Free Zone Person status lets businesses apply the 0% corporate tax rate to qualifying income earned from permitted activities inside UAE free zones.
Qualifying income must come only from approved activities in the zone and must not include excluded activities such as banking, insurance, or natural resource extraction.
Tax registration with the Federal Tax Authority remains compulsory even when the 0% rate applies, allowing the FTA to monitor compliance.
Mainland income or excluded activities is taxed at the standard 9% rate, so clear income segregation and reporting are essential.
Your business operates in a free zone, and you have long enjoyed the 0% corporate tax rate. The new UAE Corporate Tax Law, however, raises questions. Will you still qualify for that advantage, or will you move to the 9% rate? The Federal Tax Authority now applies strict criteria to decide who keeps the benefit, and understanding those conditions is vital for business continuity.
This article explains the corporate tax free zone UAE framework and shows how to qualify as a Free Zone Person under the new rules. You will learn the steps to become a Qualifying Free Zone Person, what “substance” means inside a designated zone, and which activities trigger the 9% rate. By the end, you will have a clear plan to keep your tax edge while meeting every FTA requirement.
What the new corporate tax regime means for free zone companies
The new corporate tax law has reshaped how free zone entities are taxed. Cabinet Decision No. 265 states that qualifying entities keep the 0% rate, while non-qualifying entities pay 9%.
A Free Zone Person enjoys 0% tax only if specific tests are met. Federal Decree-Law No. 47 of 2022 requires that the entity earn qualifying income solely from qualifying activities within a designated zone during every tax period.
If a Qualifying Free Zone Person earns income from any excluded activity, the benefit ends, and the 9% rate applies to that income.
Four common misconceptions still circulate:
All free zone companies automatically qualify for 0% tax.
A free zone licence alone guarantees tax exemption.
Mainland income can fall under the 0% rate.
The exemption covers passive income and investment returns inside the zone.
Free zone incentives remain valuable in 2025, but compliance is now critical. Structure your operations so that income remains qualifying, and excluded activities stay outside the entity.
Free Zone Person vs. qualifying Free Zone Person: key definitions
Knowing the difference between a Free Zone Person and a Qualifying Free Zone Person is essential for corporate tax-free zone UAE compliance. Both terms appear in Federal Decree-Law No. 47 of 2022, yet carry different tax outcomes.
A Free Zone Person is any entity incorporated and licensed in a UAE-designated free zone. The status is automatic upon licensing, but it does not guarantee tax relief.
A Qualifying Free Zone Person meets stricter tests: only qualifying activities, solely qualifying income, and full substance requirements. Only these entities enjoy the 0% rate on qualifying income.
Status
Headline rate
Main conditions
Free Zone Person
9% standard rate
Only qualifying activities, substance test, and audited statements
Qualifying Free Zone Person
0% on qualifying income
Only qualifying activities, substance test, audited statements
Non-qualifying income
9% standard rate
Applies to either status when revenue is non-qualifying
Moving from a Free Zone Person to a Qualifying Free Zone Person involves five steps:
Stop all excluded activities listed in Article 21 of the law.
Confirm every revenue stream falls under the qualifying categories.
Satisfy economic substance: adequate employees, assets, and local costs.
Maintain proper books and produce audited financial statements.
File the annual qualifying-status notification with the free zone authority.
Any permanent establishment outside the zone or any excluded activity ends the benefit, so professional guidance is often necessary.
Qualifying income: keeping your 0% rate intact
A Qualifying Free Zone Person keeps the 0% corporate tax rate only when revenue fits the qualifying income tests. Recognising those categories protects your advantage and keeps you compliant.
Key examples include manufacturing goods inside the zone, then exporting them abroad, storing or distributing products for overseas clients, and offering logistics services to foreign establishments. For instance, a company producing electronics in JAFZA and shipping to Europe earns qualifying income.
Service providers also qualify when their beneficial recipients are outside the UAE mainland. A software firm in Dubai Internet City that serves only international clients meets the test. Revenue from excluded activities, such as services to mainland entities or holding mainland investments, does not qualify.
Transfer pricing compliance is essential. Related-party transactions must follow the arm’s length principle, with documentation to prove it.
Core documents include:
Contracts showing the nature and location of activities.
Customer agreements that name the recipient and confirm their location.
Transfer pricing files that demonstrate arm’s length pricing.
Monthly income schedules separating qualifying and excluded revenue.
Excluded activities: hidden triggers that lead to 9% tax
A Free Zone Person can lose the 0% rate by carrying out excluded activities. Knowing these triggers safeguards your status.
Banking, insurance, and other financial services beyond simple trading.
