Zone Person that meets all the conditions in Article 18 of the Corporate Tax law and the related Ministerial Decisions. Only a Qualifying Free Zone Person can benefit from the 0% rate.
Corporate Tax Rates for Free Zone Companies
- 0% on qualifying income, for a Qualifying Free Zone Person.
- 9% on taxable income that is not qualifying income.
A free zone company that is not a Qualifying Free Zone Person is taxed like a mainland company: 0% on taxable income up to AED 375,000 and 9% above that.
Conditions to Be a Qualifying Free Zone Person
A Qualifying Free Zone Person must meet all of these conditions:
- Adequate substance in the UAE. It must have enough staff, assets and operating expenses in the UAE for its activities.
- Qualifying income. It must earn income that qualifies under the rules.
- No election for regular tax. It must not have chosen to be taxed at the standard rates.
- Transfer pricing compliance. It must follow the arm's length rules and transfer pricing documentation requirements.
- De minimis test. Its non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower.
- Audited financial statements. It must prepare audited financial statements in line with Ministerial Decision No. 84 of 2025.
The De Minimis Test Explained
Non-qualifying revenue in a tax period must stay at or below the lower of:
- 5% of the company's total revenue, or
- AED 5,000,000.
For example, a company with total revenue of AED 20 million can have up to AED 1 million of non-qualifying revenue (5%). A company with AED 200 million of revenue is capped at AED 5 million, not AED 10 million.
Qualifying Activities
Ministerial Decision No. 229 of 2025 lists the qualifying activities, including:
- Manufacturing and processing of goods or materials.
- Trading of qualifying commodities.
- Holding shares and other securities for investment.
- Ownership, management and operation of ships.
- Reinsurance, fund management, and wealth and investment management services.
- Headquarter services, and treasury and financing services, to related parties.
- Financing and leasing of aircraft.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Activities ancillary to these.
Excluded Activities
Income from these activities is generally not qualifying income:
- Transactions with natural persons, except for certain activities such as ship operation, fund management, wealth and investment management, and aircraft financing.
- Banking activities.
- Insurance activities, other than reinsurance and certain headquarter services.
- Finance and leasing activities, other than those specifically allowed.
- Ownership or exploitation of immovable property, except certain commercial property in a free zone transacted with free zone persons.
This is why a free zone company that sells mainly to individuals, or provides general services to mainland customers, often does not qualify for 0% on that income.
What Happens If You Fail a Condition?
If a Qualifying Free Zone Person fails any condition at any time during a tax period, it stops being a Qualifying Free Zone Person from the beginning of that tax period, and it cannot regain the status for the four following tax periods. In practice, that means standard Corporate Tax rates for five tax periods.
Registration, Returns and Small Business Relief
- Free zone companies must register for Corporate Tax, even if they expect to pay 0%. See our registration guide.
- They must file a Corporate Tax return within nine months of the end of each tax period.
- A Qualifying Free Zone Person cannot use Small Business Relief. See our Small Business Relief guide.
Frequently Asked Questions
Do free zone companies pay Corporate Tax in the UAE?
A Qualifying Free Zone Person pays 0% on qualifying income and 9% on other taxable income. Free zone companies that don't qualify pay the standard rates.
What is the de minimis rule for free zone companies?
Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower.
Do free zone companies need audited financial statements?
Yes. A Qualifying Free Zone Person must prepare audited financial statements.
What happens if a free zone company fails the conditions?
It loses Qualifying Free Zone Person status from the start of that tax period and for the next four tax periods.
Do free zone companies need to register for Corporate Tax?
Yes, every free zone company must register, even if it expects to pay 0%.
Note: This article provides general information only and is not tax advice. Free zone rules are detailed and depend on your activities and income. Confirm your position with the Federal Tax Authority or a qualified tax professional.