The UAE is known for its business-friendly environment, and Free Zones play a major role in attracting investors. If you are planning to set up a company in a Free Zone or already have one, it’s important to understand how corporate tax. This article explains everything in simple terms.

What is a Free Zone Person?

A Free Zone Person refers to any company that is registered in a Free Zone in the UAE. These zones are special business areas that offer tax benefits, simplified regulations, and full foreign ownership. Businesses operating within these zones may qualify for lower or even zero corporate tax, depending on their activities and compliance with certain conditions.

A Free Zone Person can be:

  • A company incorporated in a Free Zone.
  • A branch of a foreign company registered in a Free Zone.
  • A government-controlled entity operating within a Free Zone.

However, individuals (natural persons) and unregistered partnerships do not qualify as Free Zone Persons.

What is the Corporate Tax Rate for Free Zone Persons?

Under UAE corporate tax laws, a Free Zone Person can enjoy a 0% corporate tax rate on Qualifying Income and a 9% tax rate on other taxable income.

A Free Zone Person cannot benefit from the 0% tax rate on taxable income below AED 375,000, which applies to businesses outside Free Zones. Instead, they are taxed at 9% on any non-qualifying income.

Who is a Qualifying Free Zone Person?

Not all Free Zone companies automatically get the 0% tax benefit. To qualify, a Free Zone Person must meet the following conditions:

 

  1. Have a real presence in a Free Zone – This means having an actual office or business activity in the Free Zone.

 

  1. Earn Qualifying Income – Income must come from approved business activities (explained below).

 

  1. Not elect to be taxed at the normal rate – Some Free Zone businesses may choose to pay standard corporate tax (9%) instead of following Free Zone tax rules.
  2. Follow fair pricing rules – Transactions with related companies must be done at fair market value.

 

  1. Keep financial records – Proper financial statements and transfer pricing documentation must be maintained.
  2. Meet the revenue threshold – Non-qualifying income should not exceed AED 5 million or 5% of total revenue, whichever is lower.

If a Free Zone Person fails to meet these conditions, they will have to pay the standard 9% corporate tax for the current and next four tax years.

What is Qualifying Income?

To benefit from the 0% corporate tax, a Free Zone company must earn Qualifying Income, which includes:

  • Business transactions with other Free Zone companies (as long as the income is not from restricted activities).
  • Activities related to manufacturing, processing, and trading of goods.
  • Income from holding investments, fund management, or shipping operations.
  • Earnings from leasing and financing aircraft.
  • Profits from logistics and distribution within Designated Zones.
  • Approved intellectual property income.

What Income is Not Eligible for 0% Tax?

Certain types of income are excluded from the 0% corporate tax rate, meaning they will be taxed at 9%. These include:

  • Income from banking, insurance, and financial services (except reinsurance).
  • Earnings from real estate (except commercial properties leased to other Free Zone businesses).
  • Income from trading with businesses outside Free Zones.
  • Revenue from providing services to individuals (natural persons).

Why is This Important for Business Owners?

If you run a business in a Free Zone, knowing whether you qualify for the 0% corporate tax is essential for tax planning. Companies that fail to meet the conditions could face higher taxes and penalties. Maintaining proper records, ensuring compliance, and structuring your business activities correctly can help maximize tax benefits.

Final Thoughts

The UAE Free Zones offer an excellent opportunity for businesses to grow while enjoying tax benefits. However, it is crucial to understand the eligibility rules and requirements to qualify for the 0% corporate tax rate. If you are unsure about your tax status, consulting a tax expert can help ensure compliance and optimize your tax position.

By staying informed, Free Zone companies can continue to benefit from the UAE’s attractive tax policies while avoiding unnecessary financial risks.