What is classified as excluded activity for a UAE free zone company

Six types of activity are officially classified as excluded activities for free zone companies under the UAE’s corporate tax regime. If a free zone company derives income from any of these, the income will not qualify for the 0% corporate tax rate, even if all other free zone conditions are met. Below is the official list and what each category means in practice.

The six excluded activities for free zone companies

A free zone company conducting any of the following activities is treated as carrying out excluded activity for the purposes of the free zone corporate tax regime:

Each of these terms is further defined in official FTA guidance.

What “transactions with natural persons” means

Any transaction between a free zone company and a natural person, meaning a private individual, not a business, counts as an excluded activity. However, there are two exceptions:

• If the company is dealing in the ownership or operation of ships, only passenger-related transactions are excluded; cargo and vessel management activities are not.
• Activities conducted through an authorised domestic permanent establishment (such as an onshore branch) are not considered qualifying free zone activities and are outside the free zone regime entirely.

Otherwise, if a free zone company sells goods or provides services directly to individuals, that revenue falls under excluded activities.

Banking, insurance, finance and leasing

Engaging in any of these regulated sectors is classified as an excluded activity. Free zone banks, insurers, and finance or leasing businesses do not qualify for the 0% rate on income from these activities, for example:

• Interest income from loans is excluded.
• Premium income from insurance contracts is excluded.
• Any activity that would typically require licensing from the UAE Central Bank, securities regulator, or insurance authority is likely to meet the definition.

Ownership or exploitation of immovable property

Income from owning or exploiting immovable property (meaning real estate such as land, buildings or other permanent structures), including commercial leasing, property sales and management generated from inside or outside a free zone, counts as excluded activity. There is no exemption by property location. Both direct ownership and activities that exploit property (such as subleasing or facility operation) are included.

Ownership or exploitation of intellectual property

Commercialising, licensing or exploiting intellectual property rights (patents, trademarks, copyrights, software, and similar intangible assets) as the main business model is treated as excluded activity. Passive holding of shares or securities for investment purposes is not excluded, but if the company’s revenue mainly comes from intellectual property exploitation, that income is excluded from the free zone 0% tax regime.

What happens if a free zone company carries out excluded activities

If a qualifying free zone company (QFZP) derives income from an excluded activity, that income will always be taxable at the standard 9% rate. If non-qualifying (excluded) income exceeds the "de minimis" threshold of 5% of total revenue or AED 5,000,000 (whichever is lower), the company will lose its qualifying status for the free zone regime for that tax period and pay 9% on all taxable income, not just excluded income. The de minimis test is applied each year.

Key compliance points for free zone companies

• Review all business lines for any revenue earned directly from individuals (not companies), as this is almost always classified as excluded activity.
• Check regulatory licences: if your company is income-generating through regulated financial, leasing, or insurance activity, this is automatically excluded.
• Scrutinise all revenue linked to real estate, whether from within or outside the free zone.
• For businesses with intellectual property, only certain R&D-based IP qualifies for the 0% rate. Licensing or commercialising IP generally classifies as excluded activity.
• The de minimis threshold is strict: 5% of revenue or AED 5,000,000, whichever is lower.

Table: De minimis threshold for qualifying free zone status

If a company breaches either threshold in a tax period, free zone exemption is lost for that period.

Free zone companies should document all transactions, revenue breakdowns, and activity classifications to support their tax position in case of FTA review.