0% Tax Rate in Free Zone – Who Qualifies?

The introduction of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) has brought clarity on how Free Zone entities can continue to benefit from a 0% corporate tax rate. While Free Zones remain attractive for businesses due to tax advantages, not all companies automatically qualify for this benefit under the new law.

It explains who qualifies for the 0% tax rate in Free Zones and the conditions they must meet to maintain this status.

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1️⃣ Understanding the Qualifying Free Zone Person (QFZP)

The 0% tax rate is available only to entities recognized as a Qualifying Free Zone Person (QFZP). A Free Zone business is considered a QFZP if it satisfies the following conditions:

• Adequate substance: The company maintains a genuine business presence in the Free Zone (e.g., office premises, staff, and operational activities).

• Qualifying income: The income earned must fall within the categories defined as qualifying under the UAE Corporate Tax rules.

• No election for regular tax rate: The entity has not voluntarily chosen to be taxed under the standard corporate tax regime (9%).

• Compliance with transfer pricing: All related-party transactions are carried out at arm’s length, with proper documentation maintained.

Failing to meet any of these criteria can result in losing QFZP status and being taxed at 9% on all taxable income.

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2️⃣ What Is Considered Qualifying Income?

For a Free Zone company to enjoy the 0% corporate tax rate, its income must be qualifying income, which includes:

• Transactions with other Free Zone entities (except income from excluded activities).

• Income from overseas businesses where the services are provided to non-residents outside the UAE.

• Income from qualifying activities, such as:

o Manufacturing and processing of goods.

o Trading of qualifying commodities (e.g., oil, gas, metals, minerals traded internationally).

o Holding shares and earning dividends or capital gains from Free Zone or foreign entities.

o Re-export and distribution of goods in or from a Free Zone.

o Qualifying service activities provided to foreign companies or other Free Zone businesses.

Income from non-qualifying mainland activities or immovable property transactions (except commercial property leased to Free Zone entities) will generally be subject to 9% tax.

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3️⃣ Substance Requirements

To prove substantial presence, a QFZP must demonstrate that:

• Core income-generating activities are carried out in the Free Zone.

• There are sufficient qualified employees, expenditure, and physical assets in the Free Zone.

• Economic Substance Regulations (ESR) compliance is met annually.

This ensures that the Free Zone company is not merely a “paper entity” set up for tax advantages.

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4️⃣ Excluded Activities That Disqualify the 0% Rate

Certain activities, even if conducted within a Free Zone, may not be eligible for the 0% tax rate, including:

• Income derived from transactions with UAE mainland companies, unless for distribution of goods via customs zones.

• Income from immovable property (real estate) situated outside the Free Zone.

• Banking, insurance, financing, and other regulated financial services that are not listed as qualifying activities.

• Certain intra-group transactions that do not meet arm's length pricing standards.

If a Free Zone business earns any non-qualifying income above a de minimis threshold (5% or AED 5 million of total income), it could lose its 0% benefit for that tax period.

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5️⃣ Corporate Tax Compliance for Free Zone Entities

Even if eligible for 0% corporate tax, Free Zone companies must:

• Register for Corporate Tax with the FTA.

• File annual corporate tax returns.

• Maintain audited financial statements (mandatory for most Free Zones).

• Submit transfer pricing documentation where applicable.

Failing to comply with these requirements can result in loss of QFZP status and penalties.

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Key Takeaway

Not every Free Zone business in the UAE automatically qualifies for the 0% corporate tax rate. The benefits apply only to entities that:

• Maintain adequate substance in the Free Zone.

• Earn qualifying income.

• Avoid excluded activities and meet the de minimis rule.

• Comply with corporate tax and transfer pricing obligations.

Proper structuring and ongoing compliance are essential for Free Zone companies to retain their tax-free status under the UAE’s new tax regime.

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✅ Need Expert Guidance?

At Sheikh Anwar Accounting and Auditing LLC, we help Free Zone businesses ensure eligibility for the 0% corporate tax rate through proper planning, documentation, and compliance with FTA rules.

📧 Email: info@sa-auditors.com

🌐 Website: www.sa-auditors.com