Free Zone Corporate Tax
Corporate Tax for Free Zone Companies: Registration and the 0% Question
Free zone incorporation does not exempt a company from corporate tax — it offers a conditional 0% rate on qualifying income for those who register, maintain substance and satisfy the tests every single year. The difference between those two sentences is where free zone businesses get hurt.
- QFZP eligibility tested against your actual income mix
- Registration and elections filed correctly
- De minimis monitoring so status isn't lost by accident
- Substance and audit requirements mapped to your zone
Dubai-based, FTA-aware corporate tax support for UAE businesses.
Quick Answer
Every free zone entity must register for corporate tax. Those meeting the Qualifying Free Zone Person (QFZP) conditions pay 0% on qualifying income and 9% on the rest; those failing any condition pay 9% like mainland companies — for that year and, in some breach cases, subsequent years. Conditions include adequate substance in the zone, audited financial statements, transfer pricing compliance, qualifying income sources and staying within the de minimis limit for non-qualifying revenue.
The QFZP Conditions — All of Them, Every Year
QFZP status is not granted; it is continuously satisfied. Fail one condition in a year and the whole year's income is taxed at 9%. The conditions interlock: substance in the zone, qualifying income sources, audited accounts, transfer pricing documentation and the de minimis ceiling on non-qualifying revenue.
- Adequate substance: people, premises and activity in the zone
- Income from qualifying activities and transactions
- Audited financial statements — no exceptions
- Transfer pricing rules and documentation observed
- Non-qualifying revenue within the de minimis limit
Qualifying Income and the De Minimis Trap
Qualifying income broadly covers transactions with other free zone persons and defined qualifying activities (manufacturing, fund management, logistics and others), while mainland-market revenue generally does not qualify. The de minimis rule tolerates non-qualifying revenue only up to the lesser of 5% of total revenue or AED 5 million — breach it and QFZP status collapses for the year.
- Free zone-to-free zone transactions: generally qualifying
- Defined qualifying activities: qualifying even with mainland customers
- Excluded activities never qualify regardless of counterparty
- Mainland branch profits taxed at 9% separately
The Election Decision
Some free zone companies are better off electing into the standard regime deliberately — taking 9% with the AED 375,000 zero band and small business relief eligibility rather than sustaining QFZP compliance costs for marginal benefit. The right answer is arithmetic, not ideology: model both regimes on your real numbers.
- 1Income mapped against qualifying categories
- 2De minimis headroom calculated on projections
- 3Cost of QFZP compliance vs tax saved compared
- 4Status maintained or election made — deliberately
What 'Adequate Substance' Actually Means
Substance is the condition free zone companies most often underestimate. The core-income-generating activities of the business have to actually happen in the zone — with real employees, real premises and real expenditure proportionate to the activity. Activities can be outsourced, but only to another entity within the zone and under your supervision. A brass-plate company that books qualifying income while its people and decisions sit elsewhere does not meet the test, and loses the 0% for the year.
- Core income-generating activities performed within the zone
- Adequate employees, premises and operating expenditure
- Outsourcing allowed only within the zone, under supervision
- Decision-making and management genuinely located in the zone
The Common Ways Free Zone Companies Lose 0%
QFZP status is lost the same handful of ways every year: selling into the mainland market beyond the de minimis limit, failing to obtain audited financial statements, skipping transfer pricing documentation on related-party dealings, or drifting into an excluded activity. Because failing a single condition reprices the entire year at 9%, the discipline is to monitor all of them continuously rather than checking once at year-end.
- Mainland-market revenue beyond the de minimis limit
- No audited financial statements for the period
- Missing transfer pricing documentation on related-party deals
- Drifting into an excluded activity
The Mainland-Branch Split
A free zone company can serve the mainland through a branch, but that branch's profit is taxed at 9% and does not qualify for 0%. The head office can still be a Qualifying Free Zone Person on its qualifying income, provided the non-qualifying mainland activity stays within the de minimis limit and is accounted for separately. Clean segmentation of the two income streams — qualifying at 0%, mainland branch at 9% — is what keeps the qualifying side intact.
- A mainland branch's profit is taxed at 9%, not 0%
- The head office can stay a QFZP on qualifying income
- Non-qualifying activity must respect the de minimis limit
- Segment and account for the two income streams separately
Related Exiloz Services & Guides
Do free zone companies pay corporate tax in the UAE?
They register and file like everyone else. Qualifying Free Zone Persons pay 0% on qualifying income and 9% on the rest; entities failing the conditions pay 9% across the board.
What income qualifies for the 0% rate?
Broadly, transactions with other free zone persons and defined qualifying activities — with excluded activities and most mainland-market revenue taxed at 9%.
What is the de minimis rule?
Non-qualifying revenue must stay within the lesser of 5% of total revenue or AED 5 million. Exceeding it forfeits QFZP status for the year.
Are audited financials mandatory for free zone companies?
For QFZP status, yes — audited statements are a hard condition, whatever the company's size.
Can a free zone company choose to pay 9% instead?
Yes — an election into the standard regime is available and sometimes cheaper overall once QFZP compliance costs are counted. We model it before you choose.
Does having a free zone licence mean I pay no corporate tax?
No. A free zone licence offers a conditional 0% on qualifying income only. You must register, meet every QFZP condition each year, and you still pay 9% on any non-qualifying income.
What counts as a qualifying activity?
Defined categories such as manufacturing, goods processing, fund and wealth management, holding of shares, and logistics, among others. Transactions with other free zone persons generally qualify; most mainland-market sales do not.
Do free zone companies need transfer pricing documentation?
Yes — observing the transfer pricing rules and holding documentation for related-party transactions is one of the QFZP conditions, not an optional extra.
Can a free zone company have both 0% and 9% income?
Yes. A QFZP pays 0% on qualifying income and 9% on non-qualifying income — for example a mainland branch's profit — provided the non-qualifying share stays within the de minimis limit and the two streams are accounted for separately.
The rest of what we do
Licence, visas, bank account, books and the first tax return — handled by the same team, so the structure has to survive its first year.
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VAT Return Filing
VAT201 prepared, reconciled and filed, with the position documented.
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Corporate Tax Registration
Every taxable person must register, including free zone companies applying 0%.
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Corporate Tax Filing
Returns, elections and the qualifying income analysis behind them.
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Accounting & Bookkeeping
Books kept audit-ready from month one, not reconstructed at year end.
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Audit Preparation
Schedules, reconciliations and the evidence your auditor will ask for.
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Payroll & WPS
Payroll, WPS files and end-of-service calculated correctly.
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Tax Residency Certificate
Day-count position verified and the FTA document pack assembled.
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Customs Registration
Client code and Mirsal registration, before your first shipment, not after.
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Is Your 0% Actually Safe?
One failed condition reprices your whole year at 9%. We will test your income mix, substance and documentation against the QFZP rules — before the FTA does.
