Corporate tax in the UAE has reshaped how Free Zone businesses operate. Starting from June 2023, Free Zone companies must understand how corporate tax applies to them. The Federal Tax Authority (FTA) and the Ministry of Finance (MoF) introduced a system where some Free Zone businesses will pay 0% tax on qualifying income and 9% on non-qualifying income. Mainland companies, however, pay 9% corporate tax on profits exceeding AED 375,000.
Free Zones remain one of the strongest economic pillars of the UAE. They attract both local and international companies through incentives such as full foreign ownership, no customs duty, and flexible business regulations. The corporate tax system continues to protect their competitiveness while aligning with international taxation standards.
Understanding Corporate Tax in UAE Free Zones
Free Zones were created to make the UAE an international trade hub. Companies inside these zones enjoy simplified processes for import, export, and investment. But with the new law, every registered business—inside or outside Free Zones—must evaluate its tax position.
The UAE’s new corporate tax law promotes economic diversification. It introduces a clear difference between Qualifying Free Zone Persons (QFZPs) and non-qualifying entities. Businesses that comply with all Free Zone conditions continue to receive favorable treatment, while others are taxed at the regular 9% rate.
Why the UAE Introduced Corporate Tax in Free Zones
The UAE government introduced corporate tax to align its economy with international standards and to create a more stable source of national income. The move ensures transparency, strengthens investor confidence, and complies with the OECD Base Erosion and Profit Shifting (BEPS) guidelines.
For Free Zones, this change encourages companies to maintain proper records, accurate financial statements, and responsible operations. Corporate tax also enhances fair competition between mainland and Free Zone businesses.
Tax Rates in Free Zones
The Ministry of Finance clarified that all Free Zone companies must register and file corporate tax returns. However, Qualifying Free Zone Persons (QFZPs) can still enjoy a 0% tax rate on qualifying income.
Tax Structure Overview:
- 0% Corporate Tax: For qualifying income earned within permitted Free Zone activities.
- 9% Corporate Tax: For non-qualifying income or transactions with mainland UAE businesses.
- Registration Requirement: All Free Zone entities must register with the FTA even if they expect a 0% tax rate.
This system ensures every business stays accountable under the same federal tax structure.
Do Free Zones Have to Pay Corporate Tax?
Yes, Free Zone businesses are subject to corporate tax, but not all must pay. Those that strictly operate within Free Zones and avoid non-qualifying transactions will still enjoy a 0% tax rate.
However, if a Free Zone company conducts trade with mainland firms or generates income outside permitted categories, that income becomes taxable at 9%.
In simple terms:
- Qualifying Free Zone Persons (QFZPs) = 0% tax on eligible income.
- Non-qualifying Free Zone entities = 9% tax on all income above AED 375,000.
Every Free Zone company must file returns annually, maintain documentation, and ensure compliance with FTA regulations.
Who Is a Free Zone Person?
A Free Zone Person can be either an individual or a company operating inside a recognized UAE Free Zone. These persons enjoy special tax and customs benefits.
Categories include:
- Natural Persons: Freelancers or sole proprietors working under Free Zone permits.
- Juridical Persons: Registered legal entities such as limited liability companies or partnerships licensed inside a Free Zone.
Free Zone Persons can operate under a zero-tax structure on qualifying income and gain simplified import/export procedures, which make business easier.
Who Can Be a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person is a legal entity that meets all the conditions stated in the Corporate Tax Law. These entities benefit from a 0% corporate tax rate on qualifying income if they meet these requirements:
- Must be a juridical person (not an individual).
- Must hold a valid Free Zone license.
- Must earn qualifying income from activities approved by the FTA, such as manufacturing, logistics, or holding intellectual property.
- Must avoid trading directly with the mainland unless permitted by law.
- Must maintain proper accounting records and meet transfer-pricing and arm’s-length principles.
Failure to meet any of these conditions in a tax period causes the loss of QFZP status from that period’s start.
Conditions for Qualifying Free Zone Persons
The UAE Corporate Tax Law lists mandatory criteria to maintain QFZP status. Each Free Zone business must:
- Maintain a substantial presence in the UAE.
- Earn income that satisfies the FTA’s definition of qualifying income.
- Choose not to be subject to normal taxation.
- Follow transfer-pricing documentation and arm’s-length principles.
- Notify the FTA if any of these conditions change.
A business losing QFZP status becomes liable for 9% corporate tax from the start of that period.
What Is Qualifying Income?
Qualifying income refers to income earned through approved activities inside Free Zones. This includes revenue from:
- Trading within the same or other Free Zones.
