Many people choose to open a company in a UAE free zone because they have heard that free zone businesses pay no corporate tax. But this is not always true.
Under the UAE Corporate Tax rules there is 0% tax on some income streams for free zone companies if they meet certain criteria.However, some profits may still be subject to 9% corporate tax if you are running a business within the free zones of Dubai.
Understanding these rules will help to prevent any surprises if you already have a free zone company or are looking to set one up.
Quick Summary
UAE free zone companies are subject to the corporate tax laws of the country. However, companies who meet the criteria of a Qualifying Free Zone Person will be exempt from paying any corporate tax (0%) on their qualifying income. They will however pay a rate of 9% on other taxable income. Free zone companies will need to register under the corporate tax scheme, keep accurate financial records and file corporate tax returns. A free zone trading licence will not automatically qualify you to pay 0% corporate tax.
Do Free Zone Companies Pay Corporate Tax in the UAE?
Yes, free zone companies are liable to pay corporate tax in the UAE. However, qualifying companies will have a 0% tax rate.Federal Corporate Tax has been introduced in the UAE for tax years beginning on or after 1st June 2023. The system generally applies to both mainland and free zone companies.
Most businesses will pay no tax (0%) on their taxable profits up to AED 375,000 under the standard corporate tax regime and 9% on profits over this level.
However for free zone companies, if they meet the requirements then they can pay 0% tax on eligible income exceeding AED 375,000.
What Is a Qualifying Free Zone Person?
A Qualifying Free Zone Person refers to free zone businesses that meet the government requirements enabling them to benefit from the special 0% corporate tax regime.
It is important to note that not all companies registered within a free zone will be considered as Qualifying Free Zone Persons.Simply being registered within DMCC, IFZA, Meydan Free Zone or JAFZA will not mean the business will receive any benefit.
The company will need to be receiving qualifying income, have a real business presence and comply with the appropriate tax rules.They will also need to produce audited financial statements and comply with transfer pricing where necessary.In simple terms the government will look at what you do, where you operate and how you make money.
What Are the Requirements for 0% Corporate Tax?
To receive the 0% corporate tax rate, a free zone company must meet several conditions.
1. Maintain a Genuine Business Presence
The business will need an appropriate amount of activity within the free zone.
Therefore the business should have sufficient personnel, assets, running costs and facilities to complete its primary business activities. A business that has significant trading or logistics activity may require greater resources than a small holding company.
In some cases simply having a registered address may not be sufficient if a larger operational presence is required.
2. Earn Qualifying Income
In order to qualify for the 0% tax rate the income will need to be considered as qualifying income under UAE law.
Some dealings between free zone companies and some activities with customers outside of free zones can qualify.It will depend on which customers they have and what they will be doing.A business should not assume all income from overseas clients will be tax free.
3. Adhere to Financial and Tax Requirements
Qualifying businesses will need to keep accurate accounting records and produce audited financial statements.Requirements will also apply regarding transfer pricing with related companies/connected persons.
If a business elects to be taxed under the standard corporate tax regime then they will not qualify for the special free zone treatment.
Requirements can be found in UAE Corporate Tax legislation and in Ministerial Decision No. 229 of 2025.
Which Business Activities Qualify for 0% Corporate Tax?
Several activities have been identified by the UAE Government as qualifying for the special free zone corporate tax treatment.These include manufacturing, processing, providing certain logistics services, qualifying commodity trading and some investment activities.
Holding shares for investment purposes can also qualify if certain conditions are met.
Providing certain head office services, treasury services and distribution activities can also qualify.
There are however some requirements:
- Distribution activities must be carried out within/from a Designated Zone and must meet specific customer and goods movement criteria.
- General consulting services provided to mainland customers will not be eligible for 0% corporate tax.
The Ministry of Finance updated the eligible/ ineligible activities through Ministerial Decision No. 229 of 2025. Businesses should check their actual activities against these rules rather than relying only on their trade licence description.
Can a Free Zone Company Work With Mainland Customers?
Yes, they can provide products or services to customers in the mainland, as long as it falls within the scope of their licence, and the relevant trading rules.
However, the tax implications may differ.
For example, if the free zone company based in Dubai provides marketing services to a business in the mainland.Even though this may be legally acceptable for the free zone company to do, it may not be eligible for the preferential 0% corporate tax rate.
Therefore, the owners of the business will need to think about what customers they have. If the majority of their customers are on the mainland then a mainland business structure may be more appropriate for them.
What Is the 5% Rule for Free Zone Corporate Tax?
The UAE provides a limited allowance for certain non-qualifying revenue. This is known as the de minimis rule.The amount must be no more than 5% or AED 5 million of total revenues.
