Corporate Tax and Free Zone Taxation in the UAE
By kitaab
The United Arab Emirates (UAE) has become a hotspot for businesses from around the world and it’s easy to see why. One of the biggest draws? Free Zones. These special areas make setting up a business simpler, offering perks like 100% foreign ownership, smoother administrative processes, modern infrastructure, and flexible legal structures.
On top of that, the UAE’s Corporate Tax rules make Free Zones even more appealing. If your company or branch meets certain conditions, you could benefit from a 0% Corporate Tax rate on qualifying income.
In this blog, we’ll break down what that means, explain who qualifies as a Free Zone Person (QFZP), and show how you can make the most of these advantages.
What's Kitaab?
Kitaab provides finance, accounting and tax services for freelancers, start-ups and businesses in the service sector
Learn moreWhat are free zones in the UAE and why are they popular?
Free Zones are designed to attract international businesses by offering a comprehensive set of incentives:
100% Foreign Ownership: No local sponsor or partner required.
Streamlined Business Setup: Simplified registration and licensing processes.
Advanced Infrastructure: Modern office spaces, logistics, and tech support.
Networking Opportunities: Access to business communities and sector-specific clusters.
Flexible Legal Structures: Availability of branches, limited liability companies, and specialized commercial activities.
These advantages make Free Zones ideal for companies seeking efficiency, flexibility, and growth potential in the UAE market.
How does UAE corporate tax apply to free zone companies?
Under UAE Corporate Tax laws, Free Zone companies that meet specific conditions can benefit from 0% Corporate Tax on qualifying income. The main ways this applies are:
Qualifying Free Zone Person (QFZP) Transactions: Income from transactions between Free Zone Persons, provided they are the beneficial recipients.
Qualifying Activities in Free Zones or Designated Zones (DZ): Certain income-generating activities performed within the geographic boundaries of Free or Designated Zones.
Who qualifies as a free zone person (QFZP)?
To benefit from the 0% Corporate Tax rate, a Free Zone Person must meet the following criteria:
1. Free Zone Person Definition A Free Zone Person is a legal entity incorporated, established, or registered in a Free Zone. This includes:
Branches of UAE or non-resident companies registered in a Free Zone.
The 0% tax rate applies only to income generated within the Free Zone business.
Scenario Examples:
| Location | Tax Rate Application |
1 | Head Office in Free Zone, Branch UAE/Outside | 0% applies to Free Zone business only |
2 | Branch in Free Zone, Head Office UAE | 0% applies to Free Zone business only |
3 | Branch in Free Zone, Head Office Outside UAE | 0% applies to Free Zone business only |
2. Adequate Substance Requirement The Free Zone Person must maintain sufficient substance within the Free Zone:
Adequate assets, employees, and operational expenses.
Core income-generating activities may be outsourced within the Free Zone, but adequate supervision is required.
3. Qualifying Income Sources A QFZP must derive income from one or more of the following:
Transactions with other Free Zone Persons (beneficial recipients only).
Qualifying Activities performed in the Free Zone.
Ownership or exploitation of Qualifying Intellectual Property (IP).
Other income if de minimis thresholds are met.
Non-qualifying income (taxable at 9%) includes:
Income from foreign or domestic permanent establishments.
Immovable property outside Free Zones (except commercial property in Free Zones).
Non-qualifying IP income.
4. Standard Corporate Tax Election The Free Zone Person must not opt for the standard UAE Corporate Tax rate on its income.
5. Arm’s Length Principle Free Zone companies must keep transactions with related parties like their parent company or sister entities at fair, market-based prices. This prevents profits from being shifted artificially just to take advantage of the 0% tax rate. In practice, the tax authorities look at three things:
What your business does (functions performed)
What resources it uses (assets used)
What risks it takes (risks assumed)
Getting this right protects your Free Zone tax benefits. Kitaab helps businesses document and structure these transactions properly, so they stay compliant while enjoying the 0% rate. 6. Transfer Pricing Documentation Required if thresholds are met:
Master file, local file, disclosure forms
Ensures compliance with arm’s length principle.
7. Audited Financial Statements All Free Zone Persons must maintain audited financial statements, regardless of revenue size.
8. De Minimis Requirement Non-qualifying revenue must not exceed the lower of:
AED 5,000,000
5% of total revenue
Non-qualifying revenue includes:
Excluded activities
Transactions with Non-Free Zone Persons
Non-beneficial transactions
Taxation of a qualifying Free Zone Person
Income Type | Tax Rate |
Qualifying Income | 0% |
Non-Qualifying Income | 9% |
QFZPs do not benefit from small business relief or the AED 375,000 threshold.
Non-qualifying periods do not disqualify a QFZP if no non-qualifying income is earned.
Elections and non-qualifying periods
Free Zone Persons may elect out of QFZP treatment anytime during a tax period, before the return filing due date.
If QFZP criteria are not met, the entity loses QFZP status for the current and next four tax periods.
The UAE Corporate Tax framework offers significant incentives for Free Zone companies, including a 0% tax rate on qualifying income. By ensuring compliance with QFZP conditions, businesses can optimize their tax position, reduce liabilities, and reinvest savings into growth initiatives. Strategic planning, proper documentation, and adherence to Free Zone regulations are essential to maximize these benefits and maintain the competitive advantage of operating within UAE Free Zones.