Corporate Tax for Free Zone Businesses: What Has Changed?
Free Zones in the UAE were once considered tax-free zones. That is no longer the case. With the Corporate Tax law introduced through Federal Decree Law No. 47 of 2022, every Free Zone business must now follow a set of tax rules even if they still qualify for the zero percent rate.
The major shift is simple: being in a Free Zone does not automatically mean you are exempt. If your business wants to keep the zero percent rate, you need to meet specific conditions. If not, the standard nine percent tax rate applies.
These changes are part of the UAE’s plan to align with international tax standards. They promote fairness, transparency, and reduce the chances of tax abuse.
Free Zone Companies Are Now Taxable by Default
The law says that any business or person set up in a Free Zone is now considered a taxable person. This includes:
- Companies that are incorporated inside Free Zones
- UAE mainland businesses that have branches in Free Zones
- Foreign businesses with a registered presence in a Free Zone
All Free Zone businesses must:
- Register with the Federal Tax Authority
- File an annual Corporate Tax return
- Keep proper audited financial records
Even if you owe no tax, these steps are still required. Ignoring them can lead to fines and penalties.
Who Still Gets the Zero Percent Tax Rate?
To enjoy the zero percent rate, your business must be a Qualifying Free Zone Person (QFZP). This is not automatic. You must meet every one of these conditions:
- Be registered or set up in a Free Zone
- Carry out your core business from inside the Free Zone
- Earn income that qualifies under the law
- Avoid opting in for the nine percent tax rate
- Follow fair pricing rules when dealing with related businesses
- Keep audited financial statements
- Keep non-qualifying income below set limits
If even one condition is missed, your company may lose the zero percent rate. And once that status is lost, the nine percent rate applies not just for this year, but for the next five years.
What Is Qualifying Income?
Not all income counts toward the zero percent benefit. Your income must come from:
- Other Free Zone businesses (if they truly use your services)
- Customers outside the Free Zone, but only for approved activities
- Certain types of intellectual property
- Any other source, as long as it stays within the allowed limits
The law also uses the term “beneficial recipient.” This means the client must truly benefit from your product or service and it cannot just be a middleman.
Which Activities Are Approved?
Only specific types of work are considered “qualifying” under the law. These include:
- Making or processing products
- Acting as a holding company
- Managing funds, portfolios, or family assets
- Providing services like reinsurance or headquarters support to other group companies
- Leasing aircraft or lending money to group companies
- Running logistics or warehouse operations
- Distributing goods within certain Free Zones
If your business fits into one of these categories, you are on the right path but you still need to meet all the other QFZP rules too.
What Activities Are Not Allowed?
Some types of work are completely excluded from the zero percent rate. These include:
- Banking, insurance, and certain finance services
- Selling to individuals instead of companies
- Owning or renting out property unless it is used by another Free Zone business
- Licensing brand names or intellectual property to others
If you make money doing any of these things, it is considered non-qualifying. And if you make too much of it, you risk losing your QFZP status.
How Much Non-Qualifying Income Is Too Much?
There is a small margin for non-qualifying income, but it is strict. You must stay under:
- Five percent of your total income, or
- Five million dirhams
Whichever number is smaller. Go over that, and the full nine percent tax rate kicks in.
Quick Scenario to Understand the Risk
Imagine your business earns:
- Five million dirhams from Free Zone companies
- Three hundred thousand dirhams from a UAE customer outside the Free Zone
Your total income becomes five point three million dirhams. That means your non-qualifying income now makes up more than five percent. As a result, you lose your QFZP status and will be taxed at nine percent for the next five years.
What About Branches or Overseas Offices?
If your Free Zone company operates a branch in mainland UAE or another country, any income from those branches is taxed at nine percent.
You must treat each of those branches as a separate operation. Their income cannot be covered by QFZP benefits.
Filing and Auditing Still Required
Even if your business qualifies for the zero percent rate, you still have work to do:
- You must prepare audited financial statements
- You must report every source of income clearly
- You must track how much income is qualifying and how much is not
- You must follow transfer pricing rules for related party deals
Skipping these tasks, even if you owe no tax, can lead to audits and penalties. The Federal Tax Authority may request full breakdowns at any time.
Can I Choose to Pay Tax at Nine Percent?
Yes. Some companies choose to give up their QFZP status and be taxed. This might make sense if you want access to:
- Group tax relief
- Using past tax losses
- Restructuring your company for mergers or exits
But be careful. Once you make that choice, you lose the zero percent rate immediately. And you cannot go back for at least five years.
Summary: What You Need to Keep QFZP Status
If you want to hold onto the zero percent Corporate Tax rate, your business must:
- Be officially set up inside a UAE Free Zone
- Operate from the Free Zone with real staff and assets
- Only earn qualifying income or stay within the non-qualifying limits
- Avoid opting into the nine percent tax rate
- Keep your books in order with audited financials
- Follow all rules when dealing with group companies or related parties
- Track and report any overseas income or property clearly
One small misstep can lead to losing the benefit, and once it is gone, you are locked into the nine percent rate for five years.
If you want to keep your zero percent rate, every detail counts. From how your income is earned to how you structure your team, staying compliant is key. Get support early and stay on top of reporting to avoid surprises later.
Frequently Asked Questions
Do I have to register if I expect to pay zero tax?
Yes. All Free Zone businesses must register and file returns.
Is it enough to just hold a Free Zone license?
No. You must actually carry out work from within the Free Zone to keep QFZP status.
What happens if I fail the income threshold once?
You lose QFZP status for five years even if the breach was small.
Can I apply to fix my status afterward?
Not during the five-year period. You must wait until it ends, then requalify.
Can Free Zone companies benefit from group tax relief?
Only if they give up QFZP status and choose to be taxed.
Are all Free Zone companies impacted?
Yes. Everyone must register and file, even if they qualify for zero percent tax.
Can Tax Star help manage this process?
Yes. Tax Star helps track revenue sources, calculate thresholds, and file on time to help businesses keep their tax benefits.
