Updated 2026: UAE Free Zone companies are subject to Corporate Tax and must register with the Federal Tax Authority. The 0% Corporate Tax rate is not automatic for every Free Zone company. It applies only to the Qualifying Income of a company that meets all conditions to be treated as a Qualifying Free Zone Person.
A Free Zone company that does not meet the required conditions, or elects to follow the standard Corporate Tax regime, is taxed under the ordinary UAE Corporate Tax rules. The company’s licence, activities, customers, income sources, operational substance and compliance records must therefore be reviewed before assuming that the 0% rate applies.
How Corporate Tax Applies to Free Zone Companies
The Corporate Tax treatment depends on whether the company qualifies as a Qualifying Free Zone Person.
| Free Zone Company Status | Applicable Corporate Tax Rate |
|---|---|
| Qualifying Free Zone Person earning Qualifying Income | 0% on Qualifying Income |
| Qualifying Free Zone Person earning taxable income that is not Qualifying Income | 9% from the first dirham of taxable income |
| Free Zone company subject to the standard Corporate Tax regime | 0% on taxable income up to AED 375,000 and 9% on taxable income above AED 375,000 |
The AED 375,000 threshold applies to companies taxed under the standard Corporate Tax regime. It does not apply to the non-qualifying taxable income of a Qualifying Free Zone Person.
Conditions for the 0% Free Zone Corporate Tax Rate
A Free Zone company must meet all applicable conditions to retain Qualifying Free Zone Person status. It must:
- Be incorporated, established or registered in a recognised UAE Free Zone;
- Maintain adequate economic substance in the relevant Free Zone or Designated Zone;
- Derive Qualifying Income;
- Keep non-qualifying revenue within the permitted de minimis limit;
- Comply with the arm’s length principle for transactions with Related Parties and Connected Persons;
- Maintain the required transfer pricing documents;
- Prepare and maintain audited financial statements; and
- Not elect to be subject to the standard Corporate Tax regime.
Holding a Free Zone trade licence alone is not sufficient. The company must satisfy these requirements for every relevant Tax Period.
More information is available in our guide to the conditions for Qualifying Free Zone Person status.
What Is Qualifying Income?
Qualifying Income may include:
- Income from transactions with another Free Zone Person where that company is the Beneficial Recipient of the goods or services, provided the income is not from an Excluded Activity;
- Income from transactions with mainland UAE or foreign customers where the income arises from a Qualifying Activity that is not an Excluded Activity;
- Qualifying Income from eligible patents, copyrighted software and other permitted Qualifying Intellectual Property, calculated under the applicable nexus rules; and
- Limited other income where the company satisfies the de minimis requirements.
A Free Zone customer is the Beneficial Recipient where it has the right to use and enjoy the goods or services and is not legally or contractually required to pass them to another person.
This means that transactions with mainland or overseas customers are not automatically subject to 9% Corporate Tax. The treatment depends on whether the Free Zone company is conducting a recognised Qualifying Activity.
Current Qualifying Activities
Under Ministerial Decision No. 229 of 2025, the following are recognised as Qualifying Activities, subject to their detailed legal conditions:
- 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;
- Headquarters services provided to Related Parties;
- Treasury and financing services provided to Related Parties or conducted for the company’s own account;
- Financing and leasing of aircraft;
- Distribution of goods or materials in or from a Designated Zone;
- Logistics services; and
- Activities that are genuinely ancillary to a Qualifying Activity.
The 2025 rules expanded the qualifying commodity trading category to include eligible industrial chemicals, associated by-products and environmental commodities such as carbon credits and renewable energy certificates, provided the relevant quoted-price conditions are met.
Distribution is a Qualifying Activity only where it is conducted in or from a Designated Zone and the specific importation, customer and resale or processing requirements are satisfied. Operating from an ordinary Free Zone does not automatically make distribution income qualifying.
Excluded Activities
Income from the following activities is generally treated as non-qualifying:
- Transactions with natural persons, except for specified qualifying shipping, fund management, wealth and investment management, and aircraft financing or leasing activities;
- Banking activities;
- Insurance activities, except for permitted reinsurance and related qualifying activities;
- Finance and leasing activities other than the specific activities permitted by the Free Zone Corporate Tax rules;
- Ownership or exploitation of immovable property, except qualifying transactions involving Commercial Property located in a Free Zone and another Free Zone Person; and
- Activities that are ancillary to an Excluded Activity.
Income attributable to a mainland UAE Permanent Establishment or a foreign Permanent Establishment is generally subject to the 9% rate. Income from non-commercial property and most income from intellectual property other than Qualifying Intellectual Property is also outside the 0% regime.
The De Minimis Rule for Non-Qualifying Revenue
A Qualifying Free Zone Person may earn a limited amount of non-qualifying revenue without losing its status.
The non-qualifying revenue for a Tax Period must not exceed the lower of:
- 5% of the company’s total revenue for that Tax Period; or
- AED 5 million.
For example, where total relevant revenue is AED 20 million, the permitted limit is AED 1 million because 5% of AED 20 million is lower than AED 5 million.
The de minimis calculation includes revenue from Excluded Activities, non-qualifying transactions with Non-Free Zone Persons and transactions where another Free Zone Person is not the Beneficial Recipient.
