A UAE Free Zone licence does not automatically mean that a company pays 0% Corporate Tax.

Free Zone companies are within the scope of the UAE Corporate Tax regime. They generally need to register for Corporate Tax, file Corporate Tax Returns and maintain appropriate accounting and tax records.

A Free Zone company can benefit from the special Free Zone Corporate Tax regime only if it qualifies as a Qualifying Free Zone Person (QFZP) and continues to meet the applicable conditions.

Where those conditions are met, a QFZP is subject to:

• 0% Corporate Tax on Qualifying Income, and
• 9% Corporate Tax on Taxable Income that is not Qualifying Income.

This distinction is important.

The 0% rate does not apply automatically to all income earned by every Free Zone company, and a business can lose QFZP status if it fails to meet the required conditions.

This guide explains how Free Zone Corporate Tax works in the UAE, which companies need to register, what Qualifying Income means, how the de minimis rule works and what Free Zone businesses need to review before filing their Corporate Tax Return.

Are UAE Free Zone Companies Subject to Corporate Tax?

Yes.

A juridical person established in a UAE Free Zone is generally a Taxable Person for Corporate Tax purposes.

The Ministry of Finance confirms that Free Zone Persons are within the scope of Corporate Tax.

This applies even where the company expects to qualify for the 0% Free Zone Corporate Tax rate.

The correct starting point is therefore not:

“We are in a Free Zone, so are we exempt from Corporate Tax?”

It is:

“Are we a Qualifying Free Zone Person, and which parts of our income qualify for the 0% rate?”

For the broader registration rules, see MKCA’s guide to who must register for Corporate Tax in the UAE.

Do Free Zone Companies Have to Register for Corporate Tax?

Yes, Free Zone entities generally need to register for Corporate Tax and obtain a Corporate Tax Registration Number.

This applies whether the entity:

• Expects to be a Qualifying Free Zone Person.
• Earns mainly Qualifying Income.
• Expects its Corporate Tax liability to be zero.
• Operates only from the Free Zone.

The Federal Tax Authority has expressly confirmed that Free Zone entities must register and file a Corporate Tax Return irrespective of whether they are a Qualifying Free Zone Person.

Registration and 0% tax treatment are therefore different issues.

A company cannot treat a potential 0% rate as an exemption from the Corporate Tax compliance framework.

Businesses that have not yet completed registration should review MKCA’s Corporate Tax Registration Services.

What Is a Qualifying Free Zone Person?

A Qualifying Free Zone Person is a Free Zone Person that meets the conditions in the Corporate Tax Law and the relevant implementing decisions.

At a practical level, the company needs to satisfy several requirements.

These include:

1. Maintaining adequate substance in the UAE.
2. Deriving Qualifying Income.
3. Not electing to be subject to the standard Corporate Tax regime.
4. Complying with the arm’s length principle.
5. Complying with applicable Transfer Pricing documentation requirements.
6. Meeting the de minimis requirement for non-qualifying Revenue.
7. Preparing and maintaining audited Financial Statements.
8. Meeting any other applicable conditions prescribed under the Corporate Tax regime.

These conditions should be tested for every Tax Period.

A Free Zone company should not assume that it remains a QFZP permanently because it qualified in an earlier year.

What Corporate Tax Rate Applies to a QFZP?

A Qualifying Free Zone Person is subject to two different rates.

Type of income	Corporate Tax rate
Qualifying Income	0%
Taxable Income that is not Qualifying Income	9%

There is an important difference between this and the standard Corporate Tax regime.

While a QFZP is applying the Free Zone regime, the ordinary 0% threshold on the first AED 375,000 of Taxable Income does not apply to its non-Qualifying Income.

Non-Qualifying Taxable Income of a QFZP is generally subject to the 9% Corporate Tax rate.

What Is Qualifying Income?

Qualifying Income can arise from several categories of transactions.

