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Corporate Tax for Free Zone Companies in the UAE
The UAE has long been recognized as a global hub for trade and investment, largely due to its Free Zone ecosystem. Free Zones offer foreign investors 100% ownership, simplified business setup, and attractive tax incentives. With the introduction of Corporate Tax (CT) from 1 June 2023, Free Zone companies now face new compliance requirements while still retaining many benefits under the UAE Corporate Tax Law.
This article explores how Corporate Tax applies to Free Zone entities, the benefits they can access, and the compliance obligations they must meet.
Corporate Tax Framework
The UAE Corporate Tax regime applies to all businesses, including Free Zone companies, at the following rates:
- 0% on taxable income up to AED 375,000
- 9% on taxable income exceeding AED 375,000
- Higher rates may apply to multinational enterprises subject to OECD Pillar Two (15% minimum tax rule)
While Free Zone companies are covered under the Corporate Tax law, special provisions apply if they qualify as a Qualifying Free Zone Person (QFZP).
What is a Qualifying Free Zone Person (QFZP)?
A Free Zone entity may enjoy 0% Corporate Tax on qualifying income if it meets the following conditions:
- Substance Requirement – The company must maintain sufficient economic presence in the UAE (offices, staff, operations).
- Qualifying Income – Income must fall under categories defined by Ministerial Decisions, such as:
- Transactions with other Free Zone businesses
- Certain qualifying activities (e.g., manufacturing, trading with overseas clients, re-exports).
- No Mainland Nexus – The company should not conduct business with the UAE mainland, except under strict conditions (e.g., through a distributor subject to 9% tax).
- Transfer Pricing Compliance – Maintain proper transfer pricing documentation for related-party transactions.
- Other Regulatory Requirements – Comply with accounting, reporting, and registration obligations with the FTA.
Failure to meet these conditions will result in the Free Zone company being taxed at the standard 9% rate.
Taxable vs. Exempt Income for Free Zone Companies
- Income derived from trade with mainland UAE (except allowed limited cases).
- Non-qualifying activities (activities outside the ministerial list).
- Income that does not meet QFZP conditions.
- Transactions with other Free Zone businesses.
- Income from foreign customers for goods/services provided from the Free Zone.
- Passive income such as dividends and capital gains from qualifying shareholdings.
Compliance Obligations for Free Zone Companies
Even if eligible for 0% tax on qualifying income, Free Zone companies must:
- Register for Corporate Tax with the Federal Tax Authority (FTA).
- Maintain audited financial statements.
- File an annual Corporate Tax Return within 9 months from the end of the financial year.
- Maintain Transfer Pricing documentation if applicable.
- Ensure ongoing compliance with Free Zone authority requirements.
Impact of Corporate Tax on Free Zone Businesses
While Free Zones continue to offer competitive advantages, Corporate Tax introduces new challenges:
- Companies must clearly distinguish between qualifying and non-qualifying income.
- Businesses with both mainland and Free Zone operations may need restructuring.
- Enhanced reporting and documentation requirements will increase compliance costs.
However, with proper tax planning and compliance strategies, Free Zone businesses can still enjoy 0% tax on qualifying income and retain their global competitiveness
How TAXORYX Supports Free Zone Companies?
At TAXORYX, we specialize in guiding Free Zone entities through the Corporate Tax framework by providing:
- Corporate Tax Registration with the FTA
- Eligibility assessment for QFZP status
- Tax impact analysis for mainland-linked activities
- Accounting & financial statement preparation as per CT law
- Corporate Tax Return filing & transfer pricing compliance
By leveraging our expertise, Free Zone businesses can maximize their tax benefits while ensuring full compliance with UAE Corporate Tax regulations.
Conclusion:-
Free Zone companies remain a cornerstone of the UAE’s business landscape. Although Corporate Tax now applies across the country, Free Zone businesses still benefit from unique tax advantages when structured and managed properly. A proactive approach to registration, accounting, filing, and impact assessment ensures that Free Zone entities can continue to thrive in the UAE’s evolving tax environment
