Which Free Zone Companies Qualify for 0% Corporate Tax in the UAE
The new corporate tax system of UAE has reshaped the business environment in the UAE. Since the Corporate Tax Law came into effect for financial years starting on or after 1 June 2023, most businesses are now subject to a standard 9% corporate tax on taxable profits above AED 375,000, while profits up to AED 375,000 remain tax-free (0%).
However, companies that are operating in UAE Free Zones may still benefit from a 0% corporate tax rate only if they follow some specific conditions which are already provided by the FTA. This article includes details about who qualifies for the Free Zone 0% rate, what “qualifying income” means, and how to maintain the eligibility.
Understanding Free Zone Businesses
Free Zone Person (FZP)
A Free Zone Person refers to a business entity or branch that has been formed, set up, or officially registered within one of the UAE’s Free Zones. However, just being licensed in a Free Zone does not entitle a company to obtain the 0% corporate tax rate.
Qualifying Free Zone Person (QFZP)
A Qualifying Free Zone Person refers to a Free Zone company that meets certain legal, operational, and substance requirements. Only businesses that fulfil these conditions can benefit from the 0% corporate tax rate on their qualifying income, while any income that doesn’t meet these criteria will be taxed at the regular rate.
Read Case Study: Tax Compliance and Maintaining QFZP Status
Key Conditions to Qualify for the 0% Rate: To be recognized as a Qualifying Free Zone Person, a business must meet all of the following conditions:
Maintain Adequate Substance in the UAE: The company must have sufficient employees, assets, as well as operational expenditure in the UAE that are directly linked to generating its qualifying income.
Earn Qualifying Income: Only specific categories of income earned from approved activities are eligible for the 0% rate. These activities typically include manufacturing, processing, distribution, logistics, holding of shares or securities, and certain service-related activities carried out within or from the Free Zone.
Avoid Excluded Activities: Income from “excluded activities” (such as income from banking, insurance, or property located outside Free Zones) will not qualify for the 0% rate. If a Free Zone business earns mostly non-qualifying income, it may lose its 0% eligibility entirely.
Maintain Proper Accounting and Recordkeeping: The business must keep clear and accurate accounting records to show the difference between qualifying and non-qualifying income and to prove that the income is connected to its activities in the UAE.
Audited Financial Statements: One of the key requirements to maintain QFZP status is to have your company’s accounts audited by a Ministry of Economy (MOE) approved audit firm in UAE. If your accounts are not audited, you risk losing the QFZP status.
Comply with Transfer Pricing and Related Party Requirements: Transactions with related parties must be at arm’s length and properly documented to meet FTA standards.
Be Registered and Compliant with the FTA: The business must file annual corporate tax returns, maintain up-to-date registrations, and comply with all FTA notifications and documentation requirements.
What Is “Qualifying Income”?
“Qualifying Income” generally includes revenue from the following:
- Income or revenue generated by doing business with other free zone persons. But this revenue should not be earned from excluded activities which include real estate income from property or land (real estate income from commercial properties in free zones is permitted), revenue generated from specific insurance and financial related activities, and IP related income. However, there are cases where IP related income can become a qualifying income provided it is generated from qualifying intellectual property. An IP becomes a qualifying IP when substantial R&D and economic activity has been conducted in the free zone and the income it generates has a direct relationship with the R&D expenditure.
- Qualifying income can also include income generated from non-Free Zone persons but only if it is generated from qualifying activities which include:
- Distributing materials or goods from or in a Designated Zone
- You are providing headquarter services to one or more related parties
- You are providing financing services or treasury services to one or more related parties
- Supply chain or logistics services
- Holding of securities and shares
- You are into processing or manufacturing of goods
- Operation, ownership, and management of ships
- Reinsurance solutions and services
- You are providing wealth and fund management services
Practical Examples
Example 1: Trading Company in a Free Zone
A Free Zone company that buys goods internationally and sells to customers outside the UAE may qualify for the 0% rate, provided it has a genuine operational presence in the UAE and its transactions are properly recorded.
If the company also conducts business with customers based in the UAE mainland, the earnings from those transactions would be subject to the standard 9% corporate tax rate.
Example 2: IP Holding Company
A Free Zone company earning royalties from intellectual property can benefit from the 0% rate only if it can prove a clear nexus between R&D spending in the UAE and the income it earns from licensing that IP.
Common Mistakes to Avoid
Assuming all Free Zone Companies Automatically Get 0% CT Rate: The 0% rate will be only applicable if the company fulfills qualifying requirements and keeps correct documentation.
Failing the Substance Test: Having just a registered office without staff or real operations in the UAE can disqualify the company from being a QFZP.
Mixing Qualifying and Non-qualifying Income: If income is not clearly separated or documented, the FTA may deny the 0% tax benefit.
Ignoring compliance Deadlines: Late filings, delay in corporate tax registration, inaccurate declarations, or missing financial statements can trigger penalties or loss of eligibility.
How to Maintain Eligibility
To keep enjoying the 0% Free Zone rate, businesses should:
- Maintain full operational substance and staff within the UAE.
- Keep clear accounting records separating qualifying and non-qualifying activities.
- Review contracts and income sources annually to ensure they remain compliant.
- File timely and accurate tax returns with supporting documentation.
- Seek professional tax advice before expanding to the mainland or adding new activities.
Conclusion
The 0% corporate tax rate for Free Zone companies is one of the primary attractions for foreign investors, but the investor should know that this benefit doesn’t apply automatically. To maintain this benefit, businesses have to meet certain conditions as well as follow all compliance rules.
A well-prepared Free Zone entity with proper UAE presence, transparent accounting, and well-documented transactions can continue to enjoy significant tax advantages, while those that overlook the requirements risk being taxed at the standard 9% rate.
If your business operates in a Free Zone, it is essential to assess your eligibility under the FTA’s rules and take proactive steps to secure your 0% corporate tax status.
