Is corporate tax applicable to free zone companies in the UAE?

Yes. A company or branch registered in a free zone is a "Free Zone Person" under the Corporate Tax Law, and the Ministry of Finance treats free zone businesses as taxable persons that must register. [1][9] What a free zone company pays depends on one question: is it a Qualifying Free Zone Person (QFZP) for that tax period? [1]

Qualifying Free Zone Person Other free zone company
Qualifying income 0% [1] Not applicable
Other taxable income 9%, with no 0% band [1][4] 0% up to AED 375,000, 9% above [1][4]
Small business relief, tax groups, transfer of losses Not available [4] Available if the conditions are met [4]
Audited financial statements Always required [7] For tax, required above AED 50 million of revenue [7]
Registration and tax return Required [4][9] Required [4][9]

These rates apply in 2026: the Ministry of Finance's consolidated text of the Corporate Tax Law, updated in January 2026, keeps the 0% and 9% rates. [1] UAE companies in multinational groups with annual revenue of EUR 750 million or more, in at least 2 of the 4 previous years, also fall within the UAE's top-up tax. It aims at an effective tax rate of at least 15% in each country where the group operates. [13] Regional headquarters in Dubai →

Registration deadlines, small business relief and the general rules are covered in UAE corporate tax explained. This guide covers what decides the free zone result.

What is a free zone company in the UAE?

The UAE has more than 40 free zones, where foreign investors can own 100% of a company. [15] For corporate tax, a free zone is an area named in a Cabinet decision. A Free Zone Person is a legal entity incorporated, established or registered there, including the free zone branch of a foreign company. [1]

The FTA asks each business to confirm with its free zone authority that its location counts as a free zone, or a designated zone, for corporate tax. [4][5] DMCC, for example, tells its members it is "a qualified Free Zone" and that every DMCC entity must register for corporate tax. [14] The zone's status is only the starting point. Each company must meet the conditions itself, in every tax period. [4]

RAK ICC companies are covered on our RAK ICC page.

Who is a Qualifying Free Zone Person?

A free zone company is treated as a QFZP unless it fails a condition or elects to leave the regime. [4] It must meet every condition at all times during the tax period: [1][2][3][4]

Condition What it means in practice
Adequate substance Its core income-generating activities take place in a free zone, with adequate assets, qualified full-time employees and operating spending there. Core work can be outsourced to another person in a free zone, under the company's supervision. Wider outsourcing is allowed for qualifying intellectual property. [2]
Qualifying income It earns income of the kinds set out below. [2]
No election It has not elected to be taxed under the standard rules. [1]
Transfer pricing It deals with related parties and connected persons at arm's length and keeps the required documentation. [1][4]
Audited accounts It prepares and keeps audited financial statements, whatever its revenue. [3][7]
De minimis Its non-qualifying revenue is no higher than the lower of 5% of total revenue or AED 5 million. [3]

The FTA's guide adds 3 points: [4]

  • Distribution needs a designated zone. For distribution of goods, the substance must sit in a designated zone, not just any free zone.
  • No double counting. An employee counted for one qualifying activity cannot also be counted for another.
  • Start-up years. A company with no revenue yet is not disqualified just because it has no qualifying income. A single non-qualifying sale in that period can still fail the de minimis test (see the office chair example below).

The 0% rate runs for the remaining tax incentive period set in the free zone's own legislation. That period can be extended, but no single period can exceed 50 years. [1]

What counts as qualifying income for a free zone company?

Cabinet Decision No. 100 of 2023 sets out 4 kinds of qualifying income: [2]

  1. Income from transactions with another Free Zone Person, unless the income comes from an excluded activity.
  2. Income from transactions with anyone else, but only from a qualifying activity that is not excluded.
  3. Income from qualifying intellectual property: patents, copyrighted software and similar registered rights, calculated under a formula set by the Minister. Trademarks never qualify. [2][3]
  4. Any other income, as long as the de minimis limit is met.

"Anyone else" means any person who is not a Free Zone Person, which takes in mainland companies and customers abroad. [2]

The beneficial recipient test. Income from another free zone company counts only if that company is the beneficial recipient: it has the right to use the service or goods itself, and no obligation to pass them on to someone else. A free zone company acting as an agent or conduit for a mainland or foreign party does not count. The seller may rely on a written statement from the buyer, unless it has reason to doubt it. [2][4]

The FTA's own example shows how this works for service firms. A free zone firm gives legal advice to a client that is not a Free Zone Person, and hires a free zone translator. The legal fee is non-qualifying income, because legal services are not a qualifying activity. The translator's fee can be qualifying income, subject to the other conditions, because the law firm is the beneficial recipient of the translation. [4]

Some income is always taxed at 9% (unless another rule exempts it), and is left out of the de minimis test altogether: [2][4]

  • income of a branch outside the free zone, on the mainland or abroad
  • income from property in a free zone that is not commercial property (homes, hotels and serviced apartments), and from commercial property in a free zone where the deal is with anyone who is not a Free Zone Person
  • intellectual property income other than from qualifying intellectual property

Which activities qualify, and which are excluded?