Broadly, it can include income from:

• Transactions with another Free Zone Person, subject to the applicable conditions.
• Transactions with a Non-Free Zone Person where the income arises from a Qualifying Activity and is not an Excluded Activity.
• Qualifying Intellectual Property, subject to the applicable rules.
• Other income falling within the de minimis requirements.

The treatment depends on the actual activity, customer and transaction.

A company should therefore classify its Revenue rather than treating all Free Zone Revenue as one category.

Income From Transactions With Other Free Zone Persons

Income derived from transactions with another Free Zone Person can constitute Qualifying Income where the relevant requirements are satisfied.

One important condition is that the other Free Zone Person must be the Beneficial Recipient of the relevant goods or services.

The income should also not arise from an Excluded Activity.

Example

Assume a Free Zone company provides a qualifying service to another Free Zone company.

The customer actually uses and benefits from that service and is not contractually required to pass it on to another person.

Subject to the remaining conditions, the transaction may fall within the Qualifying Income rules.

However, simply issuing an invoice to a Free Zone address does not prove that the income qualifies.

The business should understand the customer and transaction.

Can Income From Mainland Customers Qualify for 0% Corporate Tax?

Potentially, yes.

This is an area where many businesses make incorrect assumptions.

Income from a customer outside a Free Zone is not automatically non-qualifying.

A QFZP can derive Qualifying Income from transactions with a Non-Free Zone Person where the transaction relates to a Qualifying Activity and is not an Excluded Activity.

Therefore:

Mainland customer does not automatically mean 9% Corporate Tax.

The nature of the activity matters.

Example

A Free Zone logistics company provides services that satisfy the definition of a Qualifying Activity to a mainland business.

The customer being located outside the Free Zone does not by itself prevent the income from qualifying.

The company still needs to assess the full QFZP requirements and the specific activity.

What Are the Current Qualifying Activities?

Ministerial Decision No. 229 of 2025 currently identifies the following categories of Qualifying Activities:

• Manufacturing of goods or materials.
• Processing of goods or materials.
• Trading of Qualifying Commodities.
• Holding shares and other securities for investment purposes.
• Ownership, management and operation of Ships.
• Reinsurance services.
• Fund management services.
• Wealth and investment management services.
• Headquarter services to Related Parties.
• Treasury and financing services to Related Parties or for the Free Zone Person’s own account.
• Financing and leasing of Aircraft.
• Distribution of goods or materials in or from a Designated Zone.
• Logistics services.
• Activities ancillary to the above Qualifying Activities where the applicable conditions are satisfied.

Whether a business falls into one of these categories depends on what it actually does.

A trade licence description alone should not be used as the only basis for the Corporate Tax conclusion.

What Changed Under Ministerial Decision No. 229 of 2025?

Ministerial Decision No. 229 of 2025 replaced Ministerial Decision No. 265 of 2023.

The updated decision made several important clarifications.

For example, the definition of Qualifying Commodities now covers specified categories including:

• Metals.
• Minerals.
• Industrial chemicals.
• Energy commodities.
• Agricultural commodities.
• Certain Associated By-products.
• Certain environmental commodities.

A Quoted Price condition also applies.

The decision also clarified Treasury and financing services, including certain services to Related Parties or for the QFZP’s own account.

Businesses that based their Free Zone Corporate Tax analysis on the old 2023 Ministerial Decision should therefore review it against the current decision.

What Are Excluded Activities?

Certain activities are specifically treated as Excluded Activities.

Under the current framework, these include areas such as:

• Certain transactions with natural persons.
• Banking activities.
• Insurance activities, subject to the specific exceptions.
• Finance and leasing activities, subject to the applicable exceptions.
• Certain ownership or exploitation of immovable property.
• Activities ancillary to an Excluded Activity.

An Excluded Activity should be assessed carefully because the company may generate non-qualifying Revenue.

The fact that the activity is permitted under the company’s Free Zone licence does not automatically mean the income qualifies for the Free Zone Corporate Tax regime.

Are Transactions With Individuals Qualifying?

Generally, transactions with natural persons are treated as an Excluded Activity.

