“Free Zone Means No Tax”? UAE Corporate Tax for Free Zone Companies
Free zone companies are inside UAE Corporate Tax: they register and file every year. What a Qualifying Free Zone Person is, what counts as qualifying income, the de minimis rule, and a worked example.
“We are in a free zone, so we don’t need Corporate Tax.” It is one of the most common things new clients say, and it is wrong. Free zone companies are inside UAE Corporate Tax. What a free zone can offer is a separate 0% regime for qualifying income, and only if the company meets every condition, every year.
Every free zone company registers and files
Corporate Tax applies to financial years starting on or after 1 June 2023. A free zone company registers for Corporate Tax and files a return every year, due 9 months after its financial year end, even if all its income ends up taxed at 0%. A late Corporate Tax registration carries a AED 10,000 penalty.
What a Qualifying Free Zone Person is
A free zone company that meets the conditions is a Qualifying Free Zone Person (QFZP). Its qualifying income is taxed at 0%, a regime separate from the ordinary 0% band on the first AED 375,000. To keep the status, a free zone entity must:
- Maintain adequate substance in the free zone (real premises, staff and activity there).
- Earn qualifying income: broadly, income from transactions with other free zone persons, income from qualifying activities with others as long as they are not excluded activities, and income from qualifying intellectual property.
- Meet the transfer pricing documentation requirements.
- Prepare audited financial statements.
The de minimis rule
A QFZP may have a small amount of non-qualifying income without losing its status. The limit is whichever is lower: 5% of total revenue, or AED 5,000,000. Non-qualifying income within that limit is taxed under the ordinary bands (9% above AED 375,000); it does not become tax-free.
Go over the limit and the company loses QFZP status for the current tax period and the following four. That is why a free zone company starting to sell to mainland customers needs watching.
Worked example: Pearl Coast Trading FZE
Pearl Coast Trading, a fictional client in the course, operates from Jebel Ali Free Zone with its own warehouse and staff, keeps audited accounts, and earns all its income from trading with other free zone companies and exporting. Revenue of AED 6,000,000 less AED 4,800,000 of deductions leaves AED 1,200,000 of taxable income, all qualifying income, taxed at 0%.
In its return, the Elections step answers “free zone person: yes” and “Qualifying Free Zone Person: yes”. If it had mainland customers, that income would be taxed at 9% above the band, and too much of it would cost the company its status.
What a QFZP cannot do
- Elect Small Business Relief, even if its revenue is under AED 3,000,000.
- Join a Corporate Tax group.
- Treat non-qualifying income as tax-free.
Register Pearl Coast and file its return yourself in chapters 9 to 11 of the UAE TaxLab course, and watch the free-zone walkthrough video in chapter 9.
Frequently asked questions
Does a free zone company need to register for Corporate Tax? Yes, and file every year.
Is all income of a free zone company taxed at 0%? No. Only qualifying income of a Qualifying Free Zone Person that meets all the conditions.
What happens if non-qualifying income goes over the de minimis limit? The company loses QFZP status for that period and the next four.
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