Last reviewed: 26 July 2026
A Free Zone licence does not automatically exempt a company from UAE Corporate Tax. Free Zone companies are within the Corporate Tax regime and must register, file returns and maintain the required records.
A Free Zone company can benefit from 0% only if it qualifies as a Qualifying Free Zone Person and only in relation to Qualifying Income. Other taxable income can be subject to 9%.
For the general Corporate Tax framework, read the UAE Corporate Tax Guide 2026.
The Quick Answer
- Every UAE Free Zone juridical person is generally within the Corporate Tax regime.
- A Free Zone company must register and file even if it expects all its income to qualify for 0%.
- 0% applies to Qualifying Income of a Qualifying Free Zone Person, not automatically to all revenue or profit.
- A Qualifying Free Zone Person must satisfy all statutory and compliance conditions for every relevant Tax Period.
- Income that is not Qualifying Income is subject to 9%, without the ordinary AED 375,000 0% band.
- Failing a condition can cause the company to lose Qualifying Free Zone Person status for the relevant period and four following Tax Periods.
What Is a Free Zone Person?
A Free Zone Person is a juridical person incorporated, established or otherwise registered in a UAE Free Zone. It can include a branch of a Non-Resident Person registered in a Free Zone.
A natural person cannot be a Free Zone Person merely because the individual holds a freelance permit or operates through a Free Zone. The natural-person rules must be considered separately.
Individuals and sole proprietors should refer to our guide to UAE Corporate Tax for natural persons.
What Is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a Free Zone Person that meets all the conditions in the Corporate Tax Law and the relevant Cabinet, Ministerial and FTA Decisions. The status is not granted merely by the Free Zone Authority or printed on the trade licence.
Conditions for Qualifying Free Zone Person Status
1. Maintain adequate substance
The Free Zone Person must conduct its core income-generating activities in the relevant Free Zone, maintain adequate assets, employ an adequate number of suitably qualified full-time employees and incur adequate operating expenditure in relation to those activities.
For the qualifying activity of distributing goods or materials in or from a Designated Zone, the relevant substance must be maintained in the Designated Zone.
2. Derive Qualifying Income
The company must derive Qualifying Income under the categories established by the Qualifying Income rules. The fact that income is invoiced from a Free Zone address or received into a UAE bank account does not make it Qualifying Income.
3. Do not elect to be subject to the ordinary regime
A Free Zone Person may elect to be subject to the ordinary Corporate Tax rates instead of the Qualifying Free Zone regime. The election applies from the beginning of the relevant Tax Period and for the four following Tax Periods. The commercial and tax consequences should be reviewed before making the election.
4. Comply with the arm’s-length principle
Transactions with Related Parties must be priced in accordance with the arm’s-length principle. This includes transactions between the Free Zone head office and a domestic or foreign Permanent Establishment.
5. Maintain required transfer-pricing documentation
The company must comply with the transfer-pricing documentation requirements applicable under the Corporate Tax rules, including maintaining a master file and local file where the prescribed conditions are met.
6. Prepare audited financial statements
Every Qualifying Free Zone Person must prepare and maintain audited financial statements for Tax Periods beginning on or after 1 January 2025, regardless of whether its revenue exceeds AED 50 million.
The supporting-record and audit requirements are explained in Corporate Tax records and audited financial statements.
7. Satisfy the de minimis requirement
Non-qualifying revenue must not exceed the lower of:
- 5% of the relevant total revenue; or
- AED 5 million.
The calculation has detailed exclusions and classifications. Revenue attributable to domestic or foreign Permanent Establishments, certain immovable property and intellectual property is treated under specific rules and should not be inserted mechanically into the fraction without reviewing the legislation.
8. Satisfy any additional conditions and procedures
The company must meet all other conditions and procedures prescribed under the Corporate Tax legislation, including the specific 2026 procedure applicable to certain Designated Zone distributors.
How Is a Qualifying Free Zone Person Taxed?
| Income component | Corporate Tax rate |
|---|---|
| Qualifying Income | 0% |
| Taxable income that is not Qualifying Income | 9% |
The ordinary AED 375,000 0% taxable-income band does not apply to the non-Qualifying Income of a Qualifying Free Zone Person.
Income and expenditure must be allocated appropriately between the Qualifying Income component and the component subject to 9%. An unsupported allocation can misstate the tax result.
What Counts as Qualifying Income?
Qualifying Income can arise through several routes. The classification depends on the counterparty, the activity and the specific exclusions.
Transactions with another Free Zone Person
Income from a transaction with another Free Zone Person can be Qualifying Income where the recipient is the Beneficial Recipient of the goods or services and the transaction does not relate to an Excluded Activity.
The seller or service provider may rely on an appropriate written statement or contractual undertaking from the customer regarding Beneficial Recipient status, provided the reliance is reasonable in the circumstances.
Transactions with a Non-Free Zone Person
Income from a transaction with a Non-Free Zone Person is generally Qualifying Income only where it arises from a Qualifying Activity and is not an Excluded Activity.
