UAE Free Zones and Corporate Tax Applicability

The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by the United Arab Emirates (“UAE”), on 09 December 2022. – Federal Tax Authority, UAE

Free Zones are business jurisdictions located across 7 Emirates in the UAE and companies from around the world are established in these Free Zones. The administration of the companies are governed by the respective Free Zone regulatory authority.

The companies established in these Free Zones have incentives and exemptions to Value-added tax and zero rated corporate tax. They are also exempted from customs duties while doing import or re-export from freezones to other countries excluding GCC Countries. Freezone companies can avail Zero Percent Customs Duty on Exports to GCC, if there is a 40% value-addition done to the product in the UAE before re-exporting to the GCC.

Also, there is an excise tax applicable for companies that import, stocks, or distributes items such as tobacco, energy drinks and sugary drinks. The tobacco and tobacco products have an excise tax of 100% applicable on the product price. Similarly, for electronic smoking devices and its liquids it is 100%, and there is 50% excise duty on carbonated and sugary drinks.

Free Zone and Zero Rated Corporate Tax

Freezone companies can enjoy 0% corporate tax based on their modus operandi and location of their business in UAE. Free Zone companies can avail 0% corporate tax if it is categorized as a QFZP ( Qualifying Free Zone Person).

How can a Free Zone Company become a Qualifying Free Zone Person (QFZP)?

For a Free Zone Company to be recognized as a QFZP, the Free Zone company must generate ‘Qualifying Income’. Also, they must also have adequate substance ( office infrastructure and staff).

This table below highlights the scope of Corporate Tax Applicability in the Free Zones.

Free Zone Company Vs Mainland Company – Corporate Tax Applicability

Qualifying Free Zone Person and 0% Corporate Tax in UAE

Its mandatory that all Companies in the UAE shall register for Corporate Tax. However the tax applicability depends on various factors including but not limited to the modus operandi of business. In general, a Qualifying Freezone Person ( QFZP) enjoy a 0% Corporate Tax.

Every person conducting business in a Free Trade Zone is automatically categorized as a Free Zone Person. However, in order to be a ‘Qualifying Free Zone Person‘ has to meet certain conditions.

In case of not meeting the criteria, the Free Zone person will not become a Qualifying Free Zone Person (QFZP)and become ineligible for exemption from Corporate Tax.

Following are the criteria the Free Zone Company must meet to become a Qualifying Free Zone Person

• The entity must have a permanent setup in UAE with staff, offices, and significant business activities in UAE.
• The Free Zone Company must earn ‘Qualifying Income’ in UAE
• Transfer Pricing rules and regulations, and proper documentation of the transactions are kept intact.
• Non-Qualifying Income must be less than 5% of the total revenue or AED 5 Million which ever is lesser (De-minimis)
• The company must maintain proper financial records and conduct yearly financial audits.
• The company has not elected out of the Free Zone tax benefits voluntarily

What is Qualifying Income for a QFZP?

The Qualifying Income for a Free Zone Person to make them eligible for a 0% Corporate Tax are the following:

• Income generated from doing business between two Free Zone companies. ( The receiver shall be the beneficiary recipient of the product and cannot be resellers)
• Income generated by doing business with a non-freezone company. The business must conduct qualifying activity (Please refer to the qualifying Activities in the below section)
• Any other Income provided the Qualifying Free Zone Person satisfies de minimis requirements. De Minims rule (5% or AED 5 Million which ever is lesser)- The non-qualifying activities must not exceed the threshold of 5% of total revenue or AED 5 million which ever is lesser.

All other mainland-sourced income of any kind is subject to the 9% Corporate Tax for the Free Zone Company. For Free Zone businesses to gain an unfair advantage when compared to mainland registered companies, there is the concept of Disqualifying Income.

What are the Qualifying Activities?

Here are the Qualifying Activities that the Free Zone Person can conduct to generate ‘Qualifying Income’ and get recognized as ‘Qualifying Free Zone Person’.

• Manufacturing of goods or materials.
• Processing of goods or materials.
• Trading of Qualifying Commodities.
• Holding of shares and other securities for investment purposes.
• Ownership, management and operation of Ships.
• Reinsurance services.
• Fund management services.
• Wealth and investment management services.
• Headquarter services to Related Parties.
• Treasury and financing services to Related Parties.
• Financing and leasing of Aircrafts.
• Distribution of goods or materials in or from a Designated Zone.
• Logistics services.

Disqualifying Income is any income the Free Zone Company has derived by delivering services or sale of goods to a Mainland company in UAE. The profits from these transactions will be subject to the 9% CT if they exceed the threshold amount. Also, this will forfeit their entire tax exemption.

How to Calculate the Corporate Tax in UAE?

The adjusted Taxable income for business under the new CT regime will be the accounting net profit, after adjustments for certain items including the election of unrealized gains/losses, entertainment, interest received, and donations, among others.

That 9% tax will be calculated on the taxable profits and not on the gross revenue of the business. Profits above the sum of AED 375,000 will be taxed under the CT regime.

Hence, Corporate Tax is introduced in UAE to strengthen its position as a financial hub of the world. Also, to comply with international financial regulatory bodies and other organizations such as the OECD to introduce more transparent financial practices.

UAE Corporate Tax 2026 – FAQs

Here are some of the most frequently asked questions regarding the corporate tax regime and eligibility criteria for becoming a Qualifying Free Zone Person.

1. What are the Common mistakes that cost Free Zone companies their 0% status?

Free Zone companies do not automatically qualify for 0% corporate tax. They must be under the eligibility criteria prescribed to become a ‘Qualifying Free Zone Person’. It is advisable to contact an experienced Business Consultant or Tax Advisor to study whether your Free Zone Company falls under the QFZP Category.

3. What is the Corporate Tax Registration Late Fee?

The Corporate Tax registration and filing is mandatory procedure even if the company is eligible for 0% tax rate. There is late fee and penalty of AED 10,000 for not registering and filing returns the right time.

The Corporate Tax registration is mandatory for all companies established in the UAE. There is late fee and penalty of AED 10,000 for not registering for corporate tax within the first 3 months of incorporation.

Furthermore, often Free Zone companies miss their deadlines for preparing Audited Financial Statements and failing the documentation to result in loss of QFZP Status.

Similarly, for Free Zone companies in a Designated Zone they must maintain proper billing for export to mainland and to other free zones to differentiate the qualifying activities and qualifying income. Otherwise, they may face difficulty to prove the QFZP status.

4. Does Offshore Company in UAE subject to Corporate Tax?

Yes, Offshore Company in UAE is subject to Corporate Tax, and they must mandatorily register and file the returns. Worldwide income from a UAE Company including Offshore Companies registered at the Ajman Offshore, RAKICC Offshore, and Jebel Ali Offshore will come under the Corporate Tax regime in the UAE.

However, holding Companies enjoy ‘Participation Exemption’ in the Corporate tax Law.

5. Does an International Consulting Companies enjoy 0% Corporate Tax in UAE?

No, Global Income generated by a UAE company is taxable in the UAE at a standard corporate tax rate of 9%. If International Consulting is conducted via company based in UAE, the income generated is taxable under the standard 9% corporate tax rate,

6. Does distribution of goods (Commercial Trading) by free zone companies qualify for 0% Corporate Tax in UAE?

Distribution of goods internationally (High-Sea Sales) is a qualifying activity and eligible for 0% Corporate Tax, If the free zone company is established in a designated zone with substance.

Connect with our expert team of Tax Consultants to know more about the Corporate Tax applicability for your organization.