How the free zone 0 percent corporate tax rate works in the UAE

What is the free zone 0 percent corporate tax rate?

The free zone 0 percent corporate tax is a UAE regime that lets a Qualifying Free Zone Person (QFZP) pay 0% corporate tax on qualifying income, while non-qualifying income is taxed at 9%. It sits inside Federal Decree-Law 47 of 2022 and applies to free zone entities that meet substance, audit, and activity tests.

This guide explains who qualifies, which income streams stay at 0%, and where the 9% rate kicks in. It is part of our UAE Corporate Tax hub, which covers the wider rules for mainland and free zone businesses.

The headline rule: 0% on qualifying income, 9% on the rest

UAE corporate tax took effect for financial years starting on or after June 1, 2023. The general structure is simple:

• 0% on taxable income up to AED 375,000.
• 9% on taxable income above AED 375,000.
• 15% Domestic Minimum Top-up Tax (DMTT) for large multinationals with global revenue of EUR 750M or more, from January 2025.

Free zone businesses get a parallel track. A QFZP pays 0% on qualifying income with no AED 375,000 threshold, and 9% on any non-qualifying income, again without a threshold. Losing QFZP status means the full 9% standard regime applies for that year and the next four.

What does QFZP mean?

QFZP stands for Qualifying Free Zone Person. It is the status a free zone company must hold to use the free zone 0 percent corporate tax rate. The detailed conditions are covered in our guide to the Qualifying Free Zone Person UAE rules.

Who can claim the free zone 0 percent corporate tax rate?

To be a QFZP, a free zone entity must meet every condition below for the tax period:

1. Be a juridical person incorporated in a UAE free zone or designated zone.
2. Maintain adequate substance in the free zone, with real staff, assets, and operating expenses.
3. Earn qualifying income as defined by Ministerial Decision 265 of 2023 (and later amendments).
4. Not elect to be taxed at the standard 9% rate.
5. Comply with transfer pricing rules and documentation.
6. Prepare audited financial statements under IFRS.
7. Stay within the de minimis threshold on non-qualifying income.

Miss any one of these, and the entity loses QFZP status for the current year plus the next four years. That is a five-year exit door, so the test matters.

The de minimis threshold

A QFZP can earn a small amount of non-qualifying revenue without losing status. The de minimis cap is the lower of:

• 5% of total revenue, or
• AED 5,000,000.

Go above either limit, and the entity becomes a standard 9% taxpayer for five years. This is a hard line in the regulation, not a soft target.

What counts as qualifying income?

Qualifying income is the income that gets the 0% rate. The Ministry of Finance sets the list. In broad terms it includes:

• Transactions with other free zone persons, where the free zone person is the beneficial recipient.
• Transactions with non-free zone persons, but only from a defined list of qualifying activities.
• Income from owning or exploiting qualifying intellectual property, calculated using the modified nexus approach.
• Any other income, provided the de minimis threshold is not breached.

Income that is never qualifying includes income attributable to a domestic or foreign permanent establishment, income from immovable property outside designated zones (unless from other free zone persons), and income from non-qualifying intellectual property.

For a deeper split, see our breakdown of Qualifying Income vs Non Qualifying Income.

Qualifying activities in plain English

Ministerial Decision 265 of 2023 lists the activities a QFZP can perform with mainland or foreign customers while keeping the 0% rate. The main ones are:

• Manufacturing and processing of goods or materials.
• Trading of qualifying commodities on recognised exchanges.
• Holding of shares and other securities for investment.
• Ownership, management, and operation of ships.
• Reinsurance, fund management, wealth and investment management services, all subject to regulatory oversight.
• Headquarter services to related parties.
• Treasury and financing services to related parties.
• Financing and leasing of aircraft.
• Distribution of goods or materials in or from a designated zone.
• Logistics services.

Excluded activities

Some activities are excluded. Income from them is always non-qualifying, even with a free zone counterparty:

• Transactions with natural persons (with limited exceptions like aircraft leasing and fund management).
• Banking, insurance, and finance services that are not on the qualifying list.
• Ownership or exploitation of immovable property, except commercial property in a free zone transacted with other free zone persons.
• Ownership or exploitation of non-qualifying intellectual property.

Free zone 0 percent corporate tax at a glance

Free zone-specific treatment

The federal rules are the same across all UAE free zones, but each zone has its own licensing rules, designated zone status for VAT, and substance expectations. The corporate tax outcome depends on what your licence allows you to do and where your customers sit.

Common free zones and where to read more

• DMCC Corporