UAE Free Zone Companies: Who Can Take Advantage of the 0% Corporate Tax?

 

Introduction

Special Economic Zones (SEZs) have long been catalysts for economic development. A prime example is Shenzhen in China, which transformed from a small fishing village into a major economic hub after its SEZ designation in 1980. Between 1979 and 2019, its GDP per capita soared, mirroring China’s broader economic growth. Today, more than 140 countries operate over 7,000 SEZs—demonstrating their impact on global trade and investment strategies.

The United Arab Emirates (UAE) stands out globally for its thriving free zone model. As of 2023, six of the world’s top ten free zones were in the UAE, with the Dubai Multi Commodities Centre (DMCC) earning top honors for the ninth year in a row. These zones have attracted significant international investment, solidifying the UAE’s position as a top-tier destination for global businesses.

To reinforce this reputation, the UAE introduced a 0% corporate tax scheme for eligible companies operating in free zones. This article outlines which businesses qualify and what criteria they must meet under the UAE's corporate tax rules.



Who Qualifies for the 0% Corporate Tax?

Under the UAE’s Corporate Tax Law, implemented in 2022, the following entities can benefit from tax relief:

  • All UAE businesses (mainland or free zone) with annual taxable income under AED 375,000

  • Qualifying Free Zone Persons (QFZPs), on their qualifying earnings

This blog focuses on the second category—free zone businesses that meet specific regulatory conditions and thus benefit from 0% corporate tax.

What Is a Qualifying Free Zone Person (QFZP)?

A QFZP refers to a company or branch officially registered in a UAE free zone. However, only income linked to approved business activities conducted within or from the free zone may qualify for tax exemption.

To meet QFZP status, a company must earn:

  • Income from qualifying activities conducted with other free zone or foreign companies

  • Royalties or earnings from eligible intellectual property

Moreover, to retain QFZP status, a company’s non-qualifying income must not exceed:

  • AED 5 million, or

  • 5% of its total revenue—whichever is lower (known as the de minimis threshold)

What Are Considered Qualifying Activities?

As per Ministerial Decision No. 265 of 2023, the following are recognized as qualifying business activities:

  • Industrial manufacturing and processing

  • Logistics and distribution

  • Asset and wealth management

  • Holding shares or securities

  • Activities directly supporting any of the above

Some industries, like regulated finance or real estate for mainland customers, are excluded and cannot benefit from the 0% tax rate.

Requirements to Maintain QFZP Status

To benefit from zero corporate tax as a QFZP, companies must meet all of the following conditions:

1. Operational Presence in the Free Zone

The company must perform key income-generating activities inside the free zone. This includes:

  • Having physical offices or facilities

  • Hiring appropriate full-time staff

  • Spending operational costs within the free zone

2. Generating Qualifying Income

The primary source of income must be from qualifying activities. If non-qualifying income exceeds the de minimis threshold, the company will lose QFZP status.

Important: Income from a Permanent Establishment (PE) outside the free zone, whether in the UAE or abroad, is taxed at 9%.

3. No Opt-In to Regular Corporate Tax

Businesses may choose to follow the regular 9% corporate tax regime under Article 19—but opting in disqualifies them from the 0% rate under the QFZP scheme.

4. Adherence to Transfer Pricing Rules

Companies must apply the Arm’s Length Principle when dealing with related parties, ensuring transactions mirror those made between independent companies.

  • Adequate documentation is required, based on the company's size and structure.

5. Mandatory Audited Financial Statements

All QFZPs must prepare and submit audited annual financial statements—even if they earn minimal or zero income.

Failing to meet any condition could result in disqualification for the current and next four tax periods.

For further clarity, refer to the FTA’s Corporate Tax Guide for Free Zone Persons.

UAE Free Zones and Their Role in National Growth

Free zones are central to the UAE’s economic policy. Between 2015 and 2021, over 60% of the UAE’s total exports originated from free zones. In 2020, these areas accounted for more than half of all re-exports.

According to research from Middlesex University Dubai, the UAE’s FDI-to-GDP ratio exceeds that of economic powerhouses like the US, India, and China. The NextGenFDI program, a collaboration between the UAE government and major free zones, is designed to attract innovative digital businesses.

In 2022, the UAE secured USD 22.7 billion (AED 83 billion) in foreign investment—a 10% increase over the previous year. Impressively, the country accounted for almost 50% of all FDI inflows in the MENA and West Asia regions.

Conclusion

The UAE’s tax-friendly environment is one of its biggest advantages for global investors. With a standard corporate tax rate of just 9%, and a special 0% rate for qualified free zone companies, it stands out in the global market.

But securing the 0% corporate tax regime requires strict compliance with specific conditions—from income source limitations to operational substance and reporting obligations. Failing to meet even one requirement may lead to losing eligibility for five tax years.

That’s why working with professionals is essential.

AKW Consultants offers specialized tax advisory services to help free zone businesses remain compliant and fully leverage the UAE’s 0% tax regime.


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