UAE Corporate Tax Guide on Free Zone Person

Written By Akshaya Ashok, Reviewed By Retheesh R S

Published on 10/01/2025

The United Arab Emirates is transformed into one of the most significant business formers worldwide. It welcomes all entrepreneurs and multinational corporations to its friendly business environment and strategic location. As part of these efforts, the UAE introduces corporate tax regime policy to promote economic growth without compromising fairness and transparency. As such, it is important for Free Zone persons to learn about the UAE corporate tax regime. This would allow them to follow through the complications of taxation and compliance. This guide aims to provide some of the most comprehensive guides regarding the corporate tax regime of UAE specifically tailored to Free Zone persons, which can help them make informed choices regarding their taxes.

What is a Free Zone Person?

A Free Zone Person refers to a juridical entity that operates within a Free Zone in the United Arab Emirates (UAE).

Natural Person: Refers to individuals such as freelancers, sole proprietors, or members of civil companies.

Juridical Person: Encompasses corporations, partnerships, and other entities with a separate legal personality.

What is a Qualifying Free Zone Person?

A Free Zone Person refers to a legal entity that is incorporated, established, or registered within a designated Free Zone in the UAE. This includes companies, branches of foreign entities, and other juridical persons that operate within these specific geographical areas. Under the UAE Corporate Tax Law, a Free Zone Person may qualify for certain tax benefits, including the potential to pay a corporate tax rate of 0% on qualifying income.

A registered branch of a non-resident juridical person located in a Free Zone is classified as a Free Zone Person. In this case, the non-resident parent entity is treated as a Foreign Permanent Establishment. Similarly, a branch of a UAE resident juridical person registered in a Free Zone is also considered a Free Zone Person, while the UAE resident entity is regarded as a Domestic Permanent Establishment under the CT Law.

However, entities that are not juridical persons, such as natural persons or unincorporated partnerships, cannot be recognized as Free Zone Persons.

Requirements for Becoming a Qualifying Free Zone Person

The UAE Corporate Tax Law provides a unique opportunity for Free Zone Persons to benefit from a 0% Corporate Tax rate on qualifying income. To avail of this benefit, entities must meet specific conditions outlined under the law. A Free Zone Person (FZP) that fulfills all these conditions becomes a Qualifying Free Zone Person (QFZP). Failing to meet even one requirement will disqualify the entity, subjecting it to standard Corporate Tax rates and rules.

Here are the detailed conditions to qualify as a QFZP:

1. Applicability of the Regime to a Free Zone Person: 

A Free Zone Person refers to any juridical person that is Incorporated, established, or registered in a Free Zone: This includes branches of non-resident entities and UAE juridical persons registered within the Free Zone.

• Scenarios of Business Structure:
  • A Free Zone Person can have its head office in a Free Zone and operate branches outside the Free Zone.
  • Alternatively, it can have its head office outside the Free Zone (domestically or internationally) and maintain a branch within the Free Zone.
• 0% Corporate Tax Applicability: The preferential 0% tax rate applies strictly to activities conducted within the Free Zone Business, excluding the operations of Domestic or Foreign Permanent Establishments.

2. Maintenance of Adequate Substance in the Free Zone

To qualify as a QFZP, the Free Zone Person must demonstrate substantial economic presence by:

• Core Income-Generating Activities: Conducting value-adding activities related to qualifying income entirely within the Free Zone.
• Assets and Resources: Maintaining adequate assets, full-time workers, and operating expenditures within the Free Zone to support core activities.
• Outsourcing Provision: Permissible outsourcing of activities to other entities in the Free Zone or Designated Zones, provided adequate supervision is maintained.

3. Compliance with Transfer Pricing Documentation

The Free Zone Person must adhere to globally accepted Transfer Pricing standards, which include:

• Documentation Requirements: Maintaining a master file, local file, and disclosure forms to demonstrate that all related-party transactions meet the arm’s length principle.
• Allocation of Profits: Ensuring that profits attributed to Free Zone operations are proportionate to the assets, risks, and functions performed within the Free Zone.

