Key points
- Free zone companies must register and file a corporate tax return
- The 0% rate applies only to qualifying income of a Qualifying Free Zone Person
- Fail a condition and the company pays 9% for that year and the following four
- Audited accounts and real substance in the zone are required
The basic position
When corporate tax was announced, free zones were promised that their tax incentives would be respected. The law delivers that through a special category: the Qualifying Free Zone Person (QFZP).
A QFZP pays 0% on qualifying income and 9% on any other taxable income. A free zone company that is not a QFZP is taxed like a mainland company: 0% up to AED 375,000 and 9% above.
Conditions to be a Qualifying Free Zone Person
All of the following must be met throughout the tax period:
- The company is incorporated or registered in a free zone
- It maintains adequate substance in the free zone: staff, assets and spending that match its activities
- It earns qualifying income
- It has not elected to be taxed at the standard rate
- Its related-party transactions follow the transfer pricing rules and it keeps the required documentation
- Its non-qualifying revenue stays within the de minimis limit
- It prepares audited financial statements
What counts as qualifying income
Broadly, qualifying income is:
- Income from transactions with other free zone persons, where that person is the beneficial recipient, unless the income comes from an excluded activity
- Income from qualifying activities, even when earned from mainland or foreign customers
- Income from qualifying intellectual property, within limits
Qualifying activities include manufacturing and processing of goods, trading of qualifying commodities, holding shares and securities, ship ownership and operation, reinsurance, fund management, wealth and investment management, headquarters and treasury services to related parties, aircraft financing and leasing, logistics services, and distribution of goods from a designated zone.
Excluded activities include most transactions with natural persons, banking, insurance, finance and leasing subject to exceptions, and income from immovable property other than commercial property in a free zone let to other free zone persons.
The de minimis rule
A QFZP can earn a small amount of non-qualifying revenue without losing its status. The limit is the lower of 5% of total revenue or AED 5 million in the tax period.
Go over the limit and the company stops being a QFZP for that tax period and the four that follow. During that time it is taxed at 9% above AED 375,000 on all its income.
Selling to the mainland
This is where most free zone trading and service companies are caught. Income from mainland customers is qualifying income only if it comes from a qualifying activity. A free zone consultancy billing mainland clients, for example, earns non-qualifying income.
If a free zone company has a branch or other permanent establishment on the mainland, the profit of that establishment is taxed at 9%.
What a QFZP gives up
The 0% rate has a cost. A QFZP cannot use the AED 375,000 zero-rate band on its non-qualifying income, cannot claim small business relief, and cannot join a tax group. For a small free zone company with mostly mainland income, being taxed as an ordinary company can be simpler and no more expensive.
What free zone companies should do
- Register for corporate tax if you have not already
- Map each income stream to qualifying or non-qualifying
- Measure non-qualifying revenue against the de minimis limit during the year, not after it
- Document your substance: office, employees, where decisions are made
- Appoint an auditor in good time
- Price related-party transactions at arm's length and keep the evidence
This guide is general information based on UAE rules as understood in October 2026. Tax rules change and depend on your facts. Speak to us before acting on it.