There are specified exceptions for certain Qualifying Activities, including relevant activities involving:

• Ships.
• Fund management.
• Wealth and investment management.
• Aircraft financing and leasing.

The exact treatment depends on the applicable provision.

For businesses that sell directly to individual consumers, this can be particularly important.

A company should not assume that ordinary B2C Revenue is Qualifying Income merely because the company operates from a Free Zone.

How Does the De Minimis Rule Work?

A QFZP can have a limited amount of non-qualifying Revenue without automatically losing its QFZP status.

The current de minimis requirement is satisfied where non-qualifying Revenue for the Tax Period does not exceed the lower of:

• 5% of total Revenue, or
• AED 5 million.

Example 1: AED 20 million Revenue

Assume a QFZP has total Revenue of AED 20 million.

5% of AED 20 million is:

AED 1 million

The lower of AED 1 million and AED 5 million is AED 1 million.

The relevant de minimis limit is therefore AED 1 million.

Example 2: AED 200 million Revenue

5% of AED 200 million is:

AED 10 million

Because AED 5 million is lower, the relevant de minimis limit is AED 5 million.

This is a Revenue test

Businesses should not confuse this with profit.

The test concerns non-qualifying Revenue, subject to the detailed rules determining what is included or excluded from the calculation.

A company should therefore maintain a Revenue classification schedule during the year rather than attempting to calculate the position only when the Corporate Tax Return is due.

What Happens If the De Minimis Limit Is Exceeded?

This can have a significant consequence.

Under the current rules, a Qualifying Free Zone Person that fails to meet the applicable conditions can cease to be a QFZP from the beginning of the relevant Tax Period and for the following four Tax Periods.

That effectively creates a five-Tax-Period consequence starting with the period of failure.

This is why the de minimis threshold should not be treated as a year-end calculation only.

Businesses approaching the limit should monitor Revenue during the Tax Period.

What Does Adequate Substance Mean?

A QFZP must maintain adequate substance in the UAE.

At a practical level, this means the company’s actual UAE presence should be appropriate for the core income-generating activities it performs.

Factors can include:

• Activities performed in the Free Zone or Designated Zone.
• Adequate assets.
• Adequate qualified full-time employees.
• Appropriate operating expenditure.

The appropriate level depends on the nature and scale of the business.

There is no sensible one-size-fits-all answer such as:

“Every QFZP needs exactly X employees.”

A holding company, manufacturer and logistics business can have very different operational requirements.

Can a QFZP Outsource Activities?

Outsourcing can be possible under the Free Zone Corporate Tax framework, subject to the applicable conditions.

Where core income-generating activities are outsourced, the company should be able to demonstrate appropriate supervision.

This can involve documentation showing:

• What has been outsourced.
• Who performs the work.
• Where the activity takes place.
• How the QFZP supervises the provider.
• Whether the provider has sufficient employees, expenditure and assets for the relevant activity.

Outsourcing should therefore not be treated as removing the substance requirement.

Do QFZPs Need Audited Financial Statements?

Yes.

Ministerial Decision No. 84 of 2025 requires a Qualifying Free Zone Person to prepare and maintain audited Financial Statements.

For Tax Periods commencing on or after 1 January 2025, the requirement applies to QFZPs irrespective of the AED 50 million Revenue threshold that applies to certain other Taxable Persons.

This distinction is important.

A QFZP with Revenue of AED 5 million should not conclude:

“We are below AED 50 million, so no audit is required.”

The specific QFZP rule applies separately.

The audited accounts should therefore be planned early enough to support the Corporate Tax filing process.

Do Free Zone Companies Need to File Corporate Tax Returns?

Yes.

Free Zone entities are required to file Corporate Tax Returns even where they qualify for the Free Zone regime.

The general filing deadline is nine months from the end of the relevant Tax Period.

Example

If a company’s Tax Period ends on:

31 December 2026

the general Corporate Tax filing deadline would be:

30 September 2027

subject to any applicable legislative change or specific relief.

