UAE Free Zone Companies: Who Can Enjoy the Zero Corporate Tax Regime?

 

Introduction

How crucial are Special Economic Zones (SEZs) to a nation’s economic growth?

To understand their impact, look no further than Shenzhen, China. In the late 1970s, it was a quiet fishing village with barely 30,000 residents. Once designated as one of China’s first SEZs in 1980, Shenzhen’s transformation was nothing short of miraculous—its GDP per capita grew by more than 33,000% between 1979 and 2019. During the same period, China’s national GDP increased over 54 times, underlining how SEZs can be catalysts for economic development.

From the first SEZ established at Shannon Airport in 1959 to nearly 7,000 such zones operating across 145 economies today, these zones have consistently promoted global trade and investment.

Among the countries that have harnessed the power of SEZs most effectively is the United Arab Emirates (UAE). According to fDi Intelligence, six of the world’s top ten free zones in 2023 were in the UAE. The Dubai Multi Commodities Centre (DMCC) has even retained its title as the Global Free Zone of the Year for nine consecutive years. These success stories reflect how free zones have positioned the UAE as a preferred destination for international investors.

To preserve this appeal, the UAE government introduced a 0% Corporate Tax rate for eligible free zone companies that meet specific conditions. This blog explores who qualifies for this benefit and what requirements must be fulfilled to enjoy the UAE’s zero Corporate Tax regime.

Who Can Benefit from the Zero Corporate Tax Regime?

The UAE introduced Corporate Tax in 2022 as part of its ongoing fiscal reform initiatives. Under the Corporate Tax Law, two key categories can enjoy a 0% rate:

1. Companies (mainland or free zone) with taxable income below AED 375,000, and
   
   

2. Qualifying Income earned by Qualifying Free Zone Persons (QFZPs).
   
   

This article focuses on the second category — QFZPs, who are eligible for zero Corporate Tax on certain types of income.

Who is a Qualifying Free Zone Person (QFZP)?

A Free Zone Person is a legal entity, such as a company or branch, that is registered within one of the UAE’s free zones. According to the Corporate Tax Guide for Free Zone Persons (May 2024), this includes businesses “incorporated, established, or otherwise registered in a free zone.”

However, the zero Corporate Tax benefit applies only to the portion of income that qualifies under the law.

What is Qualifying Income?

Qualifying Income refers to income generated from Qualifying Activities carried out with other free zone entities or non-free zone persons. It may also include income derived from Qualifying Intellectual Property (IP) such as patents or copyrighted software.

To claim the 0% Corporate Tax rate, the entity must also meet the de minimis requirement, which limits non-qualifying revenue to the lower of AED 5 million or 5% of total revenue.

Under Ministerial Decision No. (265) of 2023, Qualifying Activities include manufacturing, processing, logistics, investment management, and related ancillary services.

Conditions to Be a Qualifying Free Zone Person

To be recognized as a Qualifying Free Zone Person (QFZP) and benefit from the zero Corporate Tax regime, the company must meet the following conditions:

1. Maintain Adequate Substance in a Free Zone

The company must conduct its core income-generating activities within a free zone, supported by sufficient physical assets, employees, and operational expenditure.

2. Derive Qualifying Income

The entity’s income must primarily come from Qualifying Activities or transactions with other Free Zone Persons. Revenue from Qualifying IP also falls under this category. However, income earned from Domestic or International Permanent Establishments of a QFZP is taxed at the standard 9% rate.

3. Satisfy the De Minimis Rule

Non-qualifying revenue should not exceed AED 5 million or 5% of total income, whichever is lower.

4. Avoid Electing Regular Corporate Tax

Under Article 19 of the Corporate Tax Law, a Free Zone company can voluntarily opt for regular Corporate Tax. However, doing so makes it ineligible for the 0% regime.

5. Comply with the Arm’s Length Principle

All related-party transactions must comply with the Arm’s Length Principle, meaning they should be priced as if they occurred between unrelated parties. Proper Transfer Pricing documentation must be maintained to prove compliance.

6. Maintain Audited Financial Statements

Every Free Zone company, regardless of income level, must maintain audited financial statements reviewed by an independent auditor.

Failure to meet any of these conditions can result in the company losing its QFZP status for that tax period and the next four consecutive tax periods, eliminating eligibility for the zero Corporate Tax benefit.

Why UAE Free Zones Are Key to Investment Growth

Free zones have been pivotal to the UAE’s economic diversification and global competitiveness. Between 2015 and 2021, free zone exports consistently accounted for over 60% of total UAE exports. Even re-exports saw more than 55% originating from free zones in 2020.

A report by Middlesex University Dubai highlighted that the UAE’s Foreign Direct Investment (FDI) to GDP ratio surpasses major global economies such as the USA, China, and India. Initiatives like NextGenFDI, launched by the Ministry of Economy, continue to attract technology-driven and digital-first enterprises to UAE’s free zones.

In 2022 alone, the UAE attracted $22.7 billion (AED 83 billion) in FDI — a 10% increase from 2021. The nation accounted for 47.1% of total FDI inflows in West Asia and 32.4% in the MENA region, underscoring its position as a leading business hub.

Conclusion

The UAE’s Corporate Tax framework is one of the most business-friendly globally. Even the standard 9% rate on taxable income above AED 375,000 remains significantly lower than corporate tax rates in most major economies.

However, the zero Corporate Tax regime for Qualifying Free Zone Persons continues to be one of the most compelling incentives for foreign investors. That said, meeting all compliance requirements—such as calculating Qualifying Income, maintaining Transfer Pricing documentation, and preparing audited financials—can be complex.

Losing QFZP status can cost a company its 0% tax benefit for the current and four subsequent years. Therefore, it’s critical for Free Zone companies to consult experts who understand the UAE Corporate Tax Law in depth.

At AKW Consultants, our experienced Corporate Tax consultants can help your Free Zone business ensure full compliance with the UAE’s Corporate Tax regulations, maximize eligible benefits, and confidently enjoy the zero-tax advantage.