26 August 2026 · Free Zone
The Free-Zone First Return Needs Its Own Review
The Federal Tax Authority's Free Zone Persons guide says a Free Zone Person must test its status against the Corporate Tax Law, qualifying-income rules, activity conditions and compliance requirements. A first return therefore needs more than a licence copy. Review the entity's income streams, substance, related records and any election before presenting the return as a standard mainland filing.
Exiloz Management & Tax Consultant · Dubai-based FTA-focused advisory · VAT, corporate tax & accounting
A free-zone licence is not a tax result
A free-zone licence is not a tax result. A Free Zone Person must test its status as a Qualifying Free Zone Person, classify its income and meet the conditions in the Corporate Tax Law and implementing decisions. The FTA guide describes 0% Corporate Tax on Qualifying Income, while income that does not meet the Qualifying Income conditions is subject to the standard 9% rate. The first return must show that split.
That means the reader can act after this page: list every income stream, assign the relevant activity, collect the evidence for the classification and flag the amounts that do not fit. Federal Decree-Law No. 47 of 2022 is the base law. Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025 supply important activity and income rules. This list tells you what to collect before claiming the reduced rate, not after the FTA asks for an explanation.
Do not promise 0% because the business operates in a named free zone. Our view is to treat the licence as the first document, not the conclusion. If the records cannot show what was sold, to whom, from where and under which activity, the QFZP position is not ready for a first return.
The income map matters more than the zone name
Fit starts with the income map. Put each material stream on its own line and identify the customer type, contract, place of performance, delivery route and business activity. The FTA's published activity decision lists manufacturing, processing, qualifying-commodity trading, holding investments, certain financial services, distribution from a Designated Zone and logistics among Qualifying Activities, subject to the conditions.
Excluded Activities include transactions with natural persons in many cases, banking, insurance, certain finance and leasing, and most immovable-property activity. The exact exceptions matter. A free-zone company that sells to a mainland customer has not automatically failed, and a free-zone company that sells to another free-zone person has not automatically qualified. The contract and activity decide the analysis.
The de minimis test is a status test, not a blanket 0% allowance. The FTA Tax Returns Guide describes the limit as the lower of 5% of total adjusted Revenue or AED 5 million for non-qualifying Revenue. Calculate it for the relevant Tax Period and retain the revenue schedule. Do not use a rounded percentage from a previous year.
Collect evidence for the condition that creates the rate
Scope the file around the condition that creates the tax treatment. Keep the licence, lease or premises evidence, staff and operating records, contracts, invoices, customer details, related-party papers and revenue schedules. The FTA guide also requires a QFZP to maintain adequate substance, comply with transfer-pricing rules and documentation requirements, and prepare and maintain audited Financial Statements for the Corporate Tax Law.
Some cases need a separate professional. FTA Decision No. 6 of 2026 applies to a QFZP engaged in distributing goods or materials in or from a Designated Zone, for Tax Periods starting on or after 1 January 2026. It requires an agreed-upon procedures report from an independent external auditor and supporting customer and import evidence. Exiloz does not perform statutory audits or issue that report.
Exiloz can prepare the transaction index, reconcile the revenue schedule and gather the customer licences, declarations, sales agreements, invoices, customs declarations and shipping documents that an auditor may need. That is preparation support. The independent auditor owns the report. Keep the distinction in the engagement scope and in the working papers.
Separate the streams before testing the QFZP position
Begin with a revenue ledger, not a tax rate. For each stream, record the counterparty, activity, product or service, location, invoice trail and related records. Then mark qualifying, non-qualifying, exempt or unresolved. Reconcile the stream totals to the accounts. If the ledger combines warehouse, distribution and logistics income, separate it before testing the QFZP position.
Next, test the conditions. Review substance in the UAE, the relevant activity list, the de minimis calculation, the transfer-pricing file, audited financial statements and any election to apply the standard rules. For distribution from a Designated Zone, add the customer resale and import route evidence required by FTA Decision No. 6 of 2026.
Use a worked illustration. A QFZP has AED 420,000 of income that qualifies and AED 100,000 of other taxable income after allocation. AED 420,000 x 0% = AED 0. AED 100,000 x 9% = AED 9,000. The illustrative total is AED 9,000, but only if the classification and expense allocation are supported.
The return should show why each stream received its treatment
Put the conclusion beside the evidence, not in a marketing note. The file should show each stream, the rule used, the supporting record, the tax treatment and the person who approved the classification. If a stream is not clearly covered, do not force it into Qualifying Income to make the return attractive. A conservative classification is easier to explain than an unsupported 0% claim.
The current rules also carry a practical reporting burden. A QFZP may need schedules for qualifying Revenue, substance and other income, and the standard tax computation for income outside the qualifying definition. Where FTA Decision No. 6 of 2026 applies, the report is due no later than 30 days after the Corporate Tax return deadline, unless the FTA sets another date. Keep that date on the file.
Unsettled: a contract can combine activities, customers and delivery routes in a way that does not fit one published example. The FTA materials explain the categories and conditions, but they do not give a universal answer for every mixed contract. Escalate that fact pattern before submission. The point of the first review is to expose the uncertainty while there is still time to document it.
| Income or condition | Treatment | Evidence to hold |
|---|---|---|
| Qualifying Income of a QFZP | 0% Corporate Tax, subject to QFZP conditions | Activity, contract and revenue support |
| Income outside Qualifying Income | 9% Corporate Tax under the FTA guide | Allocation and transaction records |
| Non-qualifying Revenue for de minimis test | Lower of 5% of adjusted Revenue or AED 5 million | Revenue schedule for the Tax Period |
| Designated Zone distribution | Additional procedures may apply under FTA Decision No. 6 of 2026 | Customer, sales and import records |
Frequently Asked Questions
For checking a free-zone first-return position.
Does a free-zone company file Corporate Tax?
Yes, a free-zone company should not assume that its licence removes the Corporate Tax compliance task. The Federal Tax Authority's Free Zone Persons guide says the regime applies to Free Zone Persons and sets conditions for Qualifying Free Zone Person status. Check the entity's classification and return position against the law and FTA guidance.
Does every free-zone income stream qualify?
No. The FTA guide distinguishes Qualifying Income from income linked to Excluded Activities and other non-qualifying amounts. A first return should map each material stream to the applicable activity and retain the supporting contracts, invoices and records. The correct treatment depends on the entity's facts and the implementing rules.
What should a free-zone business review first?
Start with the legal entity, licence, activity list and income streams. Then review the records supporting substance, customers, related parties and the classification of income. The Federal Tax Authority's Free Zone Persons guide should be read with the Corporate Tax Law and implementing decisions before the return is filed.
Can Exiloz review a free-zone first return?
Yes. Exiloz can map free-zone income, review the QFZP evidence and prepare a first-return adjustment pack. The Federal Tax Authority and the Corporate Tax Law remain the authorities for the final treatment, so the file should show the basis for every classification.
Is the free-zone position clear?
Exiloz reviews your free-zone income, QFZP evidence and first-return computation before submission.