Yes. Free zone companies are within UAE Corporate Tax, but a Qualifying Free Zone Person pays 0% on its Qualifying Income and 9% on its other Taxable Income. Other free zone companies pay the standard rates, and all must register and file Tax Returns.

Do free zone companies pay corporate tax?

Yes. A company incorporated, established or registered in a UAE free zone is a Free Zone Person and a Taxable Person for Corporate Tax. If it meets all the conditions to be a Qualifying Free Zone Person, it pays 0% on Qualifying Income and 9% on other Taxable Income. If not, the standard rates apply.

The standard rates are 0% on Taxable Income up to AED 375,000 and 9% above that; see what the AED 375,000 threshold means. A Qualifying Free Zone Person does not get that band: its non-qualifying Taxable Income is all taxed at 9%.

What is a Qualifying Free Zone Person?

A Qualifying Free Zone Person is a Free Zone Person meeting six conditions set by Article 18 of the Corporate Tax Law and Ministerial Decision No. 229 of 2025: adequate substance, Qualifying Income, transfer pricing compliance, no election for the standard rates, audited financial statements and the de minimis test.

It must meet all six at all times during the Tax Period:

  • Adequate substance. Core income-generating activities in a free zone (a Designated Zone for distributing goods), with adequate assets, qualified full-time employees and operating expenditure there; outsourcing within a free zone needs adequate supervision.
  • Qualifying Income. It derives Qualifying Income (see below).
  • Transfer pricing. Arm's length pricing with Related Parties, and transfer pricing documentation, including a master file and local file where thresholds are met.
  • No election. It has not elected the standard rates.
  • Audited financial statements. Required whatever its Revenue.
  • De minimis. Non-qualifying Revenue stays within the limit below.

A foreign company's branch registered in a free zone is also a Free Zone Person; for branches elsewhere, see how corporate tax applies to branches of foreign companies.

What is qualifying income?

Qualifying Income is income a Qualifying Free Zone Person can have taxed at 0%: income from transactions with Free Zone Persons that are the Beneficial Recipients (unless from an Excluded Activity), income from Qualifying Activities, other than Excluded Activities, with Non-Free Zone Persons, certain qualifying intellectual property income, and other income while non-qualifying Revenue stays within the de minimis limit.

A Free Zone Person is the Beneficial Recipient if it can use and enjoy the goods or services and has no obligation to supply them to someone else.

Qualifying and excluded activities

Ministerial Decision No. 229 of 2025 replaced Ministerial Decision No. 265 of 2023 with effect from 1 June 2023. Its Qualifying Activities, each with detailed conditions, are:

  • manufacturing or processing goods or materials;
  • trading Qualifying Commodities with a quoted price (metals, minerals, industrial chemicals, energy and agricultural commodities, and environmental commodities such as carbon credits);
  • holding shares and other securities for investment purposes;
  • owning, managing and operating ships, and financing and leasing aircraft;
  • regulated reinsurance, fund management, and wealth and investment management services;
  • headquarter services to Related Parties, and treasury and financing services to Related Parties or for its own account;
  • distributing goods or materials in or from a Designated Zone;
  • logistics services, and activities ancillary to any of the above.

The Excluded Activities are transactions with natural persons (except in the ship, fund management, wealth and investment management and aircraft activities); banking; insurance, finance and leasing outside the listed Qualifying Activities; owning or exploiting immovable property, except free zone commercial property transactions with Free Zone Persons; and anything ancillary to these.

The de minimis rule

Non-qualifying Revenue in a Tax Period must not exceed 5% of total Revenue or AED 5 million, whichever is lower. It is Revenue from Excluded Activities, from activities that are not Qualifying Activities with Non-Free Zone Persons, and from Free Zone Person customers that are not the Beneficial Recipient.

For example, with total Revenue of AED 40 million the limit is AED 2 million; at AED 150 million, the AED 5 million cap applies because 5% would be AED 7.5 million.