Ministerial Decision No. 229 of 2025 lists 13 qualifying activities, plus activities ancillary to them. It repealed Ministerial Decision No. 265 of 2023 and applies from 1 June 2023. [3]

Qualifying activities [3]

  • manufacturing of goods or materials, and processing of goods or materials
  • trading of qualifying commodities: metals, minerals, industrial chemicals, energy and agricultural commodities and their by-products, and environmental commodities such as carbon credits, where a quoted price exists, but not products packaged for retail sale
  • holding shares and other securities for investment purposes (treated as held for investment once held for at least 12 months without a break)
  • ownership, management and operation of ships used in international transport
  • reinsurance, fund management, and wealth and investment management, the last two under the oversight of a UAE financial regulator
  • headquarter services to related parties, and 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 any of these

Excluded activities [3]

  • transactions with individuals, except in ship operation, fund management, wealth and investment management, and aircraft financing and leasing
  • banking
  • insurance, other than reinsurance and captive insurance within headquarter services
  • regulated finance and leasing, other than the qualifying activities above
  • owning or exploiting property, other than commercial property in a free zone where the deal is with a Free Zone Person
  • activities ancillary to any of these

The 2025 decision removed the old requirement that commodities be traded "in raw form", and added industrial chemicals, by-products and environmental commodities. A commodity in the listed groups now needs a quoted price, for it or a related commodity, from a recognised commodities exchange or a price reporting agency named in Ministerial Decision No. 230 of 2025. The Ministry of Finance also lists "self-investment" under treasury and financing for the company's own account, and confirms that a distributor's sales to public benefit entities can qualify. [3][6] A company earning 51% or more of its revenue from distribution, warehousing, logistics or inventory management cannot treat its trading as qualifying commodity trading. [3]

Consultancy, marketing, IT and most professional services are not on the list. A free zone company providing them earns qualifying income only from Free Zone Persons that are the beneficial recipients. Its fees from mainland and foreign clients are non-qualifying revenue, and count towards the de minimis limit. [2][3][4]

How does the de minimis rule work?

Non-qualifying revenue in a tax period must not exceed 5% of total revenue or AED 5 million, whichever is lower. [3] Worked from that rule:

Total revenue for the test 5% of revenue [3] Limit that applies [3]
AED 2 million AED 100,000 AED 100,000 [3]
AED 40 million AED 2 million AED 2 million [3]
AED 100 million AED 5 million AED 5 million [3]
AED 250 million AED 12.5 million AED 5 million [3]

Non-qualifying revenue is revenue from excluded activities, from non-qualifying activities with anyone who is not a Free Zone Person, and from free zone customers that are not the beneficial recipients. Branch income, the property income listed above and non-qualifying intellectual property income are left out of both sides of the sum. [2][4]

The FTA's guide gives 2 examples: [4]

  • Just over the line. A company with AED 7.3 million of revenue for the test, of which AED 500,000 is non-qualifying, is at 6.85%. It fails, and the standard rules apply to all its taxable income.
  • The office chair. A new manufacturer with no sales yet sells an office chair to an employee for AED 100. That sale to an individual is its only revenue, so 100% of its revenue is non-qualifying. It loses QFZP status for that year and the next 4.

What happens if a free zone company fails a condition?

It stops being a QFZP from the start of that tax period, and stays outside the regime for the next 4 tax periods: 5 periods in all. [1][3][4] In the FTA's example, a calendar-year company that fails the de minimis test in 2024 cannot be a QFZP again until after 31 December 2028, and tests its status afresh from 1 January 2029. [4]

A company can also elect to be taxed under the standard rules. The election takes effect from the start of the tax period in which it is made, or the next one. It can be made during the period or in that period's tax return, but not after the return's due date, and it lasts for 5 tax periods. [1][4] The standard rules give access to the AED 375,000 band at 0%, small business relief, tax groups, group and restructuring reliefs, and transfers of losses, each subject to its own conditions. [4] Whether that suits a particular company is a calculation to make with its tax adviser before the return is due.

