UAE corporate tax for free zone companies: what you need to know
Free zone companies are inside the UAE corporate tax system. Learn when 0% applies, the conditions to qualify, and how to register and file.
UAE corporate tax applies to free zone companies as well as mainland companies. Every free zone company must register with the Federal Tax Authority (FTA) and file an annual return, and a company that meets the conditions to be a Qualifying Free Zone Person can pay 0% on qualifying income and 9% on non-qualifying income.
A free zone company that does not qualify, or chooses the standard regime, pays 0% on taxable income up to AED 375,000 and 9% above that. This guide explains both positions, the conditions for 0%, registration and filing, and how VAT fits in. Tax rules change and depend on your facts, so treat this as general information at the time of writing, not tax advice.
Key takeaways
- Every free zone company must register for corporate tax with the FTA and file an annual return.
- A Qualifying Free Zone Person can pay 0% on qualifying income and 9% on non-qualifying income.
- The 0% rate is not automatic: substance, the de minimis rule, audited accounts and transfer pricing all apply.
- Under the standard regime, the rate is 0% up to AED 375,000 of taxable income and 9% above.
- VAT is a separate 5% tax with its own registration thresholds.
How UAE corporate tax works
UAE corporate tax applies to financial years starting on or after 1 June 2023, and the Federal Tax Authority administers it. Under the standard regime, the rates are:
| Taxable income | Rate |
|---|---|
| Up to AED 375,000 | 0% |
| Above AED 375,000 | 9% |
For example, a company taxed under the standard regime with taxable income of AED 500,000 would pay 0% on the first AED 375,000 and 9% on the remaining AED 125,000. That comes to AED 11,250.
This is a simplified illustration. Taxable income is worked out from your financial statements, with adjustments that the law sets out, so it is not always the same as your accounting profit.
The two ways a free zone company can be taxed
A free zone company is taxed in one of two ways:
- As a Qualifying Free Zone Person (QFZP). The company pays 0% on qualifying income and 9% on non-qualifying income, as long as it meets every condition.
- Under the standard regime. A free zone company that does not meet the conditions, or elects for the standard regime, is taxed in the same way as a mainland company: 0% on taxable income up to AED 375,000 and 9% above that.
A common misunderstanding is that a free zone license means 0% tax. It does not by itself. The 0% rate applies only to qualifying income, and only while the company meets every condition. Our guide to free zone vs mainland companies in Dubai covers the other differences between the two routes.
Conditions to be a Qualifying Free Zone Person
To be a Qualifying Free Zone Person, a company must meet all of these conditions:
- Adequate substance in the free zone. In general terms, the company's core income-generating activities should take place in the free zone, with resources that match the scale of the business.
- The de minimis rule. Non-qualifying revenue must be no more than 5% of total revenue or AED 5 million, whichever is lower.
- Audited financial statements. The company must prepare audited financial statements.
- Transfer pricing. The company must follow the UAE transfer pricing rules for its dealings with related parties.
- No election for the standard regime. The company must not have elected to be taxed under the standard regime.
How the de minimis rule works
The limit is whichever is lower: 5% of total revenue or AED 5 million. These simplified examples show how it plays out.
| Total revenue | 5% of total revenue | Limit for non-qualifying revenue |
|---|---|---|
| AED 2,000,000 | AED 100,000 | AED 100,000 |
| AED 50,000,000 | AED 2,500,000 | AED 2,500,000 |
| AED 200,000,000 | AED 10,000,000 | AED 5,000,000 |
The law sets detailed rules for this calculation. If a company fails a condition, it can lose its qualifying status, and the loss can also affect later tax periods. That is why it pays to check your position before the year starts, not after it ends.
Qualifying and non-qualifying income
Not all of a free zone company's income is qualifying income. The corporate tax law and the Cabinet and ministerial decisions under it set out which activities and transactions produce qualifying income. In general terms, the answer depends on:
- the activity the income comes from
- who the customer is, for example another free zone business, a business or individual on the mainland, or a customer outside the UAE
Because the customer matters, map out your expected customers and income streams early. A company that plans to sell to the UAE mainland should check how that income will be treated before it signs contracts.
