UAE Corporate Tax for Free Zone Companies: What You Need to Know

Since June 2023, the UAE has imposed a federal corporate tax of 9% on taxable income exceeding AED 375,000. For free zone companies — which historically operated in a near-zero-tax environment — this was a seismic shift.

But free zones are not dead. The law includes a significant carve-out: Qualifying Free Zone Persons (QFZPs) can still enjoy a 0% corporate tax rate on qualifying income. The catch? You need to meet specific conditions, maintain proper books, and file returns on time.

UAE corporate tax works on a tiered system:

• 0% on taxable income up to AED 375,000
• 9% on taxable income above AED 375,000

This means a company earning AED 500,000 in taxable income pays 9% only on the AED 125,000 above the threshold — that is AED 11,250 in corporate tax.

There is also a Small Business Relief provision: businesses with revenue below AED 3 million can elect to be treated as having no taxable income for that period. This effectively brings the tax to zero, but you still need to file.

A Qualifying Free Zone Person (QFZP) is a free zone company that meets all of the following conditions:

• Maintains adequate substance in the UAE (employees, premises, decisions made locally)
• Derives qualifying income (income from transactions with other free zone persons, or income from qualifying activities)
• Has not elected to be subject to the standard corporate tax rate
• Keeps audited financial statements
• Meets the de minimis threshold — non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue

If you meet all conditions, your qualifying income is taxed at 0%. Non-qualifying income is taxed at 9%.

The key word is "qualifying income." Income from transactions with mainland UAE companies or from excluded activities does not qualify. The rules are specific and the consequences of getting it wrong are significant — you lose QFZP status for the entire tax period, not just the offending transaction.

Qualifying income for a QFZP generally includes:

• Income from transactions with other free zone persons (provided the other party also benefits from the 0% rate on that transaction)
• Income from certain qualifying activities performed for any person — such as manufacturing, processing, logistics, and holding of shares
• Income from the distribution of goods from or within a designated free zone

Non-qualifying income includes:

• Revenue from transactions with mainland UAE customers (unless it is from qualifying activities)
• Income from excluded activities (typically regulated activities like banking, insurance, and certain fund management activities)
• Revenue from immovable property outside the free zone

Corporate tax applies to financial years starting on or after 1 June 2023. If your company has a January-December financial year, your first corporate tax period started on 1 January 2024.

All businesses — including those expecting 0% tax as QFZPs — must register for corporate tax with the FTA and obtain a Tax Registration Number. The deadline for registration varies by license issuance date, but most free zone companies should already be registered.

Corporate tax returns must be filed within 9 months of the end of the relevant tax period. For a company with a December year-end, that means filing by 30 September of the following year.

If you run a free zone company, here is a practical checklist:

• Register for corporate tax if you have not already
• Assess your QFZP eligibility — do you meet substance, income, and de minimis requirements?
• Separate qualifying from non-qualifying income in your accounting records
• Maintain audited financial statements — this is mandatory for QFZPs
• Track the de minimis threshold throughout the year, not just at year-end
• File on time — even if your tax liability is zero

The era of "set up a free zone company and forget about tax" is over. But with proper bookkeeping and planning, free zone companies can still enjoy significant tax advantages.