Some income is never Qualifying Income and is left out of the calculation; it is taxed at 9% unless an exemption applies: income attributable to a permanent establishment outside the free zone (in the UAE or abroad), income from free zone immovable property other than commercial property transactions with Free Zone Persons, and non-qualifying intellectual property income.

What are the corporate tax benefits for a Qualifying Free Zone Person?

The main benefit is a 0% Corporate Tax rate on Qualifying Income. Other Taxable Income is taxed at 9%, without the 0% band on the first AED 375,000. If the company fails any condition at any time in a Tax Period, it loses the status from the start of that period and for the next four Tax Periods.

The 0% rate lasts for the rest of the free zone's tax incentive period, which the Cabinet can extend, with no single period over 50 years.

In exchange, a Qualifying Free Zone Person cannot elect Small Business Relief, join a Tax Group, or use the Qualifying Group, Business Restructuring or tax loss transfer reliefs.

  • Opting out. It can elect the standard rates from the start of the Tax Period in which it elects, or the next. The FTA says the election must be made by that period's Tax Return due date and lasts for that period and the next four.
  • Losing the status. In the FTA's example, a calendar-year company that breaches the de minimis limit in 2024 is outside the regime for 2024 to 2028 and can qualify again from 2029.

What is the difference between a free zone and a designated zone?

A free zone is an area the Cabinet specifies as a Free Zone. A Designated Zone is a free zone listed by Cabinet decision for VAT; if fenced and customs-controlled, among other conditions, it counts as outside the UAE for certain supplies of goods. For Corporate Tax, goods distribution is a Qualifying Activity only in or from a Designated Zone.

For the free zone regime, a Designated Zone is a VAT Designated Zone that is also a Free Zone under the Corporate Tax Law. For VAT, a free zone that is not a Designated Zone is treated like any other part of the UAE.

Distribution is a Qualifying Activity only if it is carried out in or from a Designated Zone, goods entering the UAE come in through the Designated Zone, and the customer resells, processes or alters them for sale or resale, or is a public benefit entity. Sales to other end users do not count, and the substance for this activity must be in a Designated Zone. The FTA advises confirming your zone's status with your free zone authority.

Do free zone companies need audited financial statements and to register and file?

Yes. Every free zone company must register for Corporate Tax and file a Tax Return within nine months after each Tax Period ends, even if all its income is taxed at 0%. A Qualifying Free Zone Person must also prepare and maintain audited financial statements whatever its Revenue; it is a condition of the status.

Audited financial statements

Ministerial Decision No. 84 of 2025 requires every Qualifying Free Zone Person to prepare and maintain audited financial statements for Tax Periods starting on or after 1 January 2025; Ministerial Decision No. 82 of 2023 did the same for earlier periods. For Corporate Tax, other businesses generally need them only if Revenue exceeds AED 50 million. Separate statements for Qualifying Income are not required, but keep documents showing how you calculated it.

For Tax Periods starting on or after 1 January 2026, a Qualifying Free Zone Person distributing goods in or from a Designated Zone also needs an agreed-upon procedures report (ISRS 4400) from its external auditor or another UAE-licensed independent auditor, confirming the reseller and import conditions. It must reach the FTA within 30 days after the Tax Return deadline, or those conditions are treated as not met.

Both reports are issued by an independent auditor; for help preparing accounts for audit, see audit and assurance.

Registration and Tax Returns

Every free zone company, including a Qualifying Free Zone Person, must register for Corporate Tax. A free zone company incorporated on or after 1 March 2024 must apply within three months of incorporation; for earlier companies and penalties, see Corporate Tax registration deadlines.

The Tax Return must be filed, and any tax paid, within nine months of the end of the Tax Period. Keep supporting records for seven years after the end of the Tax Period.

Getting help

To check whether your free zone company qualifies, or for help with registration, Tax Returns or transfer pricing documentation, see our Corporate Tax services or contact us.