Corporate Tax Free Zone in UAE – Expert Guide

How Corporate Tax Applies to Free Zone Persons and Companies in the UAE

The UAE builds a modern tax system with clear goals. The system encourages growth with simple rules. It also protects the tax base with fair limits. A Free Zone business can enjoy special treatment under corporate tax. A Free Zone business can also pay the standard rate when it steps outside the rules. Your team should learn the conditions with care. Your team should apply the steps with discipline.

1) UAE Free Zones and the New Corporate Tax Era

A Free Zone sits inside the UAE as a special jurisdiction. The zone offers efficient licensing and strong logistics. The zone often allows full foreign ownership in many sectors. The corporate tax regime now covers all emirates. The regime applies to tax periods that start on or after 1 June 2023. A Free Zone business still registers for corporate tax. A Free Zone business still files returns on time. The Federal Tax Authority (FTA) runs the portal. The Ministry of Finance (MoF) issues policy and decisions. Your first duty is registration. Your next duty is compliance.

Why investors still choose Free Zones

• The zone links firms to airports, seaports, and roads with speed.
• The zone offers sector clusters that create partners and suppliers.
• The zone publishes clear license categories for activities with scope.
• The zone supports visas, warehouses, flexi-desks, and purpose-built units.

2) The Two-Tier Rate Structure in Plain Words

The UAE sets a simple structure. A Qualifying Free Zone Person (QFZP) can apply a 0% rate to qualifying income when rules are met. A QFZP applies 9% to non-qualifying income above AED 375,000. A non-qualifying Free Zone Person applies the standard 9% to taxable income above AED 375,000. A mainland business applies the standard 9% above the same threshold. Your finance team must split revenue by stream. Your return must show a clean allocation.

Helpful mapping for teams

• Qualifying income: Revenue from specific activities listed by law or decision.
• Non-qualifying income: Revenue from excluded activities or barred mainland dealings.
• De-minimis relief: A small limit can shield status when non-qualifying streams stay low.
• Mainland branch: Branch profits face 9% and require separate accounts.

3) Who Is a Free Zone Person and Who Qualifies

A Free Zone Person can be a natural person (where permitted) or a juridical person that holds a Free Zone license. A QFZP is a Free Zone Person that meets extra conditions. A QFZP keeps adequate substance in the UAE. A QFZP holds a valid license and performs qualifying activities. A QFZP complies with transfer pricing and keeps documentation under the Arm’s Length Principle. A QFZP chooses not to be taxed under normal rules. If a QFZP breaks a condition in a period, the status can fall away from the start of that period.

Core conditions you should test each month

• The entity keeps people, premises, and functions in the UAE as substance.
• The entity earns qualifying income from activities named in the rules.
• The entity limits or structures mainland dealings to permitted forms.
• The entity maintains master file and local file if thresholds apply.
• The entity completes corporate tax registration and timely filing.

4) Free Zone Advantages With Compliance Anchors

A zone business enjoys practical advantages. The business can hold 100% foreign ownership in many cases. The business can lease space near ports and airports. The business can recruit global staff with visa support. These benefits sit beside tax obligations. The entity must register for corporate tax. The entity must file a return even when the 0% rate applies to all income in a year. The entity must keep records that prove each rule. Good evidence protects the 0% claim during reviews.

Records that anchor your position

• Trade license, lease contracts, and establishment card.
• Audited financial statements with segment notes for zone vs. other.
• Contracts that state customer location and delivery terms.
• Staff rosters, payroll, visas, and job descriptions tied to functions.
• Transfer pricing master file, local file, and intercompany agreements.
• ESR filings and proofs for relevant activities and spending.

5) Mainland Dealings and Branch Effects

A zone entity can open a mainland branch. The profits of the mainland branch face 9% corporate tax. The head office in the zone must run separate accounts for the branch. A zone entity that sells directly into the mainland without a branch can turn revenue into non-qualifying income unless a carve-out applies. Your contracts should name counterparties with clear addresses. Your invoices should tag supply origin, destination, and mode. Your ERP should split streams month by month.

6) VAT and ESR: Parallel Rules That Still Apply

Corporate tax sits beside VAT and Economic Substance Regulations (ESR). A zone entity files VAT if it meets thresholds. A zone entity files ESR notifications and returns if it performs relevant activities. The corporate tax return should align with VAT reports and ESR data. A clean source-to-return trail builds trust. Your auditors will test links between financial statements and tax packs. Your team should keep the narrative consistent across frameworks.

7) Examples That Make Rate Outcomes Clear

Example A: Zone logistics with exports
A company stores goods in a Free Zone and ships to foreign customers. If the activity appears on the qualifying list and substance holds, the margin can fall under the 0% rate as qualifying income.

Example B: Zone consultancy with mainland clients
A zone entity sells services to mainland businesses without a carve-out and without a branch. That stream can be non-qualifying. The 9% rate can apply above AED 375,000.

Example C: Zone manufacturer with foreign buyers
A zone factory sells only to non-UAE customers. If the activity qualifies and the company maintains substance, the profit on those sales can be 0% as qualifying income.

Example D: Zone holding and IP licensing
A zone holding company receives dividends and royalties. Treatment depends on decisions, anti-abuse rules, and transfer pricing. The split between qualifying and non-qualifying income requires careful documentation.