4. Preparation of Audited Financial Statements

Regardless of revenue levels, the Free Zone Person must prepare and maintain audited financial statements annually to ensure transparency and compliance with regulatory standards.

5. Meeting De Minimis Requirements for Non-Qualifying Revenue

The de minimis rule ensures that non-qualifying revenue remains minimal to retain QFZP status:

• Threshold Limits: Non-qualifying revenue must not exceed the lower of:
  • AED 5,000,000, or
  • 5% of the total revenue of the Free Zone Person.
• Non-Qualifying Revenue Sources: Includes income from excluded activities, non-qualifying activities with Non-Free Zone Persons, or transactions where the other Free Zone Person is not the Beneficial Recipient.
• Calculation Considerations: Revenue from Domestic or Foreign Permanent Establishments and certain excluded activities is omitted from the de minimis calculation.

6. Deriving Qualifying Income

• A Free Zone Person must earn income classified as "Qualifying Income." However, during start-up phases or periods with no revenue generation, entities can retain QFZP status if no non-qualifying revenue is derived.

7. Arm's Length Principle Compliance

• Transactions with Related Parties must adhere to internationally accepted standards for profit attribution, ensuring income and expenses reflect market conditions.

Meeting these criteria ensures that the Free Zone Person can benefit from the 0% Corporate Tax rate on Qualifying Income while adhering to regulatory and compliance standards.

What is Qualifying Income that Benefits from 0% Corporate Tax Rate?

Qualifying Income refers to income derived by a Qualifying Free Zone Person (QFZP) that is eligible for the 0% Corporate Tax rate in the UAE. This tax advantage supports economic growth and competitiveness within Free Zones. To qualify, the income must arise from specific sources and meet defined criteria, including:

• Transactions with Free Zone Persons
  Income derived from transactions with other Free Zone Persons, provided these do not relate to Excluded Activities and the Free Zone Person is the Beneficial Recipient.
• Qualifying Activities
  Income generated from Qualifying Activities conducted within the geographical boundaries of a Free Zone, such as manufacturing, trading of certain goods, or services like logistics.
• Qualifying Intellectual Property (IP)
  Revenue derived from the ownership or exploitation of legally protected Qualifying IP developed in compliance with core income-generating activity requirements.
• De Minimis Revenue
  Income from non-qualifying sources can still be considered Qualifying Income if it meets the de minimis threshold, ensuring the Free Zone Person remains eligible for the 0% tax rate.

Excluded income, such as that related to domestic or foreign permanent establishments, non-commercial immovable property, and non-qualifying IP, may not benefit from the 0% rate and could be subject to the standard 9% tax.

To maintain this status, a Free Zone Person must also comply with the arm's length principle, maintain Transfer Pricing documentation, and meet other regulatory requirements.

What are the Qualifying Activities? 

Qualifying activities eligible for a 0% corporate tax rate include the following:

Manufacturing of Goods or Materials

• Production of tangible items within Free Zones.
• Examples include automotive parts, textiles, and consumer electronics.

Processing of Goods or Materials

• Transforming raw materials into finished products.
• Activities may include refining oil, processing food items, or assembling electronic devices.

Trading of Qualifying Commodities:

• Trade of metals, minerals, energy, and agricultural commodities in their raw form.
• These commodities must be traded on a recognized exchange.

Ownership and Operation of Ships

• Operating maritime vessels used in Free Zone trade.

Reinsurance Services

• Providing risk management and financial protection services within Free Zones.

Distribution of Goods or Materials

• Distribution activities that occur in or from Designated Zones.

Excluded Activities

Certain activities disqualify Free Zone Persons from the 0% tax rate. These are:

• Transactions with Natural Persons: Activities involving direct dealings with individuals rather than businesses.
• Banking and Financial Services: Offering traditional or digital banking services.
• Insurance Activities: Except for reinsurance conducted within the Free Zone.
• Finance and Leasing: Activities outside approved treasury and leasing functions.
• Ownership or Exploitation of Immovable Property: Generating income from real estate, except commercial property in Free Zones used for business purposes.

