Free zone companies and 0% corporate tax: qualifying income explained

A free zone licence does not, by itself, mean 0% corporate tax. The 0% rate applies only to qualifying income, and only for a free zone company that meets every condition to be a Qualifying Free Zone Person throughout the tax period. Other taxable income is taxed at 9%, and a company that fails a condition loses the status for five tax periods.

The rules sit in Article 18 of Federal Decree-Law No. 47 of 2022, Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025, which replaced the earlier list of qualifying activities with effect back to 1 June 2023. This guide reflects them as of October 2026. It is general information, not tax advice: the answer depends on your contracts and customers, so have a registered tax agent review your position.

The conditions you must meet

A free zone company, or a registered free zone branch of a foreign company, is a Qualifying Free Zone Person only if it:

1. Maintains adequate substance. Its core income-generating activities take place in a free zone, with adequate assets, enough qualified full-time employees and adequate operating costs for each activity. Outsourcing to another person in a free zone is allowed with adequate supervision.
2. Derives qualifying income, as defined in Cabinet Decision No. 100 of 2023.
3. Stays within the de minimis limit for non-qualifying revenue.
4. Prepares audited financial statements. Ministerial Decision No. 84 of 2025 makes this compulsory for every Qualifying Free Zone Person.
5. Follows the transfer pricing rules, pricing related-party dealings at arm's length and keeping the documents the law requires.
6. Has not elected to be taxed at the standard rates.

A company that meets all six pays 0% on qualifying income and 9% on any other taxable income. There is no 0% band on the first AED 375,000 for a Qualifying Free Zone Person, so its non-qualifying income is taxed at 9% from the first dirham.

Who your customer is decides whether income qualifies

Qualifying income is mostly about the other side of the transaction. A Free Zone Person is a company or branch registered in a free zone. Everyone else, including a mainland company or a business abroad, is a Non-Free Zone Person.

Three consequences surprise founders:

• Exporting a service doesn't make it qualifying. A free zone consultancy billing clients in London or Mumbai earns non-qualifying income unless the work is a qualifying activity.
• The free zone customer must be the beneficial recipient. If it buys your service to supply it on to a mainland client, the income isn't treated as earned from a free zone person.
• A mainland presence is taxed separately. Income attributable to a branch or other place of business outside the free zone, a domestic permanent establishment, is taxed at 9% and left out of the de minimis calculation. If you are weighing a mainland presence, read our guide on whether a free zone company can do business in mainland Dubai.

Property follows its own rule. Income from commercial property in a free zone is qualifying only where the tenant or buyer is a free zone person.

Qualifying activities, and those that never qualify

Ministerial Decision No. 229 of 2025 lists the qualifying activities:

• manufacturing or processing of goods or materials
• trading of qualifying commodities
• holding shares and other securities for investment, generally for at least 12 months
• owning, managing and operating ships used in international transport
• reinsurance, fund management, and wealth and investment management regulated by a UAE financial regulator
• headquarter services and treasury and financing services to related parties, with treasury also allowed for the company's own account
• financing and leasing of aircraft
• distribution of goods in or from a designated zone, to customers who resell or process them or to a public benefit entity
• logistics services, and activities ancillary to any of the above

The excluded activities never produce qualifying income, whoever the customer is: transactions with individuals (except for the ship, fund management, wealth management and aircraft activities), banking, insurance other than reinsurance and headquarter captive insurance, regulated finance and leasing outside the listed activities, owning or exploiting immovable property other than free zone commercial property dealt with free zone persons, and anything ancillary to these.

The 2025 decision widened commodity trading. Qualifying commodities now include industrial chemicals and environmental commodities such as carbon credits, priced on a recognised exchange or by a recognised price reporting agency; a separate decision names agencies including S&P Global Commodity Insights and Argus Media. Products packaged for retail sale are out, and a company earning 51% or more of its revenue from distribution, warehousing, logistics or inventory management can't treat its commodity trading as qualifying.

The de minimis limit in numbers

Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower. Revenue from a domestic or foreign permanent establishment, free zone property income that is taxed separately at 9%, and non-qualifying intellectual property income are left out of both figures.

The first row is the one that matters for most small free zone companies. With AED 1.5 million of revenue, a single mainland or overseas consulting contract worth AED 80,000 breaks the limit. Track non-qualifying revenue monthly, because by the time you prepare the year-end accounts it is too late to fix.

What failing costs: five tax periods

A company that fails any condition at any point in a tax period stops being a Qualifying Free Zone Person from the start of that period and for the following four periods. All its taxable income is taxed at the standard rates for those five periods.

Say a calendar-year company breaks the de minimis limit in 2026. It is taxed at the standard rates for 2026 to 2030 and can be a Qualifying Free Zone Person again from 2031. Electing out voluntarily has the same five-period effect, so treat it as a decision for half a decade, not a year.

Distributors in designated zones: the extra audit step from 2026

Distribution qualifies only if it is carried out in or from a designated zone for corporate tax, which is a VAT designated zone that is also a free zone for corporate tax. Your free zone authority can confirm this.

For tax periods starting on or after 1 January 2026, FTA Decision No. 6 of 2026 adds a requirement. A Qualifying Free Zone Person relying on the distribution activity needs an agreed-upon procedures report from an independent auditor licensed in the UAE, prepared under the international standard ISRS 4400. The report tests a sample of customers and imports to show that customers resell or process the goods and that imports came in through a designated zone. It must reach the FTA within 30 days after the corporate tax return deadline. Without it, the distribution conditions are treated as not met.

Start collecting the evidence now: customer trade licences, signed declarations that goods are bought for resale, sales agreements, import declarations and bills of lading.

When the standard regime is the better choice

The 0% rate is worth chasing when most of your revenue comes from free zone customers or qualifying activities. Take a free zone company with AED 1 million of taxable profit, all qualifying: under the standard rates it would pay 9% of AED 625,000, or AED 56,250, so the audit and tracking pay for themselves.

The picture changes for a small service business with mainland or overseas clients. Its non-qualifying revenue breaks the de minimis limit anyway, so it is taxed at the standard rates whether it likes it or not. With taxable income under AED 375,000 it pays nothing, and with revenue of AED 3 million or less it can elect for Small Business Relief, which a Qualifying Free Zone Person can't use. Audited accounts are no longer required for corporate tax at that size, although your free zone authority may still ask for them.

Before choosing a zone for the tax rate, map your customers and activities against the rules above, and compare locations in our overview of UAE free zones. Our UAE corporate tax guide covers the wider rules, and our guide to bookkeeping and audit requirements explains the audit obligations. If you want a second opinion on whether your income qualifies, book a free consultation and we can introduce you to a registered tax agent.

Sources

• Ministerial Decision No. 229 of 2025 on Qualifying Activities and Excluded Activities
• Cabinet Decision No. 100 of 2023 on Determining Qualifying Income
• FTA Decision No. 6 of 2026 on additional procedures for designated zone distributors
• Ministerial Decision No. 84 of 2025 on Audited Financial Statements
• Federal Tax Authority: Corporate Tax Guide on Free Zone Persons (CTGFZP1)
• FTA Public Clarification TAXP010: Free Zones and Designated Zones for Tax Purposes