“My company is in a Free Zone, so I don’t pay Corporate Tax” is one of the most common, and most costly, assumptions a UAE business owner can make. Free Zone incorporation does not create an automatic Corporate Tax exemption. What it creates is the possibility of qualifying for a distinct 0 percent rate structure, and that possibility depends on meeting a specific, ongoing set of conditions, not simply on where the trade license was issued.
Does Corporate Tax Apply to Free Zone Companies?
Yes. Free Zone companies are subject to UAE Corporate Tax in exactly the same way as mainland companies, under Federal Decree-Law No. 47 of 2022. Free Zone status alone does not remove a business from the scope of Corporate Tax; it simply opens the door to a separate rate treatment, available only to Free Zone businesses that meet the specific conditions to be recognized as a Qualifying Free Zone Person.
Also Check: Transfer Pricing Services
Free Zone Corporate Tax Rules: 0% and 9% Treatment
A Free Zone company that does not meet the conditions for Qualifying Free Zone Person status is taxed under the standard rate structure applicable to any other taxable person: 0 percent on taxable income up to AED 375,000, and 9 percent above that threshold. Free Zone incorporation on its own does not entitle a business to anything different from a mainland company’s standard treatment.
A Free Zone company that does meet the required conditions is instead taxed under the Qualifying Free Zone Person structure, which works differently: 0 percent on its Qualifying Income, and 9 percent on any Taxable Income that does not meet the definition of Qualifying Income, with no AED 375,000 threshold involved in this alternative structure at all.
Also Check: Corporate Tax Consultancy Services
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What Is a Qualifying Free Zone Person?
A Qualifying Free Zone Person, commonly abbreviated as QFZP, is a Free Zone entity that has been assessed as meeting a specific set of conditions under the Corporate Tax Law, entitling it to the 0 percent rate on its Qualifying Income.
Broadly, the conditions require maintaining adequate substance in the UAE, earning income that falls within defined Qualifying Income categories, staying within the permitted limit for non-qualifying revenue, preparing audited financial statements, and complying with transfer pricing requirements. All of these conditions generally need to be met together, for every Tax Period, rather than assessed once and assumed to continue automatically.
Qualifying Income
Qualifying Income is the category of income taxed at 0 percent for a Qualifying Free Zone Person. It generally covers income derived from transactions with other Free Zone Persons, subject to specific conditions, and income derived from conducting a Qualifying Activity, whether with parties inside or outside the Free Zone, subject to the exclusions and conditions set out under Cabinet Decision No. 100 of 2023 and related Ministerial Decisions. Income falling outside these categories is generally treated as non-qualifying income instead.
Non-Qualifying Income
Non-qualifying income is Taxable Income that does not meet the definition of Qualifying Income, and it is taxed at the standard 9 percent rate for a Qualifying Free Zone Person, without benefiting from any 0 percent band. Common sources of non-qualifying income include income from Excluded Activities, income from transactions with mainland UAE customers that fall outside a Qualifying Activity, and income exceeding the permitted de minimis limit for non-qualifying revenue.
A QFZP’s overall tax position for a period is effectively the sum of 0 percent applied to its Qualifying Income and 9 percent applied to everything else, which makes correctly classifying income between the two categories the single most consequential step in a QFZP’s Corporate Tax calculation.
Qualifying Activities
Qualifying Activities are the specific categories of business activity from which Qualifying Income can be derived, currently governed by Ministerial Decision No. 229 of 2025, which replaced the earlier Ministerial Decision No. 265 of 2023 and applies retroactively from 1 June 2023.
Recognized Qualifying Activities generally include manufacturing or processing of goods and materials, holding shares and other securities for investment purposes, ownership, management, and operation of ships, reinsurance services, headquarter services provided to Related Parties, treasury and financing services provided to Related Parties, fund management services, wealth and investment management services, aircraft financing and leasing, distribution of goods or materials in or from a Designated Zone under specific conditions, and trading of Qualifying Commodities such as metals, minerals, energy, and agricultural commodities traded on a recognized commodities exchange.
For distribution to qualify, goods generally need to be bought and sold in or from a Designated Zone, with imported goods entering through the Designated Zone and supplied to a customer that resells, further processes, or alters them, rather than sold directly for end consumption outside that structure.
