A UAE free zone licence does not automatically give a company a 0% corporate tax rate. The preferential rate applies to Qualifying Income of a Qualifying Free Zone Person, commonly called a QFZP. The company's activities, customers, operations and records determine whether that treatment is available.
Before choosing a location through UAE company formation, test the planned business model against the tax rules. A sales forecast divided by activity and customer type is more useful than a general promise of “tax-free business”.
What makes a company a Qualifying Free Zone Person?
Article 18 of the Corporate Tax Law requires adequate substance, Qualifying Income, compliance with the relevant transfer-pricing requirements and no election into the ordinary corporate tax regime. Additional ministerial conditions include the de minimis test and audited financial statements.
Treat this as an ongoing assessment. Incorporation establishes the company; it does not certify every future transaction for 0%. Keep a written eligibility assessment and update it when the business adds activities, changes its operating arrangements or enters a new customer market.
A licence description is a starting point for that review. Contracts, invoices and the actual services or goods supplied should support the tax classification.
Which income can benefit from the 0% rate?
Cabinet Decision No. 100 of 2023 sets the main income framework. The following is a screening guide, not a complete list of exceptions.
| Income source | Main classification check |
|---|---|
| Transactions with another Free Zone Person | The customer must be the Beneficial Recipient; Excluded Activities remain relevant. |
| Transactions with a Non-Free Zone Person | The activity must generally be a Qualifying Activity that is not excluded. |
| Intellectual property | Separate qualifying IP and its prescribed calculation from other IP income. |
| Permanent establishments and certain property income | Separate tax treatment applies; a free zone address does not settle the result. |
Revenue classification comes before the tax calculation. Identify the contractual counterparty, its status and the commercial purpose of each income stream. Avoid treating an invoice address as sufficient evidence on its own.
Do mainland or overseas customers automatically prevent 0% tax?
No. A mainland or overseas customer does not by itself decide the outcome. The activity, counterparty status and applicable exceptions must be assessed together. Equally, an overseas invoice is not automatically qualifying export income.
The Ministry of Finance's September 2025 announcement confirms that Ministerial Decision No. 229 of 2025 replaced the earlier activity decision. Use the updated definitions when assessing manufacturing, logistics, qualifying commodity trading or other listed activities. Excluded Activities generally include transactions with individuals, banking, and specified insurance, financing and property activities, subject to defined exceptions.
For a mixed business, create separate forecast lines for each service or product. Record the proposed classification and the evidence needed to support it. This makes a new contract's possible effect visible before the company commits to supplying it.
How does the 5% or AED 5 million de minimis test work?
Article 3 of Ministerial Decision No. 229 of 2025 sets the limit at the lower of 5% of total Revenue or AED 5 million for the Tax Period. Apply the prescribed definitions and exclusions before calculating it.
Consider a simplified example with no revenue excluded from the calculation:
- Total Revenue: AED 4,000,000.
- 5% of that amount: AED 200,000.
- Applicable limit: AED 200,000, because it is lower than AED 5 million.
- Non-qualifying Revenue of AED 160,000 is within the limit; AED 240,000 exceeds it.
This is a revenue test, not a profit margin or a tax-free allowance. Passing it alone does not establish QFZP status. Monitor the position during the period rather than discovering a breach after the accounts are finalised.
When can a qualifying company still pay 9%?
A QFZP can have Qualifying Income taxed at 0% and other Taxable Income taxed at 9%. The FTA's Free Zone Persons guide explains that the ordinary AED 375,000 zero-rate band does not apply to a QFZP's non-Qualifying Taxable Income.
Do not simply charge 9% on every receipt labelled “non-qualifying Revenue”: the de minimis rules can affect its treatment. Nor should 9% be applied mechanically to gross sales. Revenue, accounting profit and Taxable Income are different figures.
Keep income and attributable costs traceable in the ledger. The tax computation should explain how the accounts lead to each income category and the final liability, rather than attaching a single tax percentage to the sales report.
What substance, audit and record requirements matter?
Adequate substance is assessed against the actual activities: core income-generating functions, suitable assets, qualified staff and operating expenditure. Permitted outsourcing also requires appropriate supervision. An office agreement alone cannot demonstrate how the company conducts its business.
Ministerial Decision No. 84 of 2025, applicable to Tax Periods beginning on or after 1 January 2025, requires QFZPs to prepare and maintain audited financial statements. The separate AED 50 million revenue threshold for certain other taxpayers is not an audit exemption for a QFZP.
Agree the audit timetable early. Organise customer-status evidence, contracts, related-party pricing support, payroll and outsourced-service records so the eligibility review can be reconciled with the accounts.
What happens if the company loses QFZP status?
Under Ministerial Decision No. 229 of 2025, failing the relevant conditions can remove QFZP status from the beginning of the affected Tax Period and for the following four Tax Periods. The impact is therefore broader than one invoice.
A business using calendar-year periods that fails a condition in 2026 could lose the status for 2026 through 2030. That illustration concerns status, not a calculation of tax due. The ordinary corporate tax rules would need to be applied to the facts, including the applicable income adjustments and reliefs.
Escalate a possible breach promptly, preserve the supporting records and assess the return position. Do not assume that renewing the trade licence or moving a receipt into a later spreadsheet repairs the underlying issue.
What should you check before claiming the 0% rate?
Complete an annual review covering entity status, activities, customers, substance, the de minimis calculation, transfer pricing and audited accounts. Free zone companies also remain subject to the relevant registration, filing and record-keeping obligations; 0% is not a filing exemption.
Large multinational groups need a separate Domestic Minimum Top-up Tax assessment. Its group-level revenue threshold and effective-tax framework should not be confused with this free zone income test.
Capitals28 can help organise the company structure and supporting compliance work through its UAE compliance services, with the tax treatment reviewed against the company's actual operations and the rules for its Tax Period.
