Free Zone Corporate Tax in the UAE: When 0% Is Not Automatic

Most free zone owners were told that their company would pay no corporate tax. That was never quite true. Under the UAE Corporate Tax Law, a free zone entity starts as a normal taxable person and earns the 0% rate only on qualifying income, and only while it continues to meet a set of conditions. Miss one and the entire entity moves to the standard rate — for five years.

What is a Qualifying Free Zone Person?

A QFZP is a juridical person incorporated or registered in a UAE free zone that meets all of the following:

1. Adequate substance in the free zone — core income-generating activities carried out there, with enough assets, qualified staff and operating expenditure for the scale of the business. Outsourcing within the free zone is possible if properly supervised.
2. Derives qualifying income.
3. Has not elected to be taxed at the standard rate.
4. Meets the de minimis requirement for non-qualifying revenue.
5. Complies with transfer pricing rules and documentation.
6. Prepares audited financial statements.

Qualifying income vs non-qualifying income

Qualifying income broadly covers income from transactions with other free zone persons (other than from excluded activities) and income from qualifying activities with non-free-zone persons. Qualifying activities include, among others, manufacturing and processing, trading of qualifying commodities, holding of shares, ship management, reinsurance, fund and wealth management, headquarter services and treasury and financing services to related parties and on the entity’s own account.

Excluded activities include most transactions with natural persons (with limited exceptions), regulated banking, insurance (other than reinsurance) and leasing, ownership or exploitation of immovable property other than commercial property dealings with free zone persons, and exploitation of intellectual property that does not meet the qualifying IP rules.

What changed in 2025: Ministerial Decisions 229 and 230

Ministerial Decision No. 229 of 2025 replaced Ministerial Decision No. 265 of 2023 and applies retrospectively from 1 June 2023. The key changes:

• Commodities: the “raw form” restriction was removed. A commodity now qualifies if it is priced by reference to a recognised commodity exchange or a recognised price reporting agency. Ministerial Decision No. 230 of 2025 lists the recognised agencies.
• Environmental commodities such as carbon credits and renewable energy certificates are covered.
• Warehousing guardrail: if warehousing, distribution or inventory management income reaches 51% or more of a trader’s income, the activity no longer qualifies.
• Treasury and financing now extends to activities on the entity’s own account.

Because the rules apply retrospectively, some businesses that assessed themselves as non-qualifying under the old rules may now qualify for earlier periods.

The de minimis test

Non-qualifying revenue is tolerated up to the lower of AED 5 million or 5% of total revenue. Revenue attributable to a domestic or foreign permanent establishment, and certain income from immovable property, is excluded from both sides of the calculation. A single large mainland contract can tip a small free zone company over the 5% line, so this test must be run before the year-end, not after.

Five common reasons free zone companies lose 0%

• Mainland customers. Service income from mainland clients is generally non-qualifying.
• Sales to individuals. B2C income is an excluded activity for most businesses.
• Thin substance. A flexi-desk and no local staff rarely support a complex trading or service operation.
• No audit. Without audited financial statements, the entity cannot be a QFZP.
• Undocumented related-party pricing. Transfer pricing failures can cost QFZP status.

What happens if you fail a condition

A free zone person that stops meeting the conditions is taxed at the standard rates (0% up to AED 375,000, 9% above) on all its taxable income from the start of the tax period in which the failure occurs, and for the following four tax periods. Electing out of the regime voluntarily has the same five-period lock-out.

How to protect your 0% rate

1. Map every revenue stream to qualifying, excluded or other non-qualifying categories.
2. Run the de minimis calculation quarterly.
3. Document substance: staff, premises, decision-making and outsourcing contracts.
4. Put transfer pricing documentation in place for related-party flows.
5. Book your free zone audit early enough to meet the filing deadline.

Our free zone corporate tax and QFZP advisory service delivers a written qualifying-income analysis, and our transfer pricing team prepares the supporting documentation.

Frequently asked questions

Do all free zone companies pay 0% corporate tax?

No. Only Qualifying Free Zone Persons pay 0%, and only on qualifying income. All other taxable income is taxed at 9%.

Is income from mainland UAE customers qualifying?

Generally not, unless it arises from a qualifying activity or falls within specific exceptions such as certain Designated Zone distribution.

Can a QFZP claim Small Business Relief?

No. QFZPs are excluded from Small Business Relief. A free zone company must choose between the regimes based on which conditions it can meet.

Does a QFZP need an audit?

Yes. Audited financial statements are a condition of QFZP status.

How long does losing QFZP status last?

The current tax period plus the following four tax periods.

This article reflects the position as at October 2026 and is general guidance. Book a free consultation for a qualifying income review.