For decades, free zones in the UAE have served as magnets for global investors offering 100% foreign ownership, simplified business setups, and most notably, tax exemptions. However, with the introduction of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, the UAE officially entered the corporate tax era. Naturally, this raised an important question among thousands of companies operating within free zones: how will corporate tax apply to them?
The UAE government has designed a structured yet flexible corporate tax regime that balances global tax standards with its commitment to maintaining a competitive investment environment. While free zone entities can still enjoy tax benefits, these advantages now depend on meeting certain qualifying conditions. This blog breaks down the framework in clear terms exploring definitions, rules, compliance needs, and what every free zone business must know to stay compliant under the UAE’s corporate tax law.
Before diving into details, it’s essential to understand some key definitions used in the UAE’s corporate tax framework.
A Free Zone is a designated geographic area within the UAE where businesses can operate under special regulations, often with customs and tax advantages. Popular examples include Jebel Ali Free Zone (JAFZA), Dubai Multi Commodities Centre (DMCC), and Abu Dhabi Global Market (ADGM).
Under the UAE corporate tax law, a Free Zone Person (FZP) refers to any juridical entity (like a company or establishment) incorporated, established, or registered in a free zone. These entities can benefit from special corporate tax treatment if they qualify.
The most critical category is the Qualifying Free Zone Person (QFZP). A QFZP is a free zone business that meets specific conditions and requirements outlined by the law. When these conditions are satisfied, the business enjoys 0% corporate tax on qualifying income and 9% tax on non-qualifying income.
On the other hand, a Non-Qualifying Free Zone Person (NQFZP) is any entity that fails to meet these requirements. Such entities are taxed at the standard 9% corporate tax rate on all their income.
This differentiation ensures that only those businesses contributing genuine economic value to the UAE and complying with transparency and substance rules enjoy preferential tax treatment.
To maintain 0% tax benefits, a Free Zone Person must satisfy several key conditions defined in Ministerial Decision No. 256 of 2023 and subsequent Cabinet Decision No. 100 of 2023. The main criteria include:
Maintaining Adequate Substance in the Free Zone: The entity must have sufficient operations, full-time qualified employees, and physical presence in the free zone to reflect genuine economic activity. This prevents businesses from simply using free zone registration as a tax shelter.
Earning Qualifying Income: Only specific types of income are eligible for the 0% corporate tax rate. This includes:
Compliance with the De Minimis Rule: A QFZP can earn a small percentage of non-qualifying income up to 5% of total revenue or AED 5 million, whichever is lower without losing its qualifying status.
Maintaining Audited Financial Statements: The entity must prepare and maintain audited financial statements in accordance with accounting standards approved by the FTA.
Failure to meet any of these requirements means the business will lose its QFZP status and become fully subject to corporate tax at 9% for that tax period and the following four years.
Corporate tax for free zone entities is based on income categorization determining which revenues are “qualifying” and which are “non-qualifying.”
Qualifying Income: Typically includes income from transactions with other free zone persons, overseas entities, or entities within the same free zone. For example, income earned from trading goods between free zones or providing qualifying services to a foreign client.
Non-Qualifying Income: Includes revenues from activities or transactions with the UAE mainland (unless the mainland customer is the importer of record) and income from excluded activities such as finance, insurance, or ownership of immovable property outside the free zone.
The 0% and 9% rates apply only to the relevant portions of income. Businesses must maintain detailed records to justify their categorization, and transfer pricing rules must be adhered to ensure arm’s-length pricing between related parties.
In cases where a Free Zone Person operates both within and outside the free zone, the income from the mainland branch will automatically be subject to the standard 9% corporate tax, while qualifying free zone income remains at 0%.
Additionally, any passive income such as dividends or capital gains from shareholdings in UAE or foreign companies typically remains exempt from corporate tax, provided certain conditions are met.
Even though free zone entities enjoy preferential tax treatment, they are still required to register for corporate tax and file annual tax returns with the FTA.
Key compliance obligations include:
Corporate Tax Registration: All free zone entities regardless of qualification must register for corporate tax and obtain a Tax Registration Number (TRN).
Filing Tax Returns: A single tax return must be filed electronically within nine months from the end of the relevant tax period.
Financial Record Keeping: Businesses must maintain detailed financial records, including segregated books for qualifying and non-qualifying income.
Transfer Pricing Documentation: If the free zone business transacts with related parties, it must comply with UAE transfer pricing regulations and maintain the required documentation.
Substance Documentation: Evidence of physical presence, employees, and expenditure within the free zone must be verifiable to demonstrate substance.
Failure to comply with these requirements may result in administrative penalties or the loss of qualifying status leading to full taxation at the standard rate.
For businesses operating across multiple free zones or those with hybrid models (e.g., online sales to mainland clients), professional tax consultation is strongly advised to ensure proper income classification and compliance with FTA expectations.
The UAE’s corporate tax regime still preserves significant benefits for free zone businesses that operate within the qualifying framework.
Key benefits include:
0% tax on qualifying income from approved activities.
Continued attraction for foreign investors and entrepreneurs.
Certainty and clarity through detailed FTA guidance.
Global alignment, ensuring compliance with international tax standards such as the OECD BEPS framework.
However, these benefits come with new responsibilities and potential risks:
Loss of QFZP status due to non-compliance or excess non-qualifying income.
Misclassification of income leading to disputes with tax authorities.
Increased administrative burden to maintain documentation and meet substance requirements.
To remain competitive and compliant, businesses should periodically review their operations, evaluate their transaction flows, and ensure that their activities fall under qualifying categories. Proactive tax planning, supported by professional guidance, can help avoid penalties and preserve benefits.
The UAE’s Ministry of Finance and the FTA continue to issue clarifications and decisions refining the corporate tax framework for free zone entities. Notably, Ministerial Decision No. (229) and (230) of 2025 further elaborates on the treatment of businesses operating within Free Zones.
In addition, Corporate Tax Law, Ministerial Decisions, Cabinet Decisions, and the FTA's Corporate Tax Guide for Free Zone Persons (CTGFZP1 - May 2024) all provide clear explanations of the requirements regarding UAE Corporate Tax Law offered advantages to Free Zone businesses that are registered in the United Arab Emirates. .
These updates demonstrate the UAE’s commitment to maintaining its reputation as a transparent, globally compliant, and investor-friendly jurisdiction while ensuring fair taxation practices. Businesses should stay updated on evolving regulations and interpretations to align with current expectations.
The introduction of corporate tax in the UAE marks a defining step in the country’s economic evolution bringing the nation in line with international fiscal standards while preserving its business-friendly ecosystem. For free zone entities, the continuous updates in the rules makes one point very strong; tax benefits remain available, but only for those who genuinely operate within the rules.
By meeting the qualifying conditions, maintaining substance, and ensuring transparency, businesses can continue to benefit from the 0% corporate tax regime on qualifying income. However, navigating these rules requires not only awareness but strategic oversight.
This is where ICB Tax Consultancy plays a crucial role. With deep expertise in UAE tax law and a client-focused approach, ICB assists businesses in identifying qualifying activities, structuring their operations efficiently, and ensuring full compliance with FTA regulations. Our goal is to help free zone businesses adapt confidently to the new tax era maximizing benefits while minimizing risk.
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