Quick answer: UAE free zone companies are within the Corporate Tax system. The 0% rate applies only to a Qualifying Free Zone Person (QFZP), and only on Qualifying Income. Other income is taxed at 9%. Failing any QFZP condition, including the de minimis limit (non-qualifying revenue must stay within the lower of 5% of total revenue or AED 5 million), means losing status for that tax period and the next four. Ministerial Decision No. 229 of 2025 replaced Ministerial Decision No. 265 of 2023. Not sure where your company stands? Talk to our corporate tax consultants in the UAE.
Last updated: October 2026. This article reflects the legislation listed in the sources section at the time of writing. Always confirm against the current rules and FTA guidance.
Free Zone Corporate Tax in the UAE remains an important consideration for businesses operating in designated free zones in 2026. While free zone companies may benefit from a 0% Corporate Tax rate on Qualifying Income, this benefit is not automatic and depends on meeting the requirements set out in the UAE Corporate Tax legislation.
A company must qualify as a Qualifying Free Zone Person (QFZP), maintain adequate substance in the UAE, comply with applicable transfer pricing rules, and meet the relevant conditions for its income to qualify for the 0% rate. Income that does not qualify is generally subject to the standard 9% Corporate Tax rate, while failure to meet certain requirements may result in the loss of QFZP status.
Understanding the qualifying income rules, eligibility criteria, tax rates, and ongoing compliance obligations is therefore essential for free zone businesses seeking to preserve their tax benefits and avoid unexpected Corporate Tax liabilities.
The Legal Framework at a Glance
- Corporate Tax Law: Federal Decree-Law No. 47 of 2022, Article 18, establishes the eligibility requirements and core conditions for a Qualifying Free Zone Person (QFZP).
- Cabinet Decision No. 100 of 2023: Sets out the rules for determining Qualifying Income and applying the de minimis requirement.
- Ministerial Decision No. 229 of 2025: Specifies the Qualifying Activities and Excluded Activities relevant to the QFZP regime.
- Ministerial Decision No. 84 of 2025: Specifies the audited financial statement requirements for taxable persons with revenue exceeding AED 50 million, Qualifying Free Zone Persons (QFZPs), and Tax Groups, as applicable, for tax periods commencing on or after 1 January 2025.
- FTA Corporate Tax Guide on Free Zone Persons: Provides further interpretation, practical guidance, and examples to help businesses understand and apply the rules.
Ministerial Decision No. 229 of 2025 was issued on 28 August 2025, applies retroactively from 1 June 2023, and replaces the earlier Ministerial Decision No. 265 of 2023. Any article still citing Decision No. 265 is out of date.
Do UAE Free Zone Companies Pay Corporate Tax?
Law: Yes, free zone persons are within the Corporate Tax system. Being in a free zone does not create an exemption.
What actually applies: The Corporate Tax Law allows a 0% rate only for a QFZP, and only on Qualifying Income. A free zone person that is not a QFZP is taxed under the general rules (9% on taxable income above AED 375,000). A QFZP pays 9% on income that is not Qualifying Income.
Free zone companies must also register for Corporate Tax. See our guide to corporate tax registration for free zone companies for the steps.
What is a Qualifying Free Zone Person?
Law (Article 18): A QFZP is a Free Zone Person that meets all the stated conditions. A Free Zone Person is a juridical person incorporated, established, or registered in a free zone, including a branch of a non-resident person registered in a free zone.
The conditions are:
- It maintains adequate substance in a free zone.
- It derives Qualifying Income.
- It has not elected to be subject to the standard regime.
- It complies with transfer pricing rules (arm’s length principle and documentation).
- It meets the de minimis requirement.
- It prepares audited financial statements.
In addition to the Article 18 conditions, the Ministerial Decision requires that non-qualifying revenue stays within the de minimis limit and that audited financial statements are prepared.
When Does the 0% Rate Apply?
The 0% rate applies only where:
- the person is a QFZP for that tax period, and
- the income in question is Qualifying Income.
Everything else is taxed at 9%. Having QFZP status in one period does not guarantee it in the next.
Practical example: A free zone trading company earns AED 30 million from qualifying commodity trading with non-free zone customers and AED 1 million of non-qualifying income, with total revenue of AED 31 million.