These rules are detailed, and the right answer depends on your activities, customers and structure. For your own case, we recommend speaking to a registered tax agent or tax adviser before you rely on the 0% rate.
Tip: Keep your activities, contracts and invoices consistent. Clear records make it easier to show which income is qualifying and which is not.
Registering and filing with the FTA
Registration applies to every company, including free zone companies that expect to pay 0%.
- Register for corporate tax with the FTA through EmaraTax. Late registration carries a penalty, so do not wait for your first return.
- Keep proper accounting records from your first day of trading.
- Prepare financial statements. If you aim to be a Qualifying Free Zone Person, they must be audited.
- File your corporate tax return for each tax period by the deadline the FTA sets, and pay any tax due.
- Keep your records for as long as the law requires.
At DHCC Free Zone, we can help with the registrations and your books. These are our indicative fees:
| Service | Indicative cost |
|---|---|
| Corporate tax registration | AED 1,200 |
| VAT registration | AED 1,500 |
| Bookkeeping | AED 1,000 |
If you are setting up with DHCC Free Zone, you can add corporate tax and VAT registration to your package in our cost calculator. See our banking and tax services for details.
How VAT fits in
VAT is a separate tax from corporate tax, with its own registration and returns. The rate is 5%.
- Mandatory registration applies when your taxable supplies and imports exceed AED 375,000 over 12 months, or are expected to within the next 30 days.
- Voluntary registration is possible from AED 187,500.
The AED 375,000 figure appears in both taxes, but it measures different things. For corporate tax, it is the band of taxable income taxed at 0% under the standard regime. For VAT, it is the registration threshold for taxable supplies and imports. A company can need VAT registration even if it pays no corporate tax, so track both separately.
A first-year tax checklist for free zone companies
- Register for corporate tax with the FTA through EmaraTax on time.
- Decide whether you aim to be a Qualifying Free Zone Person, and check that you can meet every condition.
- Map your expected customers and income streams.
- Set up bookkeeping from the start.
- Plan for an audit if you aim for qualifying status.
- Record your dealings with related parties for transfer pricing.
- Track your taxable supplies against the VAT thresholds.
- Keep your license, UBO register and shareholder details up to date.
Common mistakes to avoid
- Assuming a free zone license means no tax filing. Every company registers and files, even when no tax is due.
- Registering late. Late registration carries a penalty.
- Skipping the audit. Without audited financial statements, a company cannot be a Qualifying Free Zone Person.
- Not tracking non-qualifying revenue. Small amounts add up and can push a company over the de minimis limit.
- Mixing personal and company money. Run company income and expenses through a corporate bank account so your records stay clear. Our guide to opening a corporate bank account in the UAE explains what banks ask for.
Good records also help at renewal time. Some companies need audited financial statements to renew their license, as our guide on how to renew a trade license in Dubai explains.
Corporate tax is manageable when it is set up correctly from the start. At DHCC Free Zone, we can register your company for corporate tax and VAT and help with bookkeeping. Talk to our advisers about what your company needs, and work with a registered tax agent on your tax position.
Frequently asked questions
They are within the corporate tax system and must register and file. A Qualifying Free Zone Person can pay 0% on qualifying income and 9% on non-qualifying income, while other free zone companies pay 9% on taxable income above AED 375,000.
Yes. Every company must register with the Federal Tax Authority through EmaraTax and file an annual return, even if no tax is due. Late registration carries a penalty.
Non-qualifying revenue must be no more than 5% of total revenue or AED 5 million, whichever is lower. A company that exceeds it can lose its qualifying status.
A company that wants to be a Qualifying Free Zone Person must prepare audited financial statements. Some companies also need them to renew their trade license.
No. VAT is a separate 5% tax with its own registration thresholds and returns. Mandatory registration applies when taxable supplies and imports exceed AED 375,000 over 12 months.
About DHCC Free Zone
We license companies in Dubai across 2,000+ business activities, from trading, e-commerce and consultancy to technology, media, education and healthcare, and support them from setup to every renewal.
This guide is general information about doing business in Dubai at the time of writing, not legal or tax advice. Fees are indicative until confirmed by DHCC Free Zone.
