The United Arab Emirates introduced a new Corporate Tax system to maintain global standards and strengthen economic transparency. Since June 2023, this regulation has also affected Free Zone Companies. Businesses now face either a 0 % or 9 % corporate tax rate based on their income and compliance status. This major change, driven by the Federal Tax Authority (FTA) and the Ministry of Finance, aligns the UAE with international fiscal practices.
Free Zones have long attracted investors with 100 % foreign ownership, customs benefits, and tax exemptions. However, the introduction of Corporate Tax has changed how these entities report and manage profits. Understanding these new rules is crucial for business owners aiming to remain compliant while optimizing tax benefits.
Understanding Free Zones and Their Importance
Free Zones are designated economic areas established to promote international trade and investment. Located in Dubai, Abu Dhabi, Sharjah, and other Emirates, they allow companies to operate with flexible ownership rules, easy repatriation of profits, and simplified import-export regulations.
Free Zone Companies play a vital role in the UAE’s diversification strategy by encouraging innovation, logistics, manufacturing, and professional services. Historically, such entities paid no corporate tax; however, the evolving economic landscape now links their tax advantages to strict compliance standards.
New Corporate Tax Framework for Free Zones
Under the UAE Corporate Tax Law, businesses within Free Zones must now register with the FTA and file annual corporate tax returns. The tax rate depends on whether the income qualifies for exemption or not.
- 0 % Corporate Tax: For Qualifying Free Zone Persons on qualifying income that meets government-approved criteria.
- 9 % Corporate Tax: For non-qualifying income or for companies that fail to meet compliance requirements.
Mainland entities remain subject to a 9 % corporate tax on taxable income above AED 375,000.
This approach ensures fair treatment among local and international investors while maintaining the UAE’s reputation as a low-tax jurisdiction.
Who Is a Free Zone Person?
A Free Zone Person is an individual or entity established within a UAE Free Zone and operating under its regulatory framework. Two major categories exist:
- Natural Persons: Freelancers or sole proprietors licensed to conduct business inside Free Zones. They benefit from 0 % corporate tax on qualifying income and simplified administrative processes.
- Juridical Persons: Companies or partnerships legally incorporated within a Free Zone. They can claim the same benefits provided their income qualifies under the FTA’s definitions.
Being a Free Zone Person grants access to numerous incentives that enhance business growth, flexibility, and competitiveness.
What Is a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person is a company that meets the specific conditions set by the UAE Corporate Tax Law and thus enjoys a 0 % rate on qualifying income.
Main Conditions
- Legal Entity Status: The business must be a juridical person, not an individual.
- Qualifying Income: Revenue must come from approved activities such as manufacturing, logistics, research, or technology services.
- Compliance Obligations: The company must follow FTA rules, maintain accounting records, and file accurate returns.
- Valid License: Holding an active Free Zone license is mandatory to maintain the QFZP status.
Failure to meet these requirements automatically removes the QFZP status from the start of the affected tax period.
Key Conditions for Maintaining QFZP Status
To remain eligible for 0 % corporate tax, a QFZP must:
- Keep sufficient operational presence within the UAE.
- Earn income that fits within government-approved qualifying activities.
- Elect not to be taxed as a mainland entity.
- Follow the Arm’s Length Principle in transfer-pricing documentation.
If a company violates any of these points, the FTA or the Minister of Finance may declare the loss of its QFZP status, which results in a 9 % tax on all future income.
Do Free Zone Companies Pay Corporate Tax?
Yes, all Free Zone entities must register for corporate tax, even if they qualify for a 0 % rate. The distinction lies in income type:
- Qualifying Income: 0 % tax.
- Non-Qualifying Income: 9 % tax on profits over AED 375,000.
Companies that transact with mainland UAE businesses or perform restricted activities will automatically pay the 9 % rate.
Effect of Corporate Tax on Free Zone Businesses
Corporate Tax influences how Free Zone Companies manage profits, pricing, and reporting.
Main Impacts
- Tax Rates: Either 0 % or 9 % depending on qualification.
- Profitability: Non-compliance can lead to reduced margins.