For example, if your free zone company had total revenues of AED 2 million then you would not be allowed to have more than AED 100,000.If its relevant non-qualifying revenue exceeds that limit, the company may lose its Qualifying Free Zone Person status.
This can have serious consequences because losing the status generally affects the current tax period and the following four tax periods.Some income categories are treated separately when calculating this threshold, so businesses should have their figures reviewed carefully.
Free Zone Corporate Tax vs Mainland Corporate Tax
The main difference is how the 0% tax rate applies.
| Tax rule | Free zone qualifying company | Mainland company under standard rules |
| 0% tax rate | Qualifying income | First AED 375,000 of taxable income |
| 9% tax rate | Non-qualifying taxable income | Taxable income above AED 375,000 |
| Corporate tax registration | Required | Required |
| Tax return filing | Required | Required |
| Audited accounts | Required for QFZP status | Depends on applicable requirements |
A qualifying free zone company does not receive the ordinary AED 375,000 tax-free band on its non-qualifying taxable income while it remains under the special regime.
Neither structure is automatically better. The right choice depends on the company’s activities, customers and long-term plans.
Do Free Zone Companies Need to Register for Corporate Tax?
Yes. Free zone companies generally need to register with the Federal Tax Authority, even if they expect all their income to qualify for 0% tax.They must also submit corporate tax returns within the applicable deadlines.
For most companies, the corporate tax return and any tax due must be submitted within nine months after the end of the relevant tax period.Businesses should keep invoices, financial statements, contracts and supporting documents that explain how their income was earned.
These records are important if the Federal Tax Authority requests evidence during a tax review.
Common Mistakes Free Zone Businesses Make
One of the most common mistakes is believing that a free zone licence automatically means zero corporate tax.Another mistake is ignoring the difference between qualifying and non-qualifying income.
Some businesses will not keep proper accounts because they don’t think they need to report if they are not paying any tax.This can cause problems when preparing your tax returns and claiming the special tax treatment.A company should also review its position whenever it changes its activities, starts serving new customers or expands into mainland operations.
How LBMS Can Help With Free Zone Corporate Tax
Understanding corporate tax rules can be difficult, especially for entrepreneurs who are new to the UAE.At LBMS (Libra Business Management Services), we help business owners understand the requirements involved in setting up and operating companies in Dubai and other UAE free zones.
We can help you set up and document a company in a Free Zone. We also help with registering your company with corporate tax.If you’re setting up a company or want to review your current business structure we can help you understand what processes you need to go through and if you need specialist tax help.
Final Thoughts
A 0% rate for corporate tax can still be a great advantage for eligible businesses in UAE Free Zones in 2026.However, you will have to meet certain criteria. You will need to ensure you have correct accounting procedures in place and follow the UAE corporate tax rules.
Consider how your business activities and customers may impact on your tax position before selecting a free zone or making any changes to your business.A little planning now can help prevent much larger problems later.
Frequently Asked Questions
Are all UAE free zone companies exempt from corporate tax?
No. UAE free zone companies are subject to corporate tax, but eligible businesses can receive a 0% rate on qualifying income. To receive this benefit, a company must meet the conditions for a Qualifying Free Zone Person. These include earning qualifying income, maintaining an appropriate business presence and preparing audited financial statements. Other taxable income may be subject to 9% corporate tax.
Does a free zone company pay 9% corporate tax?
Yes, a free zone company may pay 9% corporate tax. A Qualifying Free Zone Person pays 0% on qualifying income and 9% on non-qualifying taxable income. If the rules for this special regime do not apply then the general rules apply and your taxable income would generally be subject to tax at a rate of 9% if it exceeds AED 375,000.
Can a free zone company sell products in the Dubai mainland?
Yes, free zone companies can conduct some business with mainland customers however this will be subject to licensing, customs and trade rules. A free zone license does not give you complete freedom to do any retailing business on the mainland. Taxation will depend on the type of business and trade that is conducted. It is always best to confirm what businesses you are allowed to trade and how this will affect taxation.
Do free zone companies need audited financial statements?
Yes, companies seeking Qualifying Free Zone Person status must prepare audited financial statements under the applicable UAE corporate tax rules. This requirement helps demonstrate that the business meets the conditions for the 0% rate. The company must also maintain supporting accounting records and documents. It is important to have an accounting and audit set up in place from the start.
What happens if a free zone company loses their 0% tax status?
A free zone company may lose their Qualifying Free Zone Person status for the relevant tax year and the next four years if they do not meet the criteria. Whilst the Qualifying Free Zone Person status will not be in place during these years, corporate tax generally applies which could result in a large additional cost. By regularly monitoring your activities, income streams and compliance records you can identify any potential issues.