Losses on the qualifying income side of a QFZP cannot be set against its taxable income, transferred or carried forward. [4]

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

The FTA's public clarification of October 2026 sets out 4 terms, because each tax law defines these areas differently: [5]

Term What it means
Free zone for corporate tax An area named in a Cabinet decision [5]
Designated zone for corporate tax A zone on the VAT designated zone list that is also a free zone for corporate tax [5]
Designated zone for VAT A free zone on the list in Cabinet Decision No. 59 of 2017 and its amendments, meeting the VAT conditions: fenced, with security and customs controls, internal procedures for goods, and an operator following FTA procedures [5]
Designated zone for excise tax A fenced free zone, or an FTA-approved area, run under a warehouse keeper [5]

A VAT designated zone is not automatically a designated zone for corporate tax. [5] The difference matters for distributors. Distribution qualifies only where it is carried out in or from a designated zone, goods entering the UAE are imported through it, and the customer resells or processes the goods, or is a public benefit entity. Sales to the end user do not qualify, so the FTA expects the seller to check its customers, for example through a written undertaking. [3][4][5] The published VAT list includes Jebel Ali Free Zone, Dubai Airport Free Zone, Hamriyah Free Zone and Ajman Free Zone, among others. [11]

Is VAT applicable for free zone companies in the UAE?

Yes, in most cases. The FTA treats each tax law separately, so a company's corporate tax position does not decide its VAT position. [5] For VAT, fenced and unfenced free zones are part of the UAE, unless the zone is a designated zone that meets the conditions. [10] Even in a designated zone: [10]

  • the business is treated as onshore, with the same duties to register, report and account for VAT as any other UAE business
  • services are taxed under the normal UAE rules
  • goods supplied within the zone are generally outside the scope of VAT, unless the buyer will use them rather than resell them or build them into other goods, such as an office computer, stationery or a company car

The usual thresholds apply: registration is mandatory above AED 375,000 and voluntary above AED 187,500. [12]

Audited accounts, transfer pricing and the tax return

  • Audit. A QFZP prepares and keeps audited financial statements whatever its revenue, under Ministerial Decision No. 84 of 2025 for tax periods starting on or after 1 January 2025. [7] Company governance in the UAE →
  • Accounting standards. IFRS, or IFRS for SMEs where revenue is AED 50 million or less. [4]
  • Showing the split. No separate accounts are needed for qualifying income, but the company must keep the workings that show how it calculated it, and must split its expenses between the two parts at arm's length. [4]
  • Transfer pricing. A company whose dealings with related parties or connected persons pass a materiality threshold files a disclosure form with its return. A master file and local file are needed where its revenue is AED 200 million or more, or it belongs to a multinational group with revenue of AED 3.15 billion or more. [8]
  • Return and records. The return is filed, and any tax paid, within 9 months of the end of the tax period. Records are kept for 7 years. [4]

How Marlborough Gulf helps

What we do:

  • We test each free zone company against the Qualifying Free Zone Person conditions: which income streams qualify, who the beneficial recipients are, and how close the company sits to the de minimis limit.
  • We keep the books so that qualifying and non-qualifying revenue are recorded apart, and prepare the accounts for audit.
  • We plan where each activity sits across the family's free zone and mainland companies, as part of its wider structure.

What others do: An auditor audits the financial statements. Where you need representation before the Federal Tax Authority, a registered tax agent acts for you.

Tax consultancy → Accounting and bookkeeping →

Request a consultation

Common questions

Is a free zone company tax-free in the UAE?

No. It pays 0% only on qualifying income, and only while it meets every Qualifying Free Zone Person condition. Its other taxable income is taxed at 9%, and it is within the VAT rules. [1][4][10]

Is DMCC a qualifying free zone?

DMCC describes itself as a qualified free zone for corporate tax. [14] The status that decides the rate belongs to each company, which must meet the conditions every tax period. [4]

Who is exempted from UAE corporate tax?

Exempt persons include government entities, government-controlled entities, qualifying public benefit entities, qualifying investment funds, and pension and social security funds, among others. A free zone company is not an exempt person: it is a taxable person that may pay 0% on qualifying income. [1]

Are free zone companies exempt from VAT?

No. Free zones are part of the UAE for VAT unless they are designated zones meeting the conditions, and even there services are taxed normally. [10]

What is the FTA in the UAE?

The Federal Tax Authority, the body the Corporate Tax Law names as "the Authority". Free zone companies register with it and file their tax returns to it. [1][4]

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

A free zone for corporate tax is an area named in a Cabinet decision. A designated zone is on the VAT list of designated zones, and counts for corporate tax only if it is also a corporate tax free zone. [5]

This guide is general information, not tax or legal advice for your circumstances. Rules change; each source below shows the date it was read.

Marlborough Gulf does not give investment, pension or insurance advice. Regulated services are provided by licensed firms, who contract with you directly.

