The UAE’s corporate tax regime is governed by Federal Decree‑Law No. 60 of 2023 (amending earlier law) and overseen by the Federal Tax Authority (FTA). Under this regime, businesses are subject to tax on their profits (net income) from their operations—marking a significant transition from the UAE’s earlier position of no federal corporate tax for most enterprises.

For Free Zone companies, the regime offers a differentiated tax treatment provided they satisfy certain conditions—creating both opportunities and obligations. Firms that secure the status of a Qualifying Free Zone Person (QFZP) under the law may benefit from a 0 % corporate tax rate on “Qualifying Income”. Non-qualifying income, however, is taxed at the standard 9 % rate.

Given this dual structure, Free Zone companies must consider not only whether they can benefit from the 0 % rate, but also how to maintain eligibility over time—and this is where robust tax compliance and advisory services become essential.

Who qualifies as a Free Zone company and what changes now?

Free Zones in the UAE are geographic zones that offer specific incentives, including simplified company formation, full foreign ownership, and—even under the new corporate tax regime—potentially favourable tax rates. For corporate tax purposes, a “Free Zone Person” is a juridical person incorporated, established or registered in a Free Zone.

However, simply being located in a Free Zone does not automatically guarantee the 0 % rate. The law and related guidance set out multiple conditions that must be fulfilled to be designated a QFZP and benefit from the preferential tax treatment. These include:

• Maintained “adequate substance” in the Free Zone (staff, assets, expenditure).
• Derivation of “Qualifying Income” (i.e., income from certain activities or from other Free Zone persons).
• Non-engagement in “Excluded Activities” as defined in the relevant Cabinet or Ministerial Decisions.
• Compliance with the arm’s length principle and transfer-pricing documentation for related-party transactions.
• Meeting the de minimis rule (i.e., if the business earns some non-qualifying income, that amount must not exceed the lower of AED 5 million or 5% of total revenue). 

Free Zone operators must therefore engage in active planning, corporate governance and reporting oversight—and this is precisely where tax compliance and advisory services help Free Zone companies remain aligned with law, avoid pitfalls and retain the 0 % rate.

Key impacts for Free Zone companies

Tax rate and income categorisation

For QFZPs that satisfy all conditions, Qualifying Income is taxed at 0 %. Yet income which does not meet the criteria (non-qualifying income) is taxed at 9 %. Non-Free Zone income, or income attributable to a Permanent Establishment outside the Free Zone, will trigger the 9 % rate.

This differentiation means companies must classify their income carefully: revenue streams must be segmented between Qualifying and non-qualifying, and transactions with related parties or mainland UAE entities need additional scrutiny. Free Zone entities that previously assumed blanket tax-exemption may find that certain income is now taxable—making the role of tax compliance and advisory services vital in income categorisation, documentation and planning.

Substance and operational presence

One of the more demanding requirements for Free Zone companies is demonstrating “adequate substance” in the Free Zone. The FTA guidance clarifies that this involves right-sizing staff, assets, expenditure and management in the Free Zone context.

For example, if an entity is effectively managed from the mainland or abroad, or where all activities are outsourced without oversight, the substance test may fail and the QFZP status may be lost—and the entity becomes subject to 9 % tax. This operational demand places increased compliance burden on Free Zone companies and strengthens the case for seeking specialised tax compliance and advisory services to ensure that operational, structural and documentation requirements are met as part of ongoing governance.

Ongoing filings and documentation

Even for companies that benefit from the 0 % rate, the law mandates registration with the FTA, annual filing of a corporate tax return, audited financial statements and record-keeping. If a Free Zone company meets the criteria for 0 % tax but does not file the required returns on time or maintain documentation, it may incur penalties or lose its favourable tax status.

The requirement to maintain transfer-pricing documentation, audit trails and audit-level financial reports means that Free Zone firms must boost their internal compliance frameworks. Again, this is an area where expert tax compliance and advisory services play an important role: advising on documentation standards, filing timelines, record-maintenance and liaison with the FTA.

