You will often see UAE free zones described as “0% tax”. Since the UAE introduced a federal corporate tax regime, that headline is only part of the story. The 0% rate is real, but it is conditional. Here is a plain-English overview. This is general information only — not tax, legal or immigration advice.
The starting point
The UAE introduced a federal Corporate Tax under Federal Decree-Law No. 47 of 2022, applying to financial years beginning on or after 1 June 2023. In broad terms:
- the standard rate is 9% on taxable income above AED 375,000; and
- a free-zone company can access a 0% rate on its qualifying income — but only if it meets the conditions to be a Qualifying Free Zone Person (QFZP).
Crucially, a free-zone company is still a taxable person. Income that is not qualifying income is taxed at 9%.
What it takes to be a QFZP
According to the UAE Federal Tax Authority, a Qualifying Free Zone Person must meet all of the following:
- be a Free Zone Person (incorporated or registered in a free zone, including branches);
- maintain adequate substance in a free zone (real activity, assets, employees and spend — not just a registered address);
- derive qualifying income;
- not have elected to be taxed under the standard regime;
- comply with the arm’s length principle and keep transfer-pricing documentation;
- keep audited financial statements; and
- keep non-qualifying revenue within the de minimis limit.
The de minimis rule is satisfied where non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is lower.
If a free-zone company fails any condition, it is generally treated as taxable at 9% on its income for that year and the following four years.
What counts as “qualifying income”
In general terms, qualifying income includes:
- income from transactions with other free-zone persons (except excluded activities);
- income from qualifying activities with non-free-zone persons; and
- income from qualifying intellectual property, plus other income within the de minimis allowance.
Qualifying activities include manufacturing and processing of goods, trading of qualifying commodities, holding shares and securities for investment, fund and wealth management, headquarter and treasury services to related parties, and logistics, among others.
Excluded activities include transactions with natural persons (with some exceptions), regulated banking/finance/insurance, and most income from immovable property.
What this means in practice
The takeaway is not “set up in a free zone and pay no tax.” It is:
- the structure and the activity determine whether income qualifies for 0%;
- substance and documentation are now central — the regime rewards genuine operations; and
- selling directly into the UAE mainland market generally produces non-qualifying income.
This is an area where professional tax advice is genuinely worth it before you commit to a structure.
Sources: UAE Federal Tax Authority — “Corporate Tax Guide: Free Zone Persons (CTGFZP1)”, May 2024; UAE Ministry of Finance — Cabinet Decision No. 100 of 2023 on Qualifying Income; Federal Decree-Law No. 47 of 2022. As at June 2026. Rates, thresholds and qualifying/excluded activity lists change over time — always confirm current detail with the FTA (tax.gov.ae) or a qualified tax adviser.
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