This blog offers a clear, updated breakdown of how Free Zone Persons (FZPs) in the UAE are taxed under the Corporate Tax regime. It focuses on what qualifies as “Qualifying Income,” the conditions that must be met to enjoy a 0% corporate tax rate, and how businesses can ensure compliance.
We’ll explore:
- Who counts as a Free Zone Person
- What exactly is “Qualifying Income”
- Exclusions from this benefit
- The importance of maintaining adequate substance
- The role of audited financials, transfer pricing, and reporting
- Transitional rules and anti-abuse safeguards
Let’s dive in.
Free Zones have long been a cornerstone of the UAE’s business landscape, attracting investment with incentives like tax holidays and streamlined processes. Now, with the introduction of Corporate Tax, the UAE has preserved this advantage—but with clear boundaries.
Introduction
The Federal Tax Authority (FTA) and Ministry of Finance have introduced a nuanced framework that allows Free Zone Persons to continue benefiting from 0% Corporate Tax on Qualifying Income, provided they meet specific criteria.
This isn’t a blanket exemption. It’s conditional—and businesses operating in Free Zones need to understand the fine print.
Who is a Free Zone Person?
A Free Zone Person is a legal entity established in one of the UAE’s many Free Zones and licensed by the relevant Free Zone Authority.
But not all FZPs are treated equally under the Corporate Tax Law. The law distinguishes between:
- Qualifying Free Zone Persons (QFZPs): Those who meet certain conditions and are eligible for the 0% Corporate Tax rate on their Qualifying Income.
- Non-qualifying Free Zone Persons: Those who fail to meet the required conditions and are taxed at the standard 9% rate.
Being in a Free Zone doesn’t automatically qualify you for tax benefits—you must actively meet the law’s criteria.
What is Qualifying Income?
This is where the real focus lies.
Under the law, “Qualifying Income” refers to income earned by a Qualifying Free Zone Person from specific sources. These include:
- Transactions with other Free Zone Persons, provided they do not fall under Excluded Activities.
- Income from non-Free Zone Persons, only if it’s related to Qualifying Activities.
- Income from ownership or exploitation of Qualifying Intellectual Property (IP).
- Any other income, provided the QFZP satisfies the de minimis threshold (explained later).
Each category comes with definitions, conditions, and limitations. Understanding what qualifies—and what doesn’t—is key to maintaining the 0% rate.
Excluded Activities
Not all business activity within a Free Zone qualifies for tax benefits.
The law identifies certain Excluded Activities, which will disqualify that income from receiving the 0% rate—even if they occur between Free Zone Persons.
These include:
- Banking and financial services (excluding specific regulated treasury operations)
- Insurance activities (excluding captive insurance)
- Ownership or use of immovable property (except for commercial leasing in a Free Zone)
- Certain regulated activities like ownership of shares in mainland companies
- Income from oil, gas, and other natural resources
If your Free Zone business earns income from any of these activities, that portion is taxed at the standard 9% rate.
De Minimis Requirements
Here’s where it gets a bit technical—but it matters.
The De Minimis Rule allows a QFZP to earn a small portion of non-qualifying income without losing its tax-free status.
The threshold:
The non-qualifying income must not exceed the lower of:
- 5% of total revenue, or
- AED 5 million
If the threshold is breached, the Free Zone Person loses its 0% rate—not just for that portion, but for all its income in that tax period.
So yes, a small mistake can mean a big tax bill.
Proper classification and internal controls are critical to staying within this allowance.
Conditions to be a Qualifying Free Zone Person
To enjoy the 0% Corporate Tax on Qualifying Income, a Free Zone Person must meet all of the following conditions:
- Maintain Adequate Substance
- Must have sufficient assets, employees, and operations in the Free Zone.
- This isn’t just a formality—it must reflect economic reality.
- Derive Qualifying Income
- The business must be generating income that meets the definitions explained earlier.
- Not Elect for Standard Taxation
- Some FZPs may choose to be taxed at 9% voluntarily. Once elected, they must wait at least 4 years before switching back.
- Maintain Audited Financial Statements
- Financials must be independently audited and kept in proper form.
- The deadline for compliance is start of the second Tax Period beginning on or after 1 January 2024.
- Comply with Transfer Pricing Rules
- Related party transactions must be arm’s length, documented, and supported with transfer pricing files.
Meeting these requirements is not optional—they are mandatory to claim the 0% rate.
Reporting Requirements
The government isn’t taking your word for it. QFZPs are required to report the following annually:
- Corporate Tax return
- Election (if choosing standard taxation)
- Details of Qualifying and Excluded Income
- Confirmation of meeting de minimis test
- Evidence of substance
- Transfer Pricing disclosures
- Audited Financials
The submission deadline is 9 months from the end of the relevant tax period.
Non-compliance in reporting can invalidate the tax benefit, even if all business conditions were met.
Transitional Provisions
For entities that were already operating in Free Zones before 1 June 2023, certain transitional rules apply:
- Income from contracts signed before this date can still qualify for the 0% rate until the earlier of:
- Renewal of the contract, or
- 1 January 2026
This is designed to ease the transition for legacy businesses while phasing in the new regime.
However, these contracts must not have been artificially extended to misuse the benefit.
The authorities will scrutinize such extensions closely.
Anti-Abuse Rule
To preserve the spirit of the law, the regime includes a General Anti-Abuse Rule (GAAR).
If a structure or transaction has been entered into mainly to obtain a Corporate Tax advantage, and lacks commercial substance, the FTA may:
- Ignore the structure, and
- Recalculate the tax liability
This applies even if the transaction technically complies with the law. In short, intent matters.
Free Zone Persons should avoid artificial setups purely created to qualify for the 0% rate. That includes shell entities, circular cash flows, or meaningless IP transfers.
The FTA is watching—and GAAR gives them the power to act.
Final Thoughts
The UAE has struck a delicate balance with its Corporate Tax regime for Free Zone Persons. While the 0% tax rate continues to attract investment, it’s no longer handed out freely. Today, it’s earned by:
- Doing the right kind of business,
- In the right way,
- With the right records,
- And for the right reasons.
Here’s what your Free Zone business needs to keep in mind:
- Not all Free Zone income qualifies — check your activities
- Stay within the de minimis limits if you earn mixed income
- Keep proper audited financials and pass the substance test
- Understand what qualifies, what doesn’t, and what’s excluded
- Avoid structures that raise red flags under the anti-abuse rules
With the right planning and honest execution, Free Zone businesses can continue to thrive in the UAE’s competitive, tax-efficient environment — but only if they understand and comply with the evolving framework.