Risk of losing preferential status

Free Zone companies that fail to maintain their qualifying status, or that exceed the de minimis threshold for non-qualifying income, risk losing the 0 % rate and being taxed at 9 %.

In practical terms, this means Free Zone firms need to monitor income types, ensure the de minimis rules are adhered to, and assess any structural changes (e.g., changes in ownership, operations, cross-zone transactions) that could trigger loss of status. Strong advisory support is therefore critical in monitoring risk and implementing corrective measures well in advance of filing deadlines.

Strategic structuring and decision-making

The corporate tax regime also influences strategic decisions for Free Zone firms: whether to engage in mainland UAE business or transactions with non-Free Zone entities; whether to remain exclusively within Free Zone operations; how to allocate overhead and staffing; how to structure intra-group transactions; and how to plan for future growth or diversification.

Here too, tax compliance and advisory services are indispensable: guiding Free Zone companies on choosing the right Free Zone authority, structuring inter-company flows, evaluating the impact of new activities, and optimising their tax position with full awareness of regulatory requirements.

Special considerations for UAE Free Zone companies in 2025 and beyond

Free Zone companies in the UAE must also pay attention to several evolving factors:

• The FTA’s Corporate Tax Guide on Free Zone Persons, issued in May 2024, provides updated clarity on eligibility, definition of Qualifying Income, and how income from permanent establishments is treated.
• The Cabinet and Ministerial decisions (such as Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023) refine the definitions of Qualifying Activities, Excluded Activities and Determination of Qualifying Income.
• Free Zone companies planning expansion or engaging in new activities should evaluate whether the new activities fall under the Qualifying Activities list or are “excluded”. Some activities—such as services to mainland UAE entities or residential property rental—may not qualify.
• Given global tax developments (e.g., the OECD’s Pillar 2 rules), Free Zone companies operating as part of multinational groups should also assess whether they are subject to additional top-up tax or global minimum tax regime—though this is more relevant for large multinationals rather than typical Free Zone firms.
• Because the Free Zone regime hinges on maintaining documentation, substance and audit trails, companies should budget and plan for the compliance cost—not just the tax rate. Investment in strong governance and advisory services pays dividends in maintaining eligibility for the 0 % rate.

Implications for Free Zone company decision-makers

For businesses operating in UAE Free Zones and their management teams, a number of actionable implications arise from the Corporate Tax Law:

• Review the company’s activities: Are the current business activities on the Free Zone licence considered Qualifying Activities? Are transactions with non-Free Zone persons increasing the risk of non-qualifying income?
• Assess substance and structure: Does the company hold sufficient staff, assets, expenditure and decision-making in the Free Zone? Are there operations outside the zone that might jeopardise the qualifying status?
• Implement robust income classification: Segregate revenue streams into Qualifying and non-qualifying income. Monitor non-qualifying income and ensure that the de minimis thresholds are not breached.
• Strengthen documentation and compliance systems: Ensure financial statements are audited, transfer pricing documentation is in place, tax registration has been done, and annual returns will be filed on time. For many companies, retaining expert tax compliance and advisory services ensures that the internal controls are aligned with law and regulator expectations.
• Consider strategic changes carefully: Before entering into mainland UAE business, new service lines, or inter-company arrangements, assess tax implications under both the QFZP regime and the standard tax regime.
• Monitor regulatory developments: Keep abreast of changes in Cabinet/Ministerial decisions, regulatory guidance from the FTA, and global tax-policy developments which may affect Free Zone tax treatment or substance requirements.

The UAE’s Free Zone environment continues to offer attractive incentives, the introduction and refinement of the corporate tax regime means that Free Zone companies must now operate in a far more rigorous tax-compliance environment. The difference between qualifying for the 0 % rate and being subject to the 9 % standard rate lies in meeting multiple criteria, maintaining substance, accurate income classification, and filing obligations. For Free Zone companies targeting sustainability and growth in the UAE, leveraging strong tax compliance and advisory services is no longer optional—it’s essential for maintaining competitive advantage and regulatory alignment.

Also Read: Corporate Tax Compliance in the UAE: Key Requirements for 2025