- Manufacturing and processing goods for export.
- Holding and managing intellectual property rights.
- Logistics, warehousing, or re-export operations.
- Services rendered to clients within Free Zones or abroad.
Non-qualifying income includes earnings from activities conducted with mainland companies that don’t meet FTA’s qualifying conditions.
Impact of Corporate Tax on Free Zone Businesses
Corporate tax affects Free Zone entities in several ways:
1. Tax Rate Impact:
Depending on income type, companies pay either 0% or 9%.
2. Profitability:
Businesses losing QFZP status or earning non-qualifying income face higher tax costs, which reduce overall profit margins.
3. Compliance Burden:
Free Zone companies must maintain full financial records, conduct audits, and submit corporate tax returns annually.
4. Branch Operations:
Branches in mainland UAE are subject to 9% tax on income generated there.
5. Financial Strategy:
Companies must align their accounting, transfer pricing, and documentation policies to ensure tax compliance and continuity of benefits.
These factors highlight the need for professional advisory support from experts like Mubarak Al Ketbi (MAK) Auditing.
Interaction Between Corporate Tax and Economic Substance Regulations (ESR)
The ESR ensures that Free Zone entities performing specific activities maintain adequate operations within the UAE. The introduction of corporate tax strengthens ESR enforcement.
Now, companies must demonstrate real substance in the UAE by showing:
- Physical office space or facilities.
- Full-time qualified employees.
- Relevant operating expenditures in the UAE.
Failure to meet ESR requirements can lead to penalties, loss of tax benefits, or even license suspension.
Compliance and Registration Requirements
Every Free Zone company must register with the Federal Tax Authority (FTA) and obtain a Tax Registration Number (TRN).
Compliance checklist:
- Submit annual corporate tax returns.
- Maintain IFRS-based financial statements.
- Keep books and records for at least seven years.
- Follow the Arm’s Length Principle for all related-party transactions.
- Cooperate during any FTA audit or request for documentation.
Mubarak Al Ketbi (MAK) Auditing assists businesses in preparing reports, verifying records, and ensuring that FTA compliance remains smooth and penalty-free.
Penalties for Non-Compliance
The UAE imposes penalties to encourage compliance and protect the tax system’s integrity.
Common penalties include:
- AED 10,000 for late corporate tax registration.
- Monetary fines for late filing or incorrect returns.
- Additional interest for unpaid taxes.
- Suspension of Free Zone benefits for continued non-compliance.
These fines may seem small, but continuous failure can damage reputation and lead to further scrutiny by authorities.
Effects on Free Zone Startups and SMEs
Startups and small businesses in Free Zones form a large part of the UAE’s innovation ecosystem. The 0% tax on qualifying income encourages entrepreneurship and foreign investment.
For small companies:
- Lower compliance costs mean better cash flow.
- Simplified procedures promote easier business expansion.
- Tax transparency builds investor trust.
However, poor documentation or incorrect classification of income can cause loss of QFZP status. Working with a professional auditing firm helps prevent these risks.
Future Outlook for Free Zone Companies
The corporate tax regime will evolve as the UAE strengthens its global trade role. Authorities may update qualifying activity lists, reporting formats, or compliance thresholds.
Businesses must remain alert to these changes. Regular consultation with audit professionals ensures accurate tax calculation, record-keeping, and reporting in line with FTA guidelines.
Why Choose Mubarak Al Ketbi (MAK) Auditing?
Mubarak Al Ketbi (MAK) Auditing is a trusted corporate tax advisory and auditing firm in Dubai. We assist Free Zone companies in meeting their legal responsibilities and preserving tax benefits.
Our professionals specialize in:
- Corporate tax registration and filing.
- Audit preparation and IFRS compliance.
- QFZP qualification and verification.
- ESR and transfer-pricing documentation.
- Ongoing advisory on financial restructuring and risk reduction.
We combine deep regulatory knowledge with hands-on experience to help clients operate confidently under UAE corporate tax law.
What Can Help – Mubarak Al Ketbi (MAK) Auditing
Mubarak Al Ketbi (MAK) Auditing ensures Free Zone companies meet every legal and financial requirement for UAE corporate tax. Our goal is to help your business grow while maintaining compliance and transparency.
We help you with:
- Corporate tax consultation and registration.
- Maintaining accounting records under IFRS standards.
- Ensuring ESR and FTA compliance for Free Zone operations.
- Assisting in QFZP qualification and documentation.
- Auditing services to validate financial integrity.
Address: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
Contact/WhatsApp: +971 50 276 2132
