How Free Zone Companies Qualify for 0% Corporate Tax in the UAE

Under the corporate tax regime that became effective in the UAE due to the Federal Decree-Law No. 47 of 2022, the companies that are formed in one of the recognized UAE Free Zones may receive a privileged 0% corporate tax rate on their qualifying income, though subject to meeting certain regulatory requirements (PwC, 2025).

To take advantage of this tax incentive, it is not enough to be incorporated or licensed in a UAE economic zone. The entity must satisfy all the requirements to be considered a Qualifying Free Zone Person (QFZP), such as engaging in real economic activity, carrying out acceptable operations, and observing reporting and de-minimis requirements to receive the 0% rate.

Conditions to Qualify as QFZP

To secure 0% corporate tax on qualifying income, a company must satisfy all of the following conditions:

The company must be incorporated or registered in a UAE economic zone.
It must maintain adequate economic substance with premises, staff, and operating expenditure.

Income must come mainly from qualifying activities such as manufacturing, logistics, fund management, headquarters services, shipping, reinsurance, treasury, or approved IP.

Non-qualifying income must stay within the de-minimis limit (≤ AED 5 million or 5% of total revenue).
The entity must not opt into the standard corporate tax regime.
It must comply with transfer pricing rules and documentation.

Audited financial statements must be maintained.
Any additional MoF conditions must be met.

What Qualifying Income (0%) Looks Like

“Qualifying Income”, the portion eligible for 0% CT, is narrowly defined. Generally, it includes:

Revenues from trading, manufacturing, or providing goods/services by the UAE economic zone company, especially where business is with other economic zone entities or exported abroad.
Income from holding shares or securities, or owning assets in a Free Zone (including shipping, IP-based income, or treasury/treasure-management functions), provided these activities are listed among qualifying activities.
Income derived from intellectual property that qualifies (after reforms) e.g., patents or copyrighted software, when the IP falls under the “qualifying IP” definition. \

On the other hand, income is not treated as “qualifying” (and will be taxed at standard rate) if it comes from:

Domestic or foreign “permanent establishments” (e.g., a branch on the UAE mainland, or operations abroad), unless special exceptions apply.
Immovable property, unless it is commercial property located inside the UAE economic zone and transacted with another economic zone person.
Activities explicitly excluded by the Cabinet / MoF decisions (e.g., certain financial services, etc.) from the list of qualifying activities.

Also, if non-qualifying income exceeds the “de minimis” threshold (5% of revenue or AED 5 million, whichever is lower), then the zero-rate benefit may be lost (Middle East Briefing., 2024).

Why the UAE Limits Zero-Tax to QFZPs

The UAE’s 0% Free Zone tax benefit is not a broad tax haven incentive but a targeted regime requiring real economic substance. Businesses have to retain employees, facilities, real business, audited reports and transfer pricing and documentation requirements. The UAE safeguards the access to treaties and the world credibility by restricting qualifying activities and providing transparency in line with the OECD/BEPS standards. The zero percentage is not on all entities but only on genuinely operating and compliant Free Zone businesses.

Key Considerations

Active substance: passive or shell-like companies that do not actually operate can be refused QFZP status.
Only non-qualifying income should be limited: when the non-qualifying revenue is too high, or when it goes above the de minimis limit, a zero rate is lost.
Mainland/foreign operations potentially in danger of exemption: Income or proceeds through mainland branch or foreign permanent establishment is taxed usually at the regular rate (9%).
Documentation & compliance burden: Transfer pricing rules, audited financials, proper record-keeping are mandatory. Any breach may lead to losing 0% benefit — for the current and next four tax periods (QFZPs, 2025).
Not all Free Zones/activities qualify: Only those Free Zones and business activities designated by MoF/Cabinet decisions (as “qualifying”) are eligible — and companies must check the status accordingly.

Summary

Only by qualifying as a Qualifying Free Zone Person (QFZP), a company located in the Free Zone is able to enjoy the 0% rate of corporate tax in the UAE. This necessitates a real functioning in an established Free Zone, deriving income through qualified and approved activities which is of a minimum substance of the economy and it should adhere to the requirements of reporting, transfer pricing and audit. The company will also be required to maintain the non-qualifying income at the stringent de-minimis limits. The lack of fulfillment of any requirement leads to taxation of the whole income in 9% and, therefore, advisory platforms should properly inform clients about these points.

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