Excluded Activities
Excluded Activities are specific categories of activity from which income is treated as non-qualifying, regardless of who the counterparty is. Under the current framework, Excluded Activities generally include most transactions with natural persons, subject to specific carve-outs for activities such as qualifying ship operations, fund management, wealth and investment management, and aircraft financing and leasing, along with banking activities, most insurance activities, other than qualifying reinsurance and headquarter services, most finance and leasing activities outside the treasury services carve-out, ownership or exploitation of intellectual property other than Qualifying Intellectual Property, and ownership or exploitation of immovable property, other than commercial property located in a Free Zone and transacted with other Free Zone Persons.
Because the specific scope of both Qualifying and Excluded Activities has already been revised once, from Ministerial Decision No. 265 of 2023 to Ministerial Decision No. 229 of 2025, businesses should confirm their activity classification against the current Decision rather than an earlier summary that may no longer reflect the latest scope.
Also check: Corporate Tax Services in UAE
The De Minimis Requirement
A Qualifying Free Zone Person is permitted a limited amount of non-qualifying revenue without losing its QFZP status entirely, provided that non-qualifying revenue stays within the de minimis threshold. Under the current rules, the de minimis requirement is satisfied where non-qualifying revenue for a Tax Period does not exceed the lower of 5 percent of the QFZP’s total revenue for that period or AED 5,000,000. Exceeding this threshold in a Tax Period generally causes the business to fail the de minimis condition, one of the core requirements for maintaining QFZP status for that period.
Compliance Requirements for QFZP Status
Beyond correctly classifying income, a Qualifying Free Zone Person needs to meet several ongoing compliance obligations to maintain its status. This includes maintaining adequate substance in the UAE, sufficient assets, qualified full-time employees, and operating expenditure relative to the activities being carried out, preparing audited financial statements every Tax Period under Ministerial Decision No. 84 of 2025, which applies regardless of the QFZP’s revenue level, and complying with applicable transfer pricing rules, including arm’s length pricing and documentation where thresholds are exceeded on related party transactions.
Registering for Corporate Tax and filing a Corporate Tax return, separately reporting Qualifying and non-qualifying income, remain required for a QFZP in exactly the same way as for any other taxable person, since QFZP treatment operates within the standard registration and filing framework rather than replacing it.
Conditions for Maintaining QFZP Status
QFZP conditions are not assessed once at setup and then assumed to continue indefinitely. A Free Zone business needs to continue meeting the substance, qualifying income, de minimis, audited financial statement, and transfer pricing conditions in every single Tax Period to retain its status.
A business that met every condition in its first Tax Period as a QFZP but fails even one condition in a later period is generally treated as having breached its QFZP status for that later period, regardless of its earlier compliance history.
Losing QFZP Status
A Free Zone business can lose its QFZP status by failing to continue meeting any one of the required conditions during a Tax Period, whether that involves falling short of the substance requirements, exceeding the de minimis threshold for non-qualifying revenue, failing to maintain audited financial statements, or breaching applicable transfer pricing requirements.
Losing QFZP status is not limited to the single period in which the breach occurred; it generally results in the business being taxed at standard rates for the period of the breach and a specified number of subsequent Tax Periods, meaning a single compliance failure can carry consequences well beyond the year it happened in.
Free Zone Examples
The UAE’s Free Zone landscape spans dozens of individual free zones across the different Emirates, from DMCC and JAFZA in Dubai, to ADGM in Abu Dhabi, to sector-specific zones such as Dubai Internet City or Dubai Multi Commodities Centre, each licensed and regulated by its own free zone authority.
For Corporate Tax purposes, QFZP eligibility depends on the same federal conditions, substance, qualifying income, de minimis, audited financials, and transfer pricing compliance, regardless of which specific free zone a business is licensed in. Being located in a well-established free zone does not itself confer any Corporate Tax advantage that a business in a smaller or newer free zone would not equally have access to, provided the same conditions are met.
Also check: Corporate Tax Audit in UAE
Frequently Asked Questions (FAQs)
Do Free Zone companies pay Corporate Tax in the UAE?
What is a Qualifying Free Zone Person?
What is the de minimis rule for QFZP status?
What activities qualify a Free Zone business for the 0% rate?
Do Qualifying Free Zone Persons need audited financial statements?
What happens if a Free Zone business loses QFZP status?
Does being in a well-known free zone give a Corporate Tax advantage?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Free Zone Corporate Tax treatment is one part of the full compliance picture. For a complete overview of UAE Corporate Tax rates, registration, and filing, see our complete UAE Corporate Tax guide.
Farahat & Co. helps Free Zone businesses assess QFZP eligibility, classify Qualifying and non-qualifying income correctly, and maintain the ongoing conditions required to retain their status.
Contact Farahat & Co. today to discuss your Corporate Tax requirements.