Qualifying Intellectual Property
A calculated portion of income from ownership or exploitation of Qualifying Intellectual Property may qualify under the modified nexus approach. Marketing-related intellectual property, such as trademarks, does not qualify merely because it is owned by a Free Zone company.
Other income within the de minimis limit
Other revenue may be tolerated within the de minimis limit without causing the company to fail the Qualifying Free Zone Person conditions. This does not convert the underlying non-Qualifying Income into Qualifying Income; its tax treatment must still be determined correctly.
Current Qualifying Activities
Ministerial Decision No. 229 of 2025 currently lists the following Qualifying Activities, subject to their definitions and conditions:
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of Qualifying Commodities.
- Holding shares and other securities for investment purposes.
- Ownership, management and operation of Ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarter services to Related Parties.
- Treasury and financing services to Related Parties or for the company’s own account.
- Financing and leasing of Aircraft.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Activities ancillary to the listed Qualifying Activities.
Current Excluded Activities
The current Excluded Activities include:
- Transactions with natural persons, except for the specific permitted Qualifying Activities.
- Banking activities.
- Insurance activities, except for the relevant permitted reinsurance and headquarter-service activities.
- Finance and leasing activities, except for the specifically permitted commodity, ship, treasury and aircraft activities.
- Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction is with a Free Zone Person.
- Activities ancillary to an Excluded Activity.
Income from an Excluded Activity is not Qualifying Income and normally contributes to non-qualifying revenue for the de minimis test, subject to the specific calculation rules.
Does Dealing with Mainland Customers Automatically Disqualify the Company?
No. A mainland customer does not by itself disqualify a Free Zone company. However, income from a mainland or other Non-Free Zone Person normally qualifies only if it arises from a listed Qualifying Activity and is not an Excluded Activity.
What Is the Beneficial Recipient Test?
For transactions between Free Zone Persons, the recipient must generally be the Beneficial Recipient of the relevant goods or services. Broadly, this means the recipient has the right to use and enjoy the goods or services without a contractual or legal obligation to pass the same goods or services to another person.
Where the immediate customer acts merely as an agent, nominee or intermediary for another party, that other party may be the Beneficial Recipient. Contracts, customer declarations and the actual flow of the supply should be reviewed.
How Does the De Minimis Test Work?
The company compares its non-qualifying revenue with the lower of 5% of the relevant total revenue or AED 5 million.
If relevant total revenue is AED 200 million, 5% is AED 10 million. The lower amount is AED 5 million, so the maximum tolerance is AED 5 million.
The legislation excludes certain revenue from both or one side of the de minimis calculation. A detailed calculation should be prepared rather than using total turnover from the financial statements without adjustment.
Permanent Establishments Outside the Free Zone
Domestic Permanent Establishment
A Free Zone Person may have a domestic Permanent Establishment where it conducts business outside the Free Zone in the UAE. Income attributable to the domestic Permanent Establishment is generally subject to the ordinary Corporate Tax rules and does not benefit from the Free Zone 0% rate.
Foreign Permanent Establishment
Income attributable to a foreign Permanent Establishment is dealt with under the relevant Corporate Tax provisions, including any available foreign Permanent Establishment exemption or Foreign Tax Credit treatment. It should be separated from the Free Zone parent’s Qualifying Income calculation.
Immovable Property
The Free Zone treatment of immovable property depends on the location and type of property and the counterparty. Income from Commercial Property located in a Free Zone may qualify where the transaction is with another Free Zone Person and the applicable conditions are met.
Income from non-commercial property in a Free Zone, property outside a Free Zone, or transactions that do not meet the specific conditions is subject to separate treatment and can be taxed at 9%. Mixed-use property requires an appropriate allocation.
Intellectual Property
Only the calculated income from Qualifying Intellectual Property can benefit from 0% under the modified nexus approach. Qualifying Intellectual Property generally includes patents, copyrighted software and certain functionally equivalent rights. Marketing-related intellectual property such as trademarks is not Qualifying Intellectual Property.
The company must maintain tracking records linking research and development expenditure to the relevant Qualifying Intellectual Property and income.
Substance and Outsourcing
The company must perform its core income-generating activities in the relevant Free Zone and maintain adequate people, assets and operating expenditure. Outsourcing can be permitted within the UAE where the Free Zone Person exercises adequate supervision, subject to the detailed rules.
A licence, shared desk or registered address alone is not sufficient where the scale and nature of the income require greater operational substance.
Transfer Pricing and Expense Allocation
The arm’s-length principle applies to a Qualifying Free Zone Person in the same way it applies to other Taxable Persons. This includes transactions with group entities and dealings between the Free Zone head office and its Permanent Establishments.
Direct expenditure should be allocated to the income to which it relates. Common expenditure should be allocated using a reasonable and consistently applied basis that reflects the use of functions, assets and risks.
What Happens If a Condition Is Failed?
