Are UAE free zone companies exempt from corporate tax?
No. The Ministry of Finance states that juridical persons established in a UAE free zone are taxable persons and must comply with the Corporate Tax Law, Federal Decree-Law No. 47 of 2022. The law applies to financial years beginning on or after 1 June 2023.
What the law offers is a 0% rate for one kind of taxpayer on one kind of income. Article 3(2) taxes a Qualifying Free Zone Person at 0% on Qualifying Income and at 9% on taxable income that is not Qualifying Income.
The legal position is set by the Corporate Tax Law, the decisions of the Cabinet and the Ministry of Finance, and the guidance of the Federal Tax Authority (FTA).
What is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a free zone company that meets every condition in Article 18(1) of the Corporate Tax Law.
The FTA's guide adds that the company must carry out its core income generating activities in a free zone and have adequate assets, full time employees and operating expenditure there. An individual or an unincorporated partnership cannot be a Free Zone Person. A branch registered in a free zone can.
- It maintains adequate substance in the UAE.
- It derives Qualifying Income.
- It has not elected to be taxed under the standard regime (Article 19).
- It complies with the arm's length and transfer pricing documentation rules (Articles 34 and 55).
- It meets any other condition set by the Minister, which includes preparing audited financial statements.
Good to knowThe FTA tells companies to check with their free zone authority whether they operate in a Free Zone for corporate tax purposes.
What counts as Qualifying Income?
Qualifying Income is defined by Cabinet Decision No. 100 of 2023 and falls into four groups: income from transactions with another Free Zone Person, except Excluded Activities. Income from a person outside the free zones, only where it comes from a Qualifying Activity. Income from Qualifying Intellectual Property. And any other income, provided the de minimis test is met.
The activities are listed in Ministerial Decision No. 229 of 2025, issued on 28 August 2025. It repealed Ministerial Decision No. 265 of 2023 and takes effect from 1 June 2023.
| Category | Activities |
|---|---|
| Qualifying Activities | Manufacturing, processing, trading of Qualifying Commodities, holding shares and securities for investment, ship ownership and operation, reinsurance, fund management, wealth and investment management, headquarter services to related parties, treasury and financing services to related parties or for own account, aircraft financing and leasing, distribution of goods in or from a Designated Zone, logistics services, and ancillary activities |
| Excluded Activities, which include | Transactions with natural persons, with limited exceptions. Banking, insurance, finance and leasing, with exceptions. Ownership or exploitation of immovable property, other than commercial property in a free zone transacted with a Free Zone Person |
What is the de minimis test?
The de minimis test caps non-qualifying revenue at 5% of total revenue or AED 5,000,000, whichever is lower. It is set by Ministerial Decision No. 229 of 2025. Where the test is met, other income counts as Qualifying Income under Cabinet Decision No. 100 of 2023.
As an illustration, a company with total revenue of AED 2,000,000 has a limit of AED 100,000, which is 5% of its revenue.
The consequence of failing is long. A Qualifying Free Zone Person that fails any condition loses the status from the start of that tax period and for the following four tax periods.
Which free zone income is taxed at 9%?
Taxable income that is not Qualifying Income is taxed at 9%. Three further points follow from the law and the official guidance.
- There is no zero band. The FTA states that a Qualifying Free Zone Person is not eligible for the 0% rate on the first AED 375,000.
- Income attributable to a place of business in the UAE outside the free zone, or to a foreign permanent establishment, is taxable at 9%.
- Small Business Relief is not available to a Qualifying Free Zone Person.
What must every free zone company do, even at 0%?
Every free zone company must register, file and keep records, whether or not it pays any tax.
| Duty | Rule |
|---|---|
| Register with the FTA | Every Free Zone Person, including a Qualifying Free Zone Person. A company incorporated on or after 1 March 2024 applies within three months of incorporation (FTA Decision No. 3 of 2024) |
| Late registration | Administrative penalty of AED 10,000 |
| File a tax return | Within 9 months of the end of the tax period |
| Keep records | 7 years |
| Audited financial statements | Required of every Qualifying Free Zone Person, under Ministerial Decision No. 84 of 2025 |
| Economic substance reports | Removed for financial years ending after 31 December 2022 by Cabinet Decision No. 98 of 2024. Adequate substance remains a condition of the 0% rate |
What does this mean for consultants and online sellers?
Consultancy is not on the list of Qualifying Activities in Ministerial Decision No. 229 of 2025. Transactions with natural persons are an Excluded Activity, with limited exceptions.
Under Cabinet Decision No. 100 of 2023, income from transactions with another Free Zone Person is Qualifying Income, except for Excluded Activities. Income from a person outside the free zones qualifies only where it comes from a Qualifying Activity. Any other income counts only if the de minimis test is met.
This article sets out what the law and the official guidance say. It is not tax advice: confirm your company's position with a qualified tax adviser before you rely on the 0% rate.