How Corporate Tax Applies to Free Zone Companies in the UAE
The UAE sets clear corporate tax rules for businesses. The law sets a standard 9% levy on taxable income above AED 375,000. The law also gives a 0% rate on qualifying income for Qualifying Free Zone Persons. The Ministry of Finance (MoF) issues policy. The Federal Tax Authority (FTA) issues guidance and manages returns. Your company should read the rules. Your company should apply the rules with care. This guide explains what a Free Zone Person is. This guide also explains who qualifies for the 0% rate, how the limits work, and what records you must keep.
1) UAE Free Zones in Simple Words
A Free Zone sits inside the UAE as a special jurisdiction. The zone offers 100% foreign ownership in most cases. The zone offers streamlined customs and fast licensing. The zone also offers clear tax incentives under the corporate tax law. Many zones sit in Dubai, Abu Dhabi, Sharjah, and other emirates. Each zone issues trade licenses. Each zone monitors economic activity. Your company chooses a zone that matches its business model and sector.
Why many founders pick a Free Zone
- The zone gives full control to foreign owners in most sectors.
- The zone runs quick processes for visas and facilities.
- The zone supports logistics with ports, airports, and road links.
- The zone often groups firms by industry for synergy after setup.
2) Who Is a “Free Zone Person”?
A Free Zone Person is a natural person or a juridical person that’s registered in a Free Zone. A natural person can be a freelancer or a sole proprietor, depending on the zone’s rules. A juridical person can be a company or a partnership. The corporate tax law treats both as Free Zone Persons if they operate in a zone. The law still tests income type, activity type, and compliance. The label alone doesn’t grant the 0% rate. The company must meet the qualifying rules.
3) What Is a “Qualifying Free Zone Person” (QFZP)?
A Qualifying Free Zone Person meets a list of legal conditions. The FTA and MoF define those conditions. A QFZP pays 0% on qualifying income. A QFZP pays 9% on non-qualifying income above the threshold. The company must keep substance in the UAE. The company must hold a valid zone license. The company must meet transfer pricing rules and documentation with arm’s-length pricing. The company must choose not to be taxed as a normal taxpayer under the election rules. The company must file on time. If the company fails a condition in a period, the company can lose QFZP status from the start of that period.
Core elements you should check
- Legal form: The entity is a juridical person licensed in a designated zone.
- Substance: The entity keeps adequate people, assets, and risks in the UAE.
- Qualifying income: The income arises from qualifying activities stated in law or in decisions.
- Prohibited activity: The entity avoids activities that break the QFZP limits.
- Pricing: The entity applies the Arm’s Length Principle and keeps transfer pricing files.
- Election: The entity doesn’t elect out of the QFZP regime.
- Compliance: The entity registers for corporate tax and files returns and disclosures.
4) 0% vs 9%: How the Rates Work
From June 2023, the framework applies. A QFZP enjoys 0% on qualifying income. A QFZP pays 9% on non-qualifying income above AED 375,000. A non-qualifying Free Zone Person pays the standard 9% on taxable income above AED 375,000. A mainland company pays the standard 9% on taxable income above the threshold. Your finance team should map income streams to the correct bucket. Your return should disclose the split with clarity.
Helpful mapping
- Qualifying income: Income from defined qualifying activities inside the zone or cross-border, as per decisions.
- Non-qualifying income: Income from excluded activities or barred transactions, including certain mainland dealings.
- De-minimis relief: Specific tolerance levels may apply; your team must test the ratios and values each period.
5) Mainland Dealings and Branch Complications
A zone entity may set up a mainland branch. The profits of the mainland branch are taxable at 9%. The zone head office must separate branch accounts. If a zone entity without a branch supplies certain goods or services to the mainland, the income can fall outside the qualifying basket unless it meets a carve-out. Your contracts should describe counterparties and locations. Your ERP should tag invoices to zone, mainland, or foreign. Clean tagging supports the allocation of income to the correct rate.
6) VAT, ESR, and Other Rules That Interact
Corporate tax is one pillar. VAT still applies on taxable supplies under VAT law. Economic Substance Regulations (ESR) still apply to relevant activities. A zone entity should pass ESR tests on core income-generating activities, adequate employees, expenditure, and premises in the UAE. The corporate tax regime doesn’t remove ESR. The two regimes sit side by side. Your company should build an annual calendar that covers VAT, ESR, and corporate tax filings with aligned data.
Make your calendar work
- Align ESR returns with the corporate tax return period.
- Reconcile revenue by activity for VAT, ESR, and corporate tax.
- Keep minutes that explain functions, risks, and assets in the UAE.
7) Examples That Explain the Split
Example A: Pure zone logistics
A logistics company stores goods in a zone warehouse and ships goods to foreign customers. The activity may produce qualifying income if it meets the list in the decisions and keeps substance. The profits can sit at 0%.
Example B: Zone head office with mainland sales
A zone entity sells services to mainland clients without a mainland branch and without a carve-out. That stream may be non-qualifying. The stream may sit at 9% if above threshold.
Example C: Zone manufacturer with export focus
A zone company manufactures goods in the zone and exports to foreign buyers. If the activity sits on the qualifying list and substance holds, the margin may be 0%.
Example D: Zone IP holding
A zone firm holds IP and charges royalties. The outcome depends on decisions and anti-abuse tests, including transfer pricing. The split between qualifying and non-qualifying may apply.
8) Transfer Pricing and Documentation Discipline
Related-party pricing affects the zone outcome. The company must set arm’s-length terms with group entities. The company must keep a master file and a local file if thresholds apply. The files must support the method, comparables, and adjustments. The company should prepare intercompany agreements with clear functions and risks. The company should align customs values and transfer pricing positions when goods cross borders. The FTA can review the files. Good files protect the 0% claim.