The company should not confuse:

• 0% Qualifying Income,
• zero Corporate Tax payable, and
• no filing obligation.

They are not the same thing.

What Should a Free Zone Company Prepare for Filing?

A Free Zone Corporate Tax filing process should usually include a review of:

• Final Financial Statements.
• Audited Financial Statements where required.
• Revenue by activity.
• Revenue by customer category.
• Free Zone and Non-Free Zone counterparties.
• Qualifying Activities.
• Excluded Activities.
• Non-qualifying Revenue.
• De minimis calculation.
• Related Party transactions.
• Transfer Pricing.
• Domestic Permanent Establishments.
• Foreign Permanent Establishments.
• Immovable property income.
• Intellectual Property income.
• Corporate Tax elections.
• Other tax adjustments.

The exact schedule depends on the company.

A company with several business lines should avoid completing its QFZP assessment using only total annual Revenue.

Revenue should be classified according to the relevant Corporate Tax treatment.

What Transfer Pricing Rules Apply to QFZPs?

A QFZP must comply with the arm’s length principle for relevant transactions.

That means transactions with Related Parties should be priced consistently with the applicable Transfer Pricing rules.

Businesses should identify:

• Related Parties.
• Transaction types.
• Transaction values.
• Pricing method.
• Agreements.
• Supporting analysis.

QFZPs must also comply with the applicable Transfer Pricing documentation framework.

This does not mean every Free Zone company automatically needs to prepare a Master File and Local File regardless of size.

Those formal documentation requirements depend on the applicable thresholds and conditions.

However, the underlying arm’s length principle remains relevant.

Can a QFZP Use Small Business Relief?

No.

A Qualifying Free Zone Person cannot elect for Small Business Relief while it is applying the QFZP regime.

This is another reason a Free Zone company should not assume that every Corporate Tax relief can be combined with the Free Zone 0% regime.

The company needs to assess which regime applies and what the consequences are.

Can a Free Zone Company Choose the Standard Corporate Tax Regime?

A Qualifying Free Zone Person can make an election to become subject to the standard Corporate Tax rules and rates.

That is an important decision.

Once the company moves outside the QFZP regime for the applicable period, the tax treatment, relief availability and other Corporate Tax rules may change.

A company should therefore not make the election merely because one Tax Period contains some non-qualifying income.

The commercial and tax consequences should be evaluated across the relevant periods.

For businesses with mixed activities, a Corporate Tax Advisory review can help determine which issues require deeper analysis before an election or filing position is adopted.

How Is Immovable Property Income Treated?

Property income requires separate analysis.

Income arising from immovable property does not automatically benefit from the 0% QFZP rate.

Under the current framework, the relevant exception relates to Commercial Property located in a Free Zone where the transaction is conducted with another Free Zone Person.

Other immovable property income can fall outside Qualifying Income and be subject to the applicable 9% Corporate Tax treatment.

Example

A QFZP owns commercial office space inside a Free Zone and leases it to another Free Zone Person.

This may receive different treatment from:

• Residential property.
• Property located outside a Free Zone.
• Commercial Free Zone property leased to a Non-Free Zone Person.

Property-owning Free Zone companies should therefore assess each category separately.

What About a Mainland Branch?

A Free Zone company may operate through a Domestic Permanent Establishment outside the Free Zone.

Income attributable to the Domestic Permanent Establishment is not treated as Qualifying Income under the Free Zone regime.

The relevant profits are generally subject to Corporate Tax at 9% under the applicable rules.

The company should therefore maintain appropriate records that allow it to attribute income and expenses between the Free Zone business and the Domestic Permanent Establishment.

What About a Foreign Permanent Establishment?

Similar principles apply where a QFZP operates through a Foreign Permanent Establishment.

Income attributable to that Foreign Permanent Establishment is not Qualifying Income under the QFZP regime.

The appropriate treatment can also interact with other Corporate Tax provisions, including any available Foreign Permanent Establishment exemption where its conditions are satisfied.