If all QFZP conditions are met and the non-qualifying income is within the de minimis limit, the AED 30 million may be Qualifying Income taxed at 0%. If the conditions are not met, the entity is taxed under the general rules.
What is Qualifying Income?
Cabinet Decision No. 100 of 2023 sets a closed list. Qualifying Income comprises income from transactions with a free zone person (except from Excluded Activities), income from transactions with a non-free zone person for Qualifying Activities that are not Excluded Activities, income from Qualifying Intellectual Property, and other income where the de minimis requirements are satisfied.
| Category | Key condition |
|---|---|
| Transactions with other Free Zone Persons | Not from an Excluded Activity. Beneficial recipient rules apply, so check the legislation. |
| Qualifying Activities with non-Free Zone Persons | Must be a Qualifying Activity and not an Excluded Activity |
| Qualifying Intellectual Property income | Calculated using the OECD modified nexus approach |
| Other income | Only within the de minimis limit |
Qualifying Activities
Ministerial Decision No. 229 of 2025 lists the activities from which Qualifying Income may arise.
In summary:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of Qualifying Commodities (subject to restrictions)
- Holding of shares and other securities for investment
- Ownership, management, and operation of ships
- Reinsurance services
- Fund management and wealth and investment management services
- Headquarter services to Related Parties
- Treasury and financing services to Related Parties, or for own account (subject to conditions)
- Financing and leasing of aircraft
- Distribution of goods in or from a Designated Zone
- Logistics services
- Ancillary activities to the above
Each activity has its own definition and conditions in the Decision. Do not rely on this summary to conclude that your activity qualifies.
Excluded Activities
Excluded Activities include certain transactions with natural persons, banking, insurance (with specified exceptions), finance and leasing (with specified exceptions), ownership or exploitation of immovable property (subject to the Commercial Property exception), and ancillary Excluded Activities.
Revenue from an Excluded Activity is not Qualifying Income. Revenue above the de minimis limit can also cost the entity its QFZP status.
What Is the De Minimis Requirement?
Law and Decisions: Non-qualifying revenue in a tax period must not exceed the lower of 5% of total revenue or AED 5,000,000.
Practical examples:
| Total revenue | 5% of revenue | AED 5m cap | Applicable limit |
|---|---|---|---|
| AED 40 million | AED 2 million | AED 5 million | AED 2 million |
| AED 200 million | AED 10 million | AED 5 million | AED 5 million |
If a company with AED 40 million in revenue has AED 2.5 million of non-qualifying revenue, it exceeds the AED 2 million limit and fails the test for that period.
Consequence: Above the ceiling, the person ceases to be a QFZP from the beginning of that tax period and for the subsequent four tax periods. That is five periods in total.
Substance Requirements
Law (Article 18): A QFZP must maintain adequate substance in a free zone. In practice this means:
- performing Core Income Generating Activities (CIGA) in the free zone,
- having adequate assets and qualified employees in the free zone, and
- incurring adequate operating expenditure in the free zone,
in each case in line with the activities carried out. The FTA’s free zone guidance explains how this is assessed. A company with no staff and only a flexi-desk is unlikely to meet these tests, which matters for non-residents forming a company remotely from abroad.
Transfer Pricing Requirements
Law: A QFZP must comply with the arm’s length principle and with transfer pricing documentation rules where they apply. Related-party and connected-person transactions are also subject to disclosure in the Corporate Tax return.
The documentation thresholds (for example, for a Master File and Local File) are in Ministerial Decision No. 97 of 2023 and should be checked against the entity’s revenue and group position. Even where full documentation is not required, the arm’s length principle still applies.
Practical example: A free zone company charges its mainland parent a management fee. The fee needs to be supportable at arm’s length, and the transaction must be disclosed.
Audited Financial Statements
Law and Decision: A QFZP must prepare audited financial statements. This requirement applies irrespective of revenue, unlike the general audit threshold for other taxpayers. Check the current decision on financial statements for the exact standards (including accounting framework and auditor requirements).
What Happens If QFZP Conditions Are Not Met?
- Failing any QFZP condition, including substance, transfer pricing, audited financial statements and the de minimis limit, removes status from the beginning of that tax period and for the following four tax periods. That is five periods in total.
- All taxable income is then taxed under the general rules (9% above AED 375,000), not only the non-qualifying part.