Tax Rates and Implications

0% Tax Rate on Qualifying Income

The 0% tax rate applies to Qualifying Income derived by a Qualifying Free Zone Person (QFZP). To qualify, the income must stem from one or more of the following sources:

• Transactions with Other Free Zone Persons: These must be carried out with the Beneficial Recipients of the transactions, who are Free Zone Persons. The transactions should not involve Excluded Activities.
• Qualifying Activities: Income from specific activities deemed as Qualifying Activities under the Corporate Tax Law, provided these are not classified as Excluded Activities.
• Qualifying Intellectual Property: Revenue derived from the ownership or exploitation of intellectual property that meets the criteria of Qualifying Intellectual Property.
• De Minimis Income: Non-qualifying income sources may still enjoy the 0% rate, provided they meet the de minimis threshold requirements.

9% Tax Rate on Non-Qualifying Income

For income that does not meet the conditions for Qualifying Income, a standard corporate tax rate of 9% is applied. Non-Qualifying Income typically includes:

• Revenue from Excluded Activities or transactions with Non-Free Zone Persons unrelated to Qualifying Activities.
• Income from Domestic or Foreign Permanent Establishments.
• Revenue from the ownership or exploitation of intellectual property that does not meet the definition of Qualifying Intellectual Property.
• Immovable Property Income: Income derived from properties outside a Free Zone or non-commercial properties within a Free Zone.

In practice, QFZPs must ensure meticulous record-keeping and compliance with arm’s length principles, audited financial statements, and other regulatory requirements to benefit from the preferential tax rates​.

How do Business Activities in Free Zones Get Taxed?

Calculating Corporate Tax for a Free Zone Person 

Step 1: Determine the Taxable Income

Subtract the permitted deductions from the total income to determine the Free Zone individual's taxable income. 

Step 2: Apply the Tax Rates

The UAE corporate tax rates are as follows:

• 0% tax rate on qualifying income for Free Zone persons
• 9% tax rate on AED 375,000 or more in taxable income

Step 3: Calculate the Tax Liability

To calculate the tax liability, multiply the taxable income by the appropriate tax rate.

Step 4: Consider Any Tax Exemptions or Reliefs

Determine if a Free Zone individual qualifies for tax exemptions or reliefs, including a 0% tax rate on qualifying income.

Step 5: Calculate the Final Tax Liability

Take into account any tax exemptions or reliefs and calculate the final tax liability.

Example Calculation:

Suppose a Free Zone person has a taxable income of AED 500,000.

Taxable income: AED 500,000

Tax rate: 9% (since the taxable income exceeds AED 375,000)

Tax liability: AED 500,000 x 9% = AED 45,000

However, if the Free Zone person is eligible for the 0% tax rate on qualifying income, the tax liability would be:

Taxable income: AED 500,000

Tax rate: 0% (on qualifying income)

Tax liability: AED 0

Tax Incentives and Benefits for Free Zone Persons

The UAE offers various tax incentives and benefits to Free Zone persons, making it an attractive destination for businesses. These incentives are designed to promote economic growth, encourage foreign investment, and support the development of industries. Some examples of tax incentives and benefits available to Free Zone persons include:

• Tax holidays: Exemptions from corporate tax for a specified period, usually ranging from 5 to 50 years.
• Tax exemptions: Exemptions from corporate tax on specific types of income, such as income from exports or income from certain industries.
• Reduced tax rates: Lower corporate tax rates for Free Zone persons, compared to mainland UAE companies.
• Customs duty exemptions: Exemptions from customs duties on imports and exports.

Conclusion

Understanding corporate tax in the UAE can be a little bit difficult, especially for those in Free Zones. Here are some important things to keep in mind,  the tax system is based on where the business is located. Free Zone businesses often enjoy tax exemption. Also, it’s important to register for taxes and file your returns on time.

Because tax laws can be complicated, it's a good idea to get help from experts. At Reyson Badger, we have a team ready to help you navigate these rules and find the best tax strategies for your business. Consulting with our team can help you take advantage of tax benefits and lower your tax liability. This way, you can focus on growing your business without worry.

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.