Cross-border structures should therefore be reviewed separately.

Does Distribution From a Free Zone Automatically Qualify?

No.

The relevant Qualifying Activity is specifically distribution of goods or materials in or from a Designated Zone, subject to the conditions in the current Ministerial Decision.

A normal Free Zone is not automatically a Designated Zone for this purpose.

Under Ministerial Decision No. 229 of 2025, the distribution activity has detailed requirements, including conditions concerning where the activity occurs, how goods enter the UAE and the type of customer to whom they are supplied.

This is particularly relevant for trading businesses.

Do not assume that:

Free Zone trading company = automatically qualifying distribution activity.

The legal and operational facts must be reviewed.

Free Zone vs Designated Zone: Why the Difference Matters

A Free Zone and a Designated Zone should not automatically be treated as identical.

A Designated Zone is a specific category recognised under the relevant legislation.

This distinction can matter for activities such as distribution of goods or materials.

A company should verify the legal status of its location rather than relying on marketing terminology used by a business park or licence issuer.

What Happens If a QFZP Fails One of the Conditions?

Failure can affect the company’s QFZP status for more than the current year.

Under Ministerial Decision No. 229 of 2025, where a QFZP fails to meet the required conditions at any time during a Tax Period, it can cease to be a QFZP from the beginning of that Tax Period and for the following four Tax Periods.

This means businesses should monitor compliance throughout the year.

Important areas include:

• Revenue classification.
• De minimis threshold.
• Adequate substance.
• Audited Financial Statements.
• Transfer Pricing.
• Excluded Activities.
• Elections.

A year-end review may be too late to prevent a condition from being breached.

Practical QFZP Compliance Checklist

Use the following checklist for each Tax Period.

Legal and Registration

• Corporate Tax registration completed.
• TRN confirmed.
• Free Zone licence current.
• Legal entity and business activities confirmed.

QFZP Eligibility

• Adequate substance maintained.
• Qualifying Income identified.
• No standard Corporate Tax election made unless deliberate.
• Arm’s length principle applied.
• Applicable Transfer Pricing documentation maintained.
• Audited Financial Statements prepared.

Revenue

• Revenue classified by customer.
• Free Zone counterparties identified.
• Non-Free Zone counterparties identified.
• Natural-person transactions reviewed.
• Qualifying Activities identified.
• Excluded Activities identified.
• Non-qualifying Revenue calculated.
• De minimis threshold tested.

Operations

• Mainland Permanent Establishments reviewed.
• Foreign Permanent Establishments reviewed.
• Immovable property reviewed.
• Intellectual Property income reviewed.
• Distribution activities checked against Designated Zone rules.

Filing

• Audited accounts completed.
• Corporate Tax Return prepared.
• QFZP schedules reviewed.
• Taxable non-Qualifying Income calculated.
• Filing completed within the applicable deadline.
• Supporting records retained.

Common Free Zone Corporate Tax Mistakes

Mistake 1: Assuming a Free Zone licence guarantees 0%

It does not.

The company needs to satisfy the QFZP conditions.

Mistake 2: Assuming all mainland Revenue is taxed at 9%

Not necessarily.

Income from Non-Free Zone Persons can still qualify where it arises from a Qualifying Activity and is not an Excluded Activity.

Mistake 3: Ignoring the de minimis threshold

A small amount of non-qualifying Revenue may be tolerated, but the threshold must be calculated correctly and monitored.

Mistake 4: Using profit instead of Revenue for de minimis

The de minimis test is based on Revenue.

Mistake 5: Assuming companies below AED 50 million do not need audited accounts

QFZPs have a specific audited Financial Statement requirement.

Mistake 6: Treating every Free Zone as a Designated Zone

They are not automatically the same.

Mistake 7: Ignoring Related Party transactions

Transfer Pricing applies to relevant Related Party transactions.

Mistake 8: Assuming zero tax means no return

Free Zone companies still need to register and file.