- Branches: Mainland branches of Free Zone entities are fully taxable at 9 %.
- Strategy: Firms must plan finances carefully to maximize benefits.
The tax-free incentive period can extend up to 50 years in certain zones, subject to government approval.
Relationship Between Corporate Tax and ESR
The new Corporate Tax Law interacts closely with the Economic Substance Regulations (ESR). Free Zone Companies claiming 0 % tax must prove they perform real economic activities in the UAE such as staffing, expenditure, and decision-making.
This alignment prevents misuse of tax exemptions and reinforces the country’s international compliance image.
Documentation and Compliance Requirements
Free Zone Companies must maintain accurate records to justify tax positions.
Required Documents
- Financial Statements (audited annually).
- Tax Computation Reports.
- Proof of Qualifying Activities.
- Invoices and Contracts with clients.
- Transfer-pricing documentation for related party transactions.
Timely submission of returns and supporting documents protects against FTA penalties and ensures credibility.
Corporate Tax Filing for Free Zone Entities
Every Free Zone Person must register with the FTA and file a corporate tax return electronically within nine months after the end of its financial year.
For example, if a company’s financial year ends on 31 December 2024, its corporate tax return must be filed by 30 September 2025.
Accurate filing avoids penalties and demonstrates compliance under the EEAT standards for financial transparency.
Strategic Tax Planning for Free Zone Businesses
To navigate the Corporate Tax Law effectively, businesses should:
- Review their business activities to ensure qualifying income.
- Separate mainland transactions from Free Zone operations.
- Update accounting systems for tax reporting.
- Seek professional advice from authorized auditors and tax consultants.
Proper planning helps maintain 0 % eligibility and build long-term financial stability.
Impact on Investment and Expansion
The UAE’s tax policy encourages responsible business growth and international partnerships. Although some Free Zone firms now face limited taxation, the overall environment remains one of the most competitive globally. Transparent rules build investor confidence and attract sustainable foreign capital.
Investors can still enjoy low operational costs and access to modern infrastructure while benefiting from strong legal protections and global connectivity.
Common Challenges Faced by Free Zone Companies
- Misclassification of income between qualifying and non-qualifying.
- Failure to update licenses or comply with FTA requirements.
- Lack of transfer-pricing records for related transactions.
- Insufficient economic substance demonstration.
Addressing these challenges early prevents loss of benefits and ensures smooth FTA audits.
Importance of Professional Guidance
Corporate Tax laws are complex and constantly evolving. Partnering with qualified advisors ensures that businesses understand their responsibilities and take advantage of available incentives.
Mubarak Al Ketbi (MAK) Auditing specializes in helping Free Zone Companies comply with UAE Corporate Tax laws while maximizing tax reliefs legally. Their expert team guides clients through registration, reporting, and audit requirements seamlessly.
What Can Mubarak Al Ketbi (MAK) Auditing Help You With?
Mubarak Al Ketbi (MAK) Auditing offers complete tax consultancy and compliance services for Free Zone and mainland businesses across the UAE. We ensure that your company remains fully compliant while benefiting from all available incentives.
We help you:
- Assess your status as a Qualifying Free Zone Person.
- Maintain proper books and records for FTA reviews.
- File accurate corporate tax returns on time.
- Implement effective transfer-pricing documentation.
For more information, visit:
- Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact/WhatsApp: +971 50 276 2132
For More Information
- Visit our office in Dubai for detailed consultation.
- Call or WhatsApp our team for instant support.
- Learn how to stay compliant with FTA rules.
- Discover ways to legally reduce tax liabilities.
Conclusion
The introduction of Corporate Tax in UAE Free Zones marks a significant shift toward international compliance and economic sustainability. While some benefits have been redefined, Free Zones remain attractive for global business operations. Companies that maintain accurate records and follow the law can still enjoy low tax rates and strong investment confidence.
As the saying goes, “Every cloud has a silver lining.” With strategic guidance from Mubarak Al Ketbi (MAK) Auditing, your business can turn these tax changes into opportunities for growth and long-term success.