- Small Business Relief is not a fallback. A QFZP cannot elect for it, and loss of status needs to be separately assessed against the SBR conditions. See our Small Business Relief article.
- Penalties can apply for late registration, late filing, and inadequate records.
Election: A QFZP can also choose to be subject to the standard regime. Check the rules on how long that election lasts before making it.
Free Zone Corporate Tax Checklist
- Registered for Corporate Tax with the FTA
- Confirmed Free Zone Person status (including branches)
- Mapped every income stream to a Qualifying or Excluded Activity
- Identified counterparties (free zone, non-free zone, natural persons)
- Calculated the de minimis limit (lower of 5% or AED 5 million) with a buffer
- Documented substance: CIGA, staff, assets, operating expenditure in the free zone
- Reviewed transfer pricing and related-party disclosure
- Audited financial statements prepared
- Corporate Tax return filed within nine months of period end
- Records retained
- Status reassessed at the start of every tax period
Speak to a Tax Professional!
Farahat & Co. helps UAE free zone businesses assess their Qualifying Free Zone Person (QFZP) status, classify income streams, and meet their Corporate Tax compliance obligations.
Our Corporate Tax team can review your eligibility for the 0% tax rate, evaluate whether your income meets the Qualifying Income criteria, and assess your position against the applicable de minimis threshold.
Whether you need support with transfer pricing, audited financial statements, or Corporate Tax return filing, Farahat & Co. can help you understand the requirements and identify potential compliance risks. Planning a new free zone company? Our business setup team can help you choose a structure with tax in mind.
Contact our Corporate Tax team for guidance tailored to your business activities and circumstances.
Frequently Asked Questions
Do UAE Free Zone Companies Pay Corporate Tax?
Yes. UAE free zone companies fall within the Corporate Tax system. Qualifying Free Zone Persons (QFZPs) may benefit from a 0% Corporate Tax rate on Qualifying Income, while non-qualifying income is generally subject to 9%. Free zone companies that do not qualify as QFZPs are taxed under the general Corporate Tax rules.
What Is a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person is a business established or registered in a UAE free zone that meets the conditions under Article 18 of Federal Decree-Law No. 47 of 2022. These include maintaining adequate substance in the free zone, earning Qualifying Income, complying with transfer pricing rules, meeting the de minimis requirement, and preparing audited financial statements.
What Is the De Minimis Requirement for UAE Free Zone Corporate Tax?
The de minimis requirement limits non-qualifying revenue to the lower of 5% of total revenue or AED 5 million in a tax period. Exceeding this threshold can result in the loss of QFZP status from the beginning of that tax period and for the following four tax periods.
Which Activities Qualify for the 0% Corporate Tax Rate in UAE Free Zones?
Qualifying Activities may include manufacturing, processing, qualifying commodity trading, holding shares and securities for investment, logistics, reinsurance, and certain headquarters, treasury, financing, and distribution services. Eligibility depends on the specific activity, applicable conditions, and whether any Excluded Activities rules apply.
Do UAE Free Zone Companies Need Audited Financial Statements?
Yes. Qualifying Free Zone Persons must prepare and maintain audited financial statements regardless of their revenue. Other taxable persons are generally subject to the applicable revenue threshold, while Tax Groups must follow the relevant requirements for audited special-purpose financial statements. Ministerial Decision No. 84 of 2025 applies to tax periods commencing on or after 1 January 2025.
Sources and Official References
- Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Article 18, Qualifying Free Zone Person), UAE Ministry of Finance
- Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person, UAE Ministry of Finance
- Ministerial Decision No. 229 of 2025 Regarding Qualifying Activities and Excluded Activities (replacing Ministerial Decision No. 265 of 2023), UAE Ministry of Finance
- Ministerial Decision No. 84 of 2025 on Audited Financial Statements, UAE Ministry of Finance
- Ministerial Decision No. 97 of 2023 on Transfer Pricing Documentation Requirements, UAE Ministry of Finance announcement
- Corporate Tax Guide: Free Zone Persons (CTGFZP1), Federal Tax Authority
- Corporate Tax legislation and guides, Federal Tax Authority
- Corporate Tax FAQs, UAE Ministry of Finance
Disclaimer: This content is provided for general informational purposes only and does not constitute tax or legal advice. Qualifying Free Zone Person status depends on your specific facts and the applicable legislation. Please consult a qualified tax adviser before making decisions.