9) Substance: People, Premises, and Processes
Substance drives credibility. A QFZP must show real activity in the UAE. The company should hire staff or engage dedicated service providers in the zone. The company should lease a suitable office or warehouse. The company should show decision-making inside the UAE. The company should keep records inside the UAE. The company should hold board meetings in the UAE for major matters. These elements support both ESR and the corporate tax regime.
Substance checklist you can use
- Employees with job descriptions that match activity.
- Lease contracts and utility bills for premises in the zone.
- Payroll records and visa files that anchor people in the UAE.
- Board minutes and resolutions for key approvals.
10) Registration, Returns, and Status Risks
All Free Zone Persons that carry taxable business must register for corporate tax. A QFZP still registers. A QFZP still files a return. The return shows the qualifying income and the non-qualifying income. If the entity fails a QFZP condition in a period, the entity can lose QFZP status from the start of that period. The entity would then pay 9% on taxable income for that period and for future periods during the incentive window unless rules allow a reset.
Avoid status loss
- Track de-minimis tests every month.
- Check counterparties for mainland exposure.
- Review license scope and renewals before expiry dates.
- Keep transfer pricing files ready before the deadline.
11) Branches, PE Risk, and Cross-Border Matters
A zone entity that creates a permanent establishment abroad can face foreign tax. A zone entity that creates a taxable presence in the mainland through staff or a fixed place can shift streams into the 9% bucket. Your legal and tax teams should review agency roles, on-the-ground sales, and fixed sites. Clear maps of who does what and where reduce surprises in audits.
12) Records You Must Keep to Defend the 0%
You can only defend the 0% with proof. Keep organized files. Keep digital backups.
Records that help you sleep at night
- Trade license, zone lease, and establishment card.
- Audited financial statements with segment notes for zone vs. non-zone.
- Contracts that show customer location and delivery terms.
- Transfer pricing master file and local file with tested methods.
- ESR filings, notifications, and supporting evidence.
- Schedules that split qualifying and non-qualifying income by month.
13) Governance: Policies and Controls That Prevent Errors
Strong internal controls cut risk. Your board should approve a tax control framework. Your CFO should own a zone qualification policy. Your controller should run monthly checks on qualifying shares and de-minimis. Your tax lead should certify the arm’s-length positions. Your internal auditor should test the files before the deadline. These simple roles prevent status loss and penalties.
14) Practical Playbook for CFOs
You can follow a simple playbook. You can run it each month.
- Tag revenue: Mark each invoice by location and activity.
- Split costs: Allocate direct and indirect costs using clear drivers.
- Run de-minimis: Compare non-qualifying streams against thresholds.
- Check people: Confirm headcount, roles, and location align with activity.
- Refresh files: Update transfer pricing and ESR evidence.
- Predict tax: Model the 0% and 9% outcomes before the period closes.
- Fix gaps: Adjust processes and contracts before year-end.
- File on time: Submit the return and pay any due tax.
15) Special Topics: Holding, Distribution, and Services
Holding structures:
A zone holding company may manage shares, dividends, and finance. The treatment depends on activity rules and anti-abuse conditions. Document the purpose and functions. Avoid conduit risks without substance.
Distribution hubs:
A zone distribution company may buy goods and resell abroad. Customs, VAT, and transfer pricing must align with physical flows. Qualifying status can hold if the activity sits on the list and substance tests pass.
Service centers:
A zone service center may support group entities across borders. The margin must match functions and risks. The service list must avoid barred activities for QFZP status.
16) Frequently Asked Questions (In-Article)
Q1. Do all Free Zone companies pay 0%?
No. Only a Qualifying Free Zone Person can apply 0% on qualifying income. Other zone entities pay 9% on taxable income above AED 375,000.
Q2. Must a QFZP still register and file?
Yes. Every Free Zone Person that conducts business must register and file. A QFZP still files and discloses the split.
Q3. Does a mainland branch change the result?
Yes. A mainland branch pays 9% on its profits. The head office must keep separate books for that branch.
Q4. Can de-minimis relief save status?
It can in some cases. You must check the ratios and values for non-qualifying income. You must keep proof for the test.
Q5. What records protect the 0% rate?
You should keep zone licenses, leases, employee files, audited accounts, contracts, ESR proof, and transfer pricing files. You should also keep monthly splits.
17) Mistakes That Cause Penalties
Firms make repeat mistakes. Firms mix mainland sales with zone sales without tracking. Firms let licenses lapse. Firms ignore transfer pricing. Firms file late. Firms fail ESR. Each mistake can cost money. Each mistake can cost the 0% rate. A short monthly control list solves most issues.
Red flags you should fix now
- Unmapped invoices to the mainland without carve-outs.
- Nominal staff with outsourced reality that fails substance.
- Intercompany rates without a method and comparables.
- Missing board minutes for key decisions taken in the UAE.
18) How Mubarak Al Ketbi (MAK) Auditing Supports You
Your team needs a steady hand. Mubarak Al Ketbi (MAK) Auditing delivers that hand. Our advisers review licenses, contracts, and processes. Our advisers tag income streams with clear logic. Our advisers prepare ESR files and transfer pricing files. Our advisers model 0% and 9% outcomes with evidence. Our advisers brief management on options and risks. You gain clarity, speed, and compliance with our support.
What Can Help — Mubarak Al Ketbi (MAK) Auditing
Mubarak Al Ketbi (MAK) Auditing guides Free Zone companies with clear steps. We test substance. We prepare files. We help you keep the 0% on qualifying income with confidence. We explain choices in plain words so decisions feel easy. In the end, the ball is in your court because you choose the timing and the scope, and we make the implementation smooth.
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact / WhatsApp: +971 50 276 2132