Sources

  1. Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments (Ministry of Finance consolidated English text, January 2026 version "v13.1.26"), Articles 1, 3, 4, 18, 19, 34 and 55. Read 29 Oct

    https://mof.gov.ae/wp-content/uploads/2026/01/Federal-Decree-Law-No.-47-of-2022-and-its-amendments-en-v13.1.26.pdf

  2. Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person, Ministry of Finance, 25 Oct 2023, Articles 1, 3, 4, 5, 6, 7 and 8. Read 29 Oct 2026. https://mof.gov.ae/wp-content/uploads/2023/11/Cabinet-Decision-No.-100-of-2023-on-Determining-Qualifying-Income-for-the-Qualifying-Free-Zone-Person.pdf
  3. Ministerial Decision No. 229 of 2025 Regarding Qualifying Activities and Excluded Activities, Ministry of Finance, 28 Aug 2025, Articles 1, 2, 3, 5, 6 and 7. Read 29 Oct 2026. https://mof.gov.ae/wp-content/uploads/2025/09/EN-Ministerial-Decision-No.-229-of-2025-Regarding-Qualifying-Activities-and-Excluded-Activities.pdf
  4. Federal Tax Authority, Free Zone Persons Corporate Tax Guide (CTGFZP1), May 2024, sections 3.1 to 3.4, 4.3.1, 4.4 to 4.7 (Examples 2, 5, 8, 9 and 11), 5.4, 5.5.1, 10.14 and 12. Read 29 Oct 2026. https://tax.gov.ae/Datafolder/Files/Guides/CT/Free%20Zone%20Persons%20-%2020%2005%202024%20final%20for%20GCD.pdf
  5. Federal Tax Authority, Tax Public Clarification TAXP010, Free Zones and Designated Zones for Tax Purposes, October 2026 (file dated 2 Oct 2026). Read 29 Oct 2026. https://tax.gov.ae/Datafolder/Files/Pdf/2026/Guide/TAXP010%20-%20Designated%20Zones%20for%20CT%20VAT%20Excise%20-%2010%202026.pdf
  6. UAE Ministry of Finance, "Ministry of Finance Issues Two Ministerial Decisions on Qualifying Activities and Excluded Activities in Free Zones for Corporate Tax Purposes and on Recognised Price Reporting Agencies", 3 Sep 2025. Read 29 Oct 2026. https://mof.gov.ae/en/news/ministry-of-finance-issues-two-ministerial-decisions-on-qualifying-activities-and-excluded-activities-in-free-zones-for-corporate-tax-purposes-and-on-recognised-price-reporting-agencies/
  7. Ministerial Decision No. 84 of 2025 on Audited Financial Statements, Ministry of Finance, 25 Mar 2025, Articles 2, 3 and 4. Read 29 Oct 2026. https://mof.gov.ae/wp-content/uploads/2025/04/Ministerial-Decision-No.-84-of-2025-on-Audited-Financial-Statements.pdf
  8. Federal Tax Authority, Transfer Pricing Guide (CTGTP1), October 2023, sections 6.5 and 6.6. Read 29 Oct 2026. https://tax.gov.ae/Datafolder/Files/Pdf/2023/Transfer%20Pricing%20Guide%20-%20EN%20-%2023%2010%202023.pdf
  9. UAE Ministry of Finance, Corporate Tax in the UAE, page updated 29 Oct 2026. https://mof.gov.ae/en/public-finance/tax/corporate-tax/
  10. Federal Tax Authority, Designated Zones VAT Guide (VATGDZ1), Issue 1, July 2018, sections 2.1 to 2.4, 3.2 and 3.3. Read 29 Oct 2026. https://tax.gov.ae/DataFolder/Files/Pdf/Designated-Zones-VAT-Guide.pdf
  11. Federal Tax Authority, Designated Zones for the purposes of Federal Decree-Law No. 8 of 2017 on Value Added Tax (list under Cabinet Decision No. 59 of 2017, as amended by Cabinet Decision No. 35 of 2018). Read 29 Oct 2026. https://tax.gov.ae/-/media/Files/FTA/links/Legislation/VAT/ar/05-designated-zones.pdf
  12. Federal Tax Authority, Registration for VAT, page dated 6 Apr 2026. Read 29 Oct 2026. https://tax.gov.ae/en/taxes/Vat/vat.topics/registration.for.vat.aspx
  13. Federal Tax Authority, "Federal Tax Authority issues new guide on scope and registration for Top-up Tax on multinational enterprises", 7 Oct 2026. https://tax.gov.ae/en/media.centre/news/federal.tax.authority.issues.new.guide.on.scope.and.registration.for.topup.tax.on.multinational.enterprises.aspx
  14. DMCC, Corporate Tax (member support). Read 29 Oct 2026. https://dmcc.ae/members/support/corporate-tax
  15. UAE Ministry of Economy and Tourism, 40 Free Zones for Company Incorporation ("More than 40 free zones allow tax exemptions and 100% ownership for foreign investors"), updated 29 Oct 2026. https://www.moet.gov.ae/en/-/100-company-ownersh-1