Extraction of natural resources such as oil, gas, or minerals.
Activities of a domestic permanent establishment outside the free zone.
Critical alert: Intellectual property income is complex. If licensing lacks economic substance or arm’s length pricing, the income becomes excluded, and the 9% rate applies.
Example: A technology firm earns AED 2 million from software licences (qualifying). It buys commercial property in Dubai Marina for AED 500,000. That real estate deal is an excluded activity, so the full AED 2.5 million is now taxed at 9%.
The change happens immediately, even if the excluded activity is minor.
The de minimis rule: balancing qualifying and non-qualifying income
The de minimis rule gives limited relief. A Qualifying Free Zone Person can still earn some non-qualifying income, as long as it stays below 5% of total income or the prescribed absolute limit.
Income mix
% non-qualifying
Tax outcome
Pure qualifying activities
0%
0% corporate tax
Mostly qualifying, small treasury activity
3%
0% corporate tax
Mixed income above threshold
7%
9% on taxable income
Significant excluded activities
15%
Full 9% rate
Example: A manufacturer earns AED 10 million in qualifying income and AED 400,000 from local sales. The non-qualifying share is 3.8%, so the 0% rate stands.
Exceed the limit, and you can:
Move excluded activities to a separate entity.
Grow the qualifying income to dilute the percentage.
Transfer non-qualifying revenue to a mainland subsidiary.
Review treasury services for possible reclassification.
Compliance essentials: substance, transfer pricing, and reporting
Compliance extends far beyond tax registration. Economic Substance Regulations require genuine operations: staff, assets, and decision-making inside the UAE.
Transfer pricing must meet OECD standards. Keep full documentation and audited financial statements, and file everything on the EmaraTax platform on time.
Penalties include:
Late return filing: AED 500 within 30 days, AED 1,000 after.
Transfer pricing failures: Up to AED 50,000.
Economic substance breaches: AED 10,000 to AED 300,000.
How CTC Tax & Accounting safeguards your free zone advantage
As an FTA-registered Tax Agency with ACCA certifications and Big Four experience, our team keeps your Free Zone Person status compliant while you enjoy the 0% rate.
Popular services include:
Corporate tax registration with accurate qualifying documentation.
Ongoing monitoring to preserve qualifying income status.
Outsourced CFO support for strategic growth and cash-flow insights.
Do not let complex rules erode your advantage. Book your free 20-minute consultation and keep your compliance secure.
Frequently asked questions
Do free zone companies have to pay UAE corporate tax?
They can access the 0% rate if they qualify, but they are not automatically exempt. Entities that fail the qualifying tests pay the standard 9% on taxable income, especially if they earn mainland revenue or conduct excluded activities.
How can a free zone company qualify for the 0% UAE corporate tax rate?
The company must become a Qualifying Free Zone Person, earn only qualifying income, maintain economic substance, avoid excluded activities, and register with the FTA. It must also file its annual tax return even when the tax due is zero.
Is corporate tax registration mandatory for all free zone companies?
Yes. Every free zone company that meets the revenue threshold must register with the FTA. Registration allows authorities to verify ongoing compliance with the 0% regime.
What officially defines a Qualifying Free Zone Person?
It is an entity licensed in a designated free zone that carries out qualifying activities, earns qualifying income, meets substance tests, prepares audited statements, and files annual notifications confirming its status.
What is qualifying income, and how does it differ from income taxed at 9%?
Qualifying income arises from approved activities conducted wholly inside the free zone or with overseas counterparties. Income from mainland transactions or excluded activities is non-qualifying and taxed at 9%.
What are excluded activities, and what happens if a company undertakes them?
Excluded activities include certain financial services, insurance, real estate, and natural resource extraction. Conducting any excluded activity makes all related income subject to the 9% rate and removes the 0% benefit.
How does the de minimis rule help if a company earns some non-qualifying income?
If non-qualifying income is below 5% of total income or the set absolute limit, the entity can keep its 0% status. Exceeding either limit triggers the 9% rate on all taxable income.
What compliance obligations must a free zone company meet to keep the 0% rate?
Key duties include annual tax returns, economic substance reporting, proper bookkeeping, transfer pricing documentation, and prompt updates to the FTA and free zone authority about any business changes.
How is income from transactions with mainland UAE companies treated?
Such income is usually non-qualifying and taxed at 9%. Limited exceptions may apply, so each mainland deal should be reviewed before execution.
Do salaries or dividends paid by a free zone company attract corporate tax?
Salaries are deductible business expenses and do not attract corporate tax for the paying company. Dividend treatment depends on the recipient’s tax residence and the company’s status, so tailored advice is recommended.