8) Transfer Pricing: Why Arm’s Length Protects the 0%

Related-party pricing sets the margin. The law requires arm’s-length outcomes. Your entity should map each related-party transaction. Your entity should select a method and test comparables. Your entity should sign agreements that match functions and risks. Customs values for imports should align with transfer pricing where goods move. The FTA can request files. Ready files support the 0% rate on qualifying income.

Practical steps for your files

• Build a transaction matrix by counterparty and type.
• Choose a method (TNMM, CUP, or others) with a reasoned memo.
• Benchmark with screened sets and sensitivity checks.
• Reconcile tested margins to audited statements.

9) Substance: People, Premises, and Decision-Making

Substance proves reality. A QFZP needs real people with relevant skills. A QFZP needs premises that fit the licensed activity. A QFZP needs processes and decision-making in the UAE. Board meetings should occur in the UAE for major approvals. The company should store records in the UAE. These items support both ESR and corporate tax. Strong substance reduces challenges to the 0% rate.

Substance checklist

• Staff on payroll with UAE visas and defined roles.
• Office or warehouse lease in the zone with utilities and access.
• Local management that signs contracts and approves budgets.
• Documented processes for order handling, quality, and reporting.

10) Registration, Filing, and Status Risks

Every Free Zone Person that conducts business must register for corporate tax. A QFZP still registers and still files. The return shows qualifying and non-qualifying income. If the entity fails a QFZP condition in a period, status can fall away from the start of that period. The entity then applies 9% on taxable income for that period and may continue on that basis during the incentive window unless reset rules apply. Early detection avoids status loss.

Controls that avoid surprises

• Monitor de-minimis thresholds monthly, not yearly.
• Review counterparties for mainland exposure.
• Renew licenses and permits before expiry to avoid gaps.
• Complete transfer pricing files before the deadline, not after.

11) Governance, EEAT, and Stakeholder Confidence

Search engines and regulators value quality. Your company should show Expertise with qualified staff and recognized advisors. Your company should show Experience with real operations and case studies. Your company should show Authority with audited statements and signed policies. Your company should show Trust with on-time filings and consistent data. A one-page Tax Control Framework can name roles, calendars, documents, and escalation steps. Your board should review the framework each year.

12) Financial Statement Links and Narrative

Audited financial statements tell the story. The corporate tax return should echo that story with numbers and notes. Segment reporting can show zone vs. other. Notes can explain transfer pricing and related-party balances. The Management Discussion and Analysis should describe risks, markets, and processes. Banks, investors, and the FTA appreciate clear links between books and returns. A tidy narrative reduces questions.

13) Technology That Makes Compliance Easier

Modern ERPs can tag invoices by customer location and delivery point. A tax engine can compute adjustments and build return files. A document hub can store contracts, leases, and studies with search filters. Dashboards can track de-minimis ratios, deadlines, and alerts. You save time. You cut errors. You scale without losing control.

14) A Simple Monthly Playbook for CFOs

You can run a short cycle each month and avoid year-end stress.

1. Tag revenue by zone, mainland, and foreign.
2. Split costs with drivers that match functions and risks.
3. Test de-minimis for non-qualifying streams.
4. Check substance with headcount and premises evidence.
5. Update TP files with new comparables or contracts.
6. Model tax under 0% vs. 9% to plan cash.
7. Fix gaps in contracts or processes before year-end.
8. Prepare drafts of disclosures and board minutes early.

15) Risks That Commonly Trigger Penalties

Mistakes repeat across firms. Firms mix mainland sales with zone sales without clear tagging. Firms skip transfer pricing files. Firms let licenses lapse. Firms misapply the 0% to streams that fail tests. Firms file late returns. Each error can cost money and time. A short red-flag routine helps you respond fast.

Red flags to address now

• Invoices to mainland customers with no carve-out analysis.
• Nominal staff with outsourced reality that fails substance.
• Intercompany prices with no written method or benchmarking.
• Missing board minutes for key approvals and strategy changes.

17) Step-by-Step Checklist Before Year-End

• Confirm registration, portal access, and user roles.
• Review qualifying vs. non-qualifying revenue by month.
• Reconcile related-party balances with agreements and TP metrics.
• Refresh fixed-asset registers and tax depreciation.
• Re-test de-minimis and document the result.
• Draft return disclosures and board approvals.
• Align VAT and ESR reports with the corporate tax pack.
• File and store everything in a secure archive.

18) How Mubarak Al Ketbi (MAK) Auditing Adds Value

Your team needs clarity and speed. Mubarak Al Ketbi (MAK) Auditing provides both. Our advisers review your license and activity list. Our advisers segment revenue by destination and counterparty. Our advisers prepare ESR files and transfer pricing files. Our advisers build a dashboard for de-minimis tests and deadlines. Our advisers train staff to keep evidence that stands up to review. You gain a steady process that protects your 0% claim when the facts allow it.

What Can Help — Mubarak Al Ketbi (MAK) Auditing

Mubarak Al Ketbi (MAK) Auditing helps Free Zone companies apply the rules with confidence. We test substance with care. We split income with logic. We prepare returns with accuracy. We brief management with options and steps. With our guidance, you move through corporate tax with less friction and more control—because when push comes to shove, the ball is in your court.

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