If the Free Zone Person fails the Qualifying Free Zone Person conditions, it is subject to the ordinary Corporate Tax rules from the beginning of the Tax Period in which the failure occurs and for the four following Tax Periods.
The ordinary rates are 0% on taxable income up to AED 375,000 and 9% on taxable income exceeding AED 375,000, unless another applicable provision applies.
Specific 2026 Requirement for Certain Designated Zone Distributors
For Tax Periods beginning on or after 1 January 2026, FTA Decision No. 6 of 2026 introduces an additional procedure for a Qualifying Free Zone Person conducting the Qualifying Activity of distributing goods or materials in or from a Designated Zone.
The company must obtain a report from an independent external auditor applying agreed-upon procedures to the relevant compliance requirements. The report is generally submitted no later than 30 days following the Corporate Tax Return filing deadline, using the method prescribed by the FTA.
This requirement is limited to the specified Designated Zone distribution activity. It does not apply to every Free Zone company or every Qualifying Free Zone Person.
Registration, Filing and Payment
A Free Zone company must register for Corporate Tax and submit a return for every Tax Period while it remains a Taxable Person, even where all income is expected to qualify for 0% or the company made a loss.
For the procedure and deadlines, see UAE Corporate Tax registration and filing and paying a UAE Corporate Tax Return.
Free Zone Review Checklist
- Confirm that the entity is legally a Free Zone Person.
- Identify all licences, branches and places where activities are performed.
- Map every income stream by counterparty, activity and location.
- Determine whether each Free Zone customer is the Beneficial Recipient.
- Identify Qualifying Activities and Excluded Activities under the current decision.
- Separate domestic and foreign Permanent Establishments.
- Review immovable-property and intellectual-property income separately.
- Calculate relevant total revenue and non-qualifying revenue for the de minimis test.
- Document adequate substance and any outsourced functions.
- Apply transfer pricing and prepare any required documentation.
- Prepare audited financial statements.
- Check whether the 2026 Designated Zone distribution report applies.
- Allocate income and expenditure between the 0% and 9% components.
- Confirm registration, filing and payment deadlines.
- Retain all contracts, customer declarations, calculations and supporting records.
Common Free Zone Mistakes
- Assuming the Free Zone licence automatically provides a 0% rate.
- Using the trade-licence activity description without reviewing the legal definition of the actual activity.
- Treating all transactions with mainland customers as disqualifying, or treating all of them as qualifying.
- Ignoring the Beneficial Recipient test for transactions with other Free Zone Persons.
- Applying the ordinary AED 375,000 0% band to non-Qualifying Income of a Qualifying Free Zone Person.
- Failing to calculate the de minimis threshold correctly.
- Ignoring domestic Permanent Establishment exposure from operations outside the Free Zone.
- Failing to prepare audited financial statements because revenue is below AED 50 million.
- Treating trademarks as Qualifying Intellectual Property.
- Failing to document substance, outsourcing supervision or transfer pricing.
- Assuming a failed condition affects only the current Tax Period.
- Applying the 2026 Designated Zone distribution procedure to every Free Zone company, or failing to apply it where required.
Frequently Asked Questions
Does every Free Zone company receive 0%?
No. The company must satisfy all Qualifying Free Zone Person conditions, and 0% applies only to Qualifying Income.
Must a Free Zone company register and file?
Yes. A Free Zone company that is a Taxable Person must register and file even if it expects no Corporate Tax to be payable.
Can a Free Zone company sell to mainland customers?
Yes, but the income classification depends on the activity and other conditions. Income from a Non-Free Zone Person generally qualifies only where it arises from a Qualifying Activity and is not an Excluded Activity.
Does non-qualifying revenue always cause the company to lose its status?
Not if it remains within the de minimis limit and all other conditions are met. The non-Qualifying Income itself is still subject to the applicable tax treatment.
Does every Qualifying Free Zone Person need audited accounts?
Yes, for Tax Periods beginning on or after 1 January 2025 under the current audited-financial-statements decision.
Can a Qualifying Free Zone Person claim Small Business Relief?
No. A Qualifying Free Zone Person is excluded from Small Business Relief.
Can a Free Zone Person choose the ordinary regime?
Yes. The election applies from the beginning of the relevant Tax Period and for the four following Tax Periods. It should be assessed carefully before being made.
Where can I find concise answers?
Visit the UAE Corporate Tax FAQs for brief answers and links to the detailed guides.
Related Guides
For the overall framework: UAE Corporate Tax Guide 2026
For registration: UAE Corporate Tax registration
For returns and payment: filing and paying a UAE Corporate Tax Return
For the tax calculation: how UAE Corporate Tax is calculated
For records and audit: Corporate Tax records and audited financial statements
For missed obligations: UAE Corporate Tax penalties
Need a Free Zone Corporate Tax Review?
MAIC can review the company’s activities, counterparties, contracts, substance, Permanent Establishments, de minimis calculation, income classification, audited-account requirement and return position.
A reliable conclusion requires a review of the actual transactions and operating model rather than the licence name alone.