Revenue attributable to a Domestic or Foreign Permanent Establishment, specified immovable-property income and most intellectual-property income is excluded from the de minimis calculation. Such income may still be taxed at 9% even where the company remains a Qualifying Free Zone Person.
Adequate Substance in the Free Zone
A Qualifying Free Zone Person must carry out its core income-generating activities in the relevant Free Zone or Designated Zone. Considering the nature and scale of its activities, it must have:
- Adequate assets;
- An adequate number of qualified full-time employees; and
- An adequate level of operating expenditure.
Core activities may be outsourced to another person in the relevant Free Zone or Designated Zone where the company maintains adequate supervision. A licence, flexi-desk or registered address without sufficient operational substance may not be enough to support Qualifying Free Zone Person status.
Audited Financial Statements
A Qualifying Free Zone Person must prepare and maintain audited financial statements, regardless of its revenue level.
Ministerial Decision No. 84 of 2025 applies this requirement to Tax Periods commencing on or after 1 January 2025. The audit should support the company’s revenue classification, income allocation, expenses, Related Party transactions and calculation of Qualifying and non-qualifying income.
Transfer Pricing Requirements
Free Zone companies must apply the arm’s length principle to transactions and arrangements with Related Parties and Connected Persons. This applies to domestic and cross-border transactions, including dealings with mainland entities, overseas group companies and other Free Zone companies.
The company must maintain sufficient evidence showing:
- The nature of each Related Party transaction;
- The pricing method applied;
- The functions performed, assets used and risks assumed by each party;
- The allocation of shared costs and expenses; and
- Why the transaction reflects an arm’s length result.
A master file and local file must also be maintained where the applicable transfer pricing documentation thresholds are met.
What Happens If the Conditions Are Not Met?
If a company fails to meet a Qualifying Free Zone Person condition during a Tax Period, it generally loses its qualifying status from the beginning of that Tax Period and for the following four Tax Periods.
The company will therefore be subject to the standard Corporate Tax regime for a total of five Tax Periods, even if it corrects the issue during that period.
A Free Zone company may also elect to be taxed under the standard Corporate Tax regime. The election can apply from the beginning of the current Tax Period or the following Tax Period and remains effective for that period and the next four Tax Periods.
The election is therefore not permanently irrevocable, but it cannot be reversed during the five-period commitment.
Limitations That Apply to Qualifying Free Zone Persons
A Qualifying Free Zone Person cannot generally benefit from:
- Small Business Relief;
- Qualifying Group Relief;
- Business Restructuring Relief;
- Transfer of Tax Losses between group companies; or
- Membership in a Corporate Tax Group.
A company should compare the benefit of the 0% rate with the restrictions and compliance costs before deciding whether the Free Zone regime is suitable for its activities.
Registration, Filing and Record-Keeping
All Free Zone companies must complete Corporate Tax registration, including companies that expect all their income to qualify for the 0% rate.
A Corporate Tax Return must generally be submitted, and any Corporate Tax due must be paid, within nine months from the end of each Tax Period. Relevant records and supporting documents must be retained for at least seven years following the end of the Tax Period.
Free Zone companies should maintain separate records for:
- Transactions with Free Zone Persons;
- Transactions with mainland and foreign customers;
- Qualifying and Excluded Activities;
- Income attributable to Permanent Establishments;
- Immovable-property and intellectual-property income;
- Related Party transactions;
- Direct and shared expenses; and
- The annual de minimis calculation.
Our Corporate Tax filing support can assist with the classification and reporting of Free Zone income.
Domestic Minimum Top-up Tax for Large Multinational Groups
A Free Zone company that belongs to a large multinational enterprise group may also fall within the UAE Domestic Minimum Top-up Tax rules.
The rules apply to UAE Constituent Entities of multinational groups with consolidated annual revenue of at least EUR 750 million in at least two of the four financial years preceding the relevant year. The UAE Domestic Minimum Top-up Tax applies to financial years beginning on or after 1 January 2025 and is designed to bring the effective tax rate on in-scope UAE profits up to the 15% minimum rate.
Qualifying Free Zone Person status does not, by itself, remove an in-scope multinational group from the Domestic Minimum Top-up Tax requirements.
What Free Zone Companies Should Review
- Confirm whether each business activity is qualifying, excluded or neither;
- Classify customers as Free Zone Persons, Non-Free Zone Persons or natural persons;
- Confirm that Free Zone customers are the Beneficial Recipients;
- Calculate non-qualifying revenue against the de minimis limit;
- Review whether the company has adequate staff, assets and expenditure in the Free Zone;
- Prepare audited financial statements;
- Review Related Party pricing and transfer pricing documentation;
- Separate Qualifying Income from income taxable at 9%;
- File the Corporate Tax Return within the applicable deadline; and
- Assess Domestic Minimum Top-up Tax exposure where the company belongs to a large multinational group.
Free Zone status can provide a 0% Corporate Tax benefit, but only where the company’s income and operations meet the detailed legal conditions. Our Corporate Tax advisers can review the company’s activities, income streams, substance, transfer pricing and filing position before the Tax Return is submitted.