Mistake 9: Reviewing QFZP status only at year-end

A breach can affect the company’s status for the entire Tax Period and subsequent periods.

Frequently Asked Questions About UAE Free Zone Corporate Tax

Do Free Zone companies pay Corporate Tax in the UAE?

Free Zone companies are subject to the UAE Corporate Tax regime.

A Qualifying Free Zone Person can benefit from 0% Corporate Tax on Qualifying Income, while Taxable Income that is not Qualifying Income is generally subject to 9%.

Is every Free Zone company eligible for 0% Corporate Tax?

No.

The business must satisfy the QFZP requirements.

Do Free Zone companies need Corporate Tax registration?

Yes.

Free Zone entities generally need to register for Corporate Tax even where they expect all their income to qualify for the 0% rate.

Does a QFZP need to file a Corporate Tax Return?

Yes.

QFZP status does not remove the filing obligation.

Does a QFZP need audited Financial Statements?

Yes.

Under Ministerial Decision No. 84 of 2025, Qualifying Free Zone Persons must prepare and maintain audited Financial Statements for the applicable Tax Periods.

What is the de minimis threshold for non-qualifying Revenue?

The current threshold is the lower of:

• 5% of total Revenue, or
• AED 5 million.

What happens if the threshold is exceeded?

The Free Zone Person can cease to qualify as a QFZP from the beginning of that Tax Period and for the following four Tax Periods.

Is income from mainland companies always taxed at 9%?

No.

Income from a Non-Free Zone Person may still qualify where it relates to a Qualifying Activity and is not an Excluded Activity.

Can a QFZP claim Small Business Relief?

No.

A QFZP is not eligible to elect for Small Business Relief while applying the Free Zone regime.

Does a Free Zone company need Transfer Pricing documentation?

A QFZP must comply with the arm’s length principle and the applicable Transfer Pricing documentation rules.

The requirement to prepare formal Master File and Local File documentation depends on the applicable thresholds and conditions.

Does a Free Zone company have to pay 9% on the first AED 375,000 of non-Qualifying Income?

The standard 0% threshold on the first AED 375,000 does not apply to a QFZP’s Taxable Income that is not Qualifying Income.

That income is generally subject to the 9% QFZP rate.

Does the Free Zone regime last permanently?

The Corporate Tax Law provides the framework for the Free Zone incentive period, but a company must continue meeting the QFZP requirements.

Failure to satisfy the conditions can cause the company to lose QFZP status.

How MKCA Can Help Free Zone Businesses With Corporate Tax

Free Zone Corporate Tax can become complex where a company has several activities, different customer categories or operations outside the Free Zone.

MKCA can support UAE Free Zone businesses with:

• QFZP eligibility assessment.
• Qualifying Income analysis.
• Qualifying Activity and Excluded Activity review.
• De minimis calculations.
• Corporate Tax registration.
• Revenue classification.
• Transfer Pricing review.
• Free Zone Corporate Tax filing.
• Review of audited Financial Statement requirements.
• Ongoing Corporate Tax compliance.

The objective is to determine the company’s actual Corporate Tax position based on its activities and transactions rather than relying only on the wording of its Free Zone licence.

Businesses with mixed or complex activities can use MKCA’s Corporate Tax Advisory Services to review their Free Zone tax position before filing.

Conclusion

The UAE Free Zone Corporate Tax regime can provide a 0% rate on Qualifying Income, but that treatment is conditional.

A Free Zone company remains within the Corporate Tax system and generally needs to register, maintain records and file Corporate Tax Returns.

To remain a Qualifying Free Zone Person, the company must monitor its activities, Revenue, substance, Transfer Pricing, audited Financial Statements and the de minimis threshold.

The most important practical step is to classify Revenue correctly.

A business should know which income comes from Free Zone Persons, Non-Free Zone Persons, Qualifying Activities, Excluded Activities and other sources before the Corporate Tax Return is prepared.

The Free Zone licence is the starting point.

The actual transactions determine the Corporate Tax treatment.