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Most UAE free zone companies pay corporate tax: 0% applies only to qualifying income. What it means for IFZA, Meydan, DMCC, RAKEZ and SHAMS companies.
Yes, most UAE free zone companies pay corporate tax. A free zone company gets 0% only on qualifying income, and only if it meets every Qualifying Free Zone Person (QFZP) condition, including audited accounts and a strict limit on other income. A consultancy, agency or software business selling to mainland or overseas clients usually pays the standard rates: 0% on the first AED 375,000 of taxable income and 9% above it.
Many owners still hear "free zone" and assume "tax-free". That assumption leads to missed registrations and unexpected tax bills, so here is how the rules work.
The short answer: most free zone companies pay corporate tax
The Ministry of Finance treats free zone companies as taxable persons, just like any mainland company. Under Federal Decree-Law 47 of 2022 (the CT Law), you are on one of two routes.
Route A: Qualifying Free Zone Person. Under Article 3(2), you pay 0% on qualifying income and 9% on any other taxable income. You do not get the AED 375,000 0% band on that other income.
Route B: everyone else. Under Article 3(1), you pay 0% on the first AED 375,000 of taxable income and 9% on the rest.
To be a QFZP, Article 18(1) requires adequate substance in the UAE, qualifying income, no election to be taxed at standard rates, compliance with Articles 34 and 55 (arm's length pricing and transfer pricing documentation), and any other condition the Minister sets.
Many free zone service businesses end up on Route B. That is not a failure. It is simply how the law is drafted.
Who gets 0%: qualifying income in plain terms
Under Cabinet Decision 100 of 2023, Article 3, qualifying income comes from four places:
Sales to another free zone person that is the beneficial recipient (it uses the service or goods itself), unless the activity is excluded.
Sales to non-free zone persons, but only for qualifying activities that are not excluded.
Income from qualifying intellectual property, which is narrow and nexus-based.
Any other income, provided you stay within the de minimis limit.
Income of a domestic or foreign permanent establishment, and some free zone property income, is taxed at 9% regardless. Ministerial Decision 229 of 2025 sets the qualifying activity list: manufacturing, processing, trading qualifying commodities, holding shares for 12 months or more, ships, reinsurance, fund and wealth management, headquarter and treasury services to related parties, aircraft financing and leasing, distribution in or from a Designated Zone, logistics and ancillary activities. Excluded activities include transactions with natural persons (except ships, fund management, wealth management and aircraft financing), banking, most insurance, most finance and leasing, and most property income.
Type of business | Typical customers | Likely outcome |
|---|---|---|
Consultancy, agency, marketing or IT services | Mainland or overseas clients | Services are not a listed qualifying activity: above the de minimis limit, standard rates |
Services to other free zone companies | Free zone firms using the service themselves | Can be qualifying income |
Selling to individuals, including D2C e-commerce | Consumers | Excluded activity |
Distribution to resellers | Resellers, goods imported through a Designated Zone | Qualifying activity |
Holding shares for investment | N/A, held 12 months or more | Qualifying |
Headquarter or treasury services | Group companies | Qualifying |
Manufacturing, processing, logistics | Any business customer | Qualifying |
Trading qualifying commodities | Commodity buyers | Qualifying, with conditions |
Rent | Mainland tenants, or residential property in a free zone | Taxable |
The de minimis rule in one line: non-qualifying revenue must not exceed 5% of total revenue or AED 5,000,000, whichever is lower. And for a listed qualifying activity, where your customer sits is not the test.
Does your free zone change the answer? IFZA, Meydan, DMCC, RAKEZ and SHAMS
Mostly not. The rules for UAE corporate tax in a free zone are federal, so the same rules apply in IFZA, Meydan, DMCC, RAKEZ, SHAMS or anywhere else. What differs between zones is licence cost, visa allocation and permitted activities, which is why choosing a zone is a commercial decision. Our guide on mainland or free zone: choosing the right UAE set-up covers that side.
FTA public clarification TAXP010 (October 2026) explains two labels. A corporate tax Free Zone is an area specified by Cabinet decision. A corporate tax Designated Zone must be both on the VAT Designated Zones list under Cabinet Decision 59 of 2017 and a corporate tax Free Zone. Designated Zone status matters mainly for distribution, and the FTA tells you to confirm your status with your free zone authority.
What every free zone company must do, whatever its rate
Whether you pay 0%, 9% or nothing under a relief, the admin is the same baseline:
Register for corporate tax. Registration is free. Companies incorporated on or after 1 March 2024 must register within 3 months of incorporation, and late registration costs AED 10,000.
Keep accounting records for 7 years.
File and pay within 9 months of the end of each tax period, even if no tax is due. See UAE corporate tax filing deadlines and late penalties.
Audit, if you are a QFZP. MD 229 of 2025 requires audited financial statements prepared under MD 84 of 2025. More on which UAE companies need an audit in 2026.
Follow arm's length and transfer pricing rules. Article 34 (arm's length pricing) applies to every company, and Article 55 (transfer pricing documentation) applies where its thresholds are met. For QFZPs, complying with both is a condition of the 0% rate. Use properly drafted intercompany agreements, not downloaded templates.
Consider Small Business Relief if you are not a QFZP. It covers revenue up to AED 3m for tax periods ending on or before 31 December 2029 (MD 131 of 2026), is not available to QFZPs or members of large multinational groups, and still requires a return. Details: Small Business Relief extended to 2029.
VAT is a separate regime with its own registration and returns. Mismatches between VAT and corporate tax figures are exactly the kind of inconsistency that draws FTA attention.
Is claiming QFZP status worth it? The costs and the five-year lock
Keeping QFZP status costs money and attention every year: an annual audit, monthly tracking of non-qualifying revenue against the de minimis limit, real substance in the free zone (office, staff, decisions made there) and transfer pricing files.
The bigger risk is the cliff. Fail any condition and you stop being a QFZP from the start of that tax period and for the next four, five periods in total. You can elect to be taxed at standard rates under Article 19, effective from the start of the current or next period, but because "has not elected" is itself an Article 18 condition, electing triggers the same five-period consequence under MD 229 of 2025.
Three illustrations (figures are illustrative):
Consultancy, AED 2.5m revenue, all mainland clients. Not a QFZP. It elects Small Business Relief, pays no tax, but still registers and files.
Consultancy, AED 1.5m taxable income, mainland clients. 0% on AED 375,000 and 9% on AED 1,125,000: tax of AED 101,250.
Designated Zone distributor, AED 40m revenue including AED 1.5m retail sales. That is 3.75%, inside the limit. If retail reaches AED 2.5m (6.25%), it fails and loses QFZP status for five tax periods.
If most of your income is non-qualifying, QFZP is out of reach and the real decision is about Small Business Relief and clean books. For group structures, read how ADGM and DIFC entities keep the 0% rate.
Where Cosmos fits
Most of the pain here is administrative: registering on time, keeping books that hold up, tracking revenue by type and filing returns when no tax is due. Cosmos keeps the books and files UAE corporate tax and VAT returns through an FTA-registered tax agent, and can check each year whether QFZP status is realistic for your income mix. Cosmos also offers fractional CFO support. Cosmos is not an audit firm: if you are a QFZP, your audited financial statements must come from a licensed auditor. If you are unsure which route you are on, that is the conversation to have before your first return is due.
Frequently asked questions
Are free zone companies exempt from UAE corporate tax? No. They are taxable persons. Only qualifying income of a QFZP is taxed at 0%.
Is IFZA, Meydan or DMCC tax-free? No zone is tax-free. The federal rules are identical across all free zones.
Do I need to register and file if my free zone company made no profit? Yes. Registration and a return within 9 months of the period end are required regardless of profit.
Can a free zone company use Small Business Relief? Yes, if it is not a QFZP, has revenue up to AED 3m and is not in a large multinational group. It still files a return.
Does a free zone company need an audit? QFZPs must have audited financial statements. Others should check the separate audit rules for their size and licence.
What happens if I sell to mainland customers? For a listed qualifying activity, customer location is not the test. For services, mainland income is usually non-qualifying and counts against the de minimis limit.
Can I opt out of QFZP status? Yes, by electing standard rates under Article 19, but that locks you out for five tax periods.
What happens if I break the de minimis limit once? You lose QFZP status from the start of that period and for the next four.
The free zone label decides your licence and visas. Your income decides your tax. Map it honestly before you file.
