Do UAE free zone companies pay Corporate Tax? How the 0% rate really works

Every UAE free zone company must register for Corporate Tax and file an annual return. A company that is a Qualifying Free Zone Person pays 0% on qualifying income and 9% on other taxable income. To qualify it must keep adequate substance in the free zone, earn qualifying income, stay within the de minimis limit, follow transfer pricing rules and have audited financial statements.

Since UAE Corporate Tax took effect for financial years starting on or after 1 June 2023, the most common question from free zone companies is whether they still pay nothing. The answer is: possibly, but it is not automatic.

Does every free zone company have to register?

Yes. Every free zone company is a taxable person under Federal Decree-Law No. 47 of 2022. It must register with the Federal Tax Authority, keep proper accounts and file a Corporate Tax return for each tax period, even if it expects to pay 0%.

What is a Qualifying Free Zone Person?

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

• Adequate substance. Its core income-generating activities are carried out in the free zone, with enough assets, qualified full-time staff and operating expenditure.
• Qualifying income. It earns income from the activities and counterparties that the rules treat as qualifying.
• De minimis limit. Its non-qualifying revenue does not exceed the lower of AED 5 million or 5% of total revenue.
• No election. It has not elected to be taxed at the standard rates.
• Transfer pricing. It complies with the arm’s length principle and keeps transfer pricing documentation.
• Audited financial statements. It prepares financial statements audited under the applicable standards.

What counts as qualifying income?

Broadly, income from transactions with other free zone persons (unless it comes from an excluded activity), and income from specific qualifying activities carried out with anyone. The qualifying activities are listed in Ministerial Decision No. 265 of 2023 and include manufacturing and processing, trading of qualifying commodities, holding shares, ship management, reinsurance, fund and wealth management, headquarter and treasury services, and certain logistics and distribution activities.

Income from selling goods or services to mainland customers usually does not qualify unless it falls within one of those activities.

What happens if a condition is missed?

The company stops being a QFZP from the start of the tax period in which it fails, and cannot return to QFZP status for the following four tax periods. For those five periods its taxable income is taxed at the standard rates: 0% up to AED 375,000 and 9% above that.

A practical checklist for free zone companies

1. Map every revenue stream to its customer type and activity.
2. Test non-qualifying revenue against the de minimis limit each quarter, not just at year end.
3. Document where your staff, assets and decision-making sit.
4. Prepare transfer pricing files for related-party transactions.
5. Book the audit early; audited financial statements are a condition, not a formality.

Does the AED 375,000 0% band apply to a Qualifying Free Zone Person?

No. A Qualifying Free Zone Person pays 0% on qualifying income and 9% on taxable income that is not qualifying income. The AED 375,000 band applies to companies taxed at the standard rates.

Can a free zone company sell to mainland customers and keep the 0% rate?

It can keep QFZP status if the mainland revenue is qualifying income or stays within the de minimis limit. Mainland revenue that is non-qualifying and exceeds the limit ends QFZP status for five tax periods.