The UAE has long stood as a global financial center and a preferred destination for foreign investors due to its 0% corporate income tax policy—until recently. In December 2022, the UAE government announced the implementation of a Federal Corporate Tax (CT) Law, which officially came into effect on June 1, 2023.
Under the new UAE Corporate Tax framework, a 9% corporate tax applies to annual taxable income exceeding AED 375,000 for businesses that do not qualify as Qualifying Free Zone Persons (QFZPs).
However, Free Zone businesses that meet specific eligibility criteria can continue enjoying a 0% corporate tax rate on qualifying income. Any income that falls outside the qualifying scope is taxed at 9%.
If you’re a business owner operating in a UAE Free Zone, this guide will help you understand how the new corporate tax regime affects your operations and what steps you must take to stay compliant.
At KrezKo, a leading corporate tax consultant in Dubai, we provide expert guidance and corporate tax filing services to help Free Zone companies like yours navigate this new tax landscape with confidence.
What is Qualifying Income for Free Zone Persons?
To benefit from the 0% corporate tax rate, Free Zone entities must generate qualifying income as defined by the UAE Ministry of Finance. Qualifying income typically includes:
- Transactions with other Free Zone entities
- Income from international business activities (outside the UAE)
- Qualifying activities such as manufacturing, holding shares, or managing funds
- Income earned from certain designated activities (as per Cabinet Decision No. 55 of 2023)
It’s important to note that non-qualifying income—such as revenue from transactions with mainland UAE entities—will be taxed at 9%.
Conditions to Be a Qualifying Free Zone Person (QFZP)
- Maintain Adequate Economic Substance in the UAE Your business must have a physical presence, full-time staff, and income-generating activities in the Free Zone.
- Derive Only Qualifying Income Engaging in non-qualifying activities may make your business subject to the full 9% corporate tax.
- Not Elect to Be Taxed at 9% Free Zone companies can choose to be taxed like a mainland entity. If not, they must follow QFZP rules.
- Submit Annual Tax Returns & Financial Statements Even if you qualify for the 0% rate, filing is mandatory.
- Be a Tax Resident Person in a Free Zone You must be registered in a recognized UAE Free Zone with a valid license.
What Are Qualifying Activities?
According to the UAE Ministry of Finance, Qualifying Activities are specific business operations eligible for the 0% tax rate if all compliance conditions are met. These include:
- Manufacturing or processing of goods and materials
- Trading of Qualifying Commodities (such as metals, minerals, energy products)
- Holding shares or securities for investment purposes
- Ownership, management, and operation of ships
- Reinsurance services
- Fund and wealth management services
- Headquarter services to related parties
- Treasury and financing services to related parties
- Financing or leasing of aircraft
- Distribution of goods from a designated free zone
- Logistics services
- Any activity ancillary to the above
If your Free Zone company is engaged in any of these, you may be eligible for the 0% corporate tax rate, subject to satisfying other conditions (like maintaining economic substance and not conducting mainland transactions).
The Cabinet Decision also specifies Excluded Activities that are not eligible for Free Zone tax benefits. These include:
- Banking services
- Insurance (other than reinsurance)
- Finance and leasing (non-related parties)
- Ownership of intellectual property assets
- Activities with natural persons (mainland UAE transactions)
If your business is involved in any of these, you will likely be taxed at the standard 9% corporate tax rate.
What Is Qualifying Income?
Qualifying income is a key concept in the UAE’s corporate tax law that determines whether a Free Zone Person is eligible for the 0% corporate tax rate. Only income that meets the conditions under the UAE Ministry of Finance guidelines and Cabinet Decision No. 55 of 2023 will be considered qualifying for tax relief.
Free Zone businesses must assess and differentiate their qualifying and non-qualifying income to ensure compliance and avoid penalties.
- Transactions with other Free Zone Persons (i.e., B2B within the same or other UAE Free Zones)
- Income from transactions with foreign (non-UAE) entities
- Income from eligible Qualifying Activities (as defined in Cabinet Decision No. 265 of 2023)
- Income from the sale of goods or services within a Designated Free Zone
- Ancillary income related to core qualifying business operations
This income is taxed at 0% corporate tax, provided the entity meets all requirements of being a Qualifying Free Zone Person (QFZP).
- Income mainland UAE customers (unless through a distributor)
- Transactions with natural persons (individuals) in the UAE
- Passive income not related to qualifying activities
- Income from excluded activities (like insurance, banking, etc.)
- Loss of 0% tax benefit
- Financial penalties from the Federal Tax Authority (FTA)
- Reputational and compliance risks
The De Minimis Rule allows Free Zone businesses to earn a limited amount of non-qualifying income without losing their Qualifying Free Zone Person (QFZP) status.
According to Ministerial Decision No. 139 of 2023, a Free Zone Person can still be considered a QFZP — and enjoy the 0% tax rate — if their non-qualifying income meets the following thresholds:
- Less than AED 5 million, or
- Less than 5% of total revenue, whichever is lower.
If your non-qualifying income exceeds either of these limits, your entire income will be taxed at 9%, including previously qualifying income.
The introduction of corporate tax in the UAE marks a major shift for Free Zone companies that once enjoyed blanket tax exemptions. While 0% corporate tax is still available, it now comes with strict conditions — and failure to comply may result in taxation at the standard 9% rate.
1. Mandatory Tax Registration & Return Filing Even if you qualify for the 0% tax rate, all Free Zone entities must register with the Federal Tax Authority (FTA) and file annual tax returns. Non-compliance can lead to penalties of up to AED 10,000
2. Income Classification Is Now Critical Businesses must separate qualifying and non-qualifying income to maintain 0% tax status. Income from mainland clients or excluded activities may push the company into the 9% tax bracket, especially if the De Minimis Rule threshold is breached.
3. More Recordkeeping and Compliance Requirements
- Maintain audited financial statements
- Demonstrate economic substance (real office, employees, operations)
- Track revenue sources accurately
- Submit returns and supporting documents on time
4. Strategic Restructuring May Be Needed
Some Free Zone businesses may need to restructure their operations or licensing to retain tax benefits. This could involve separating qualifying activities from non-qualifying ones or spinning off divisions into new entities.
5. Increased Demand for Expert Guidance
Given the complexity of compliance, most Free Zone entities now require support from a qualified corporate tax consultant in Dubai — like KrezKo — to stay eligible for tax relief and avoid costly errors.
Under the UAE Corporate Tax Law, not all Free Zone entities are automatically eligible for the 0% corporate tax rate. To benefit from this Free Zone tax relief, a business must meet strict qualifying conditions and be recognized as a Qualifying Free Zone Person (QFZP).
QFZP Eligibility Criteria - Physical office space within the Free Zone
- Full-time, qualified employees
- Income-generating activity carried out in the UAE
- Transactions with other Free Zone Persons
- Business with foreign clients
- Activities listed under Qualifying Activities (e.g., fund management, logistics, manufacturing)
To retain QFZP status, you must not choose to be subject to the standard 9% corporate tax rate voluntarily.
- 5% of your total revenue, or
- AED 5 million, whichever is lower.
You must prepare and retain audited financial statements in accordance with International Financial Reporting Standards (IFRS). These are required for FTA compliance.
Each Free Zone may set additional conditions to qualify for the corporate tax exemption. You must stay updated with and adhere to your specific Free Zone’s requirements.
Need Help With Corporate Tax or Business Setup in UAE?
Talk to our experts at KrezKo. We provide 100% compliant solutions for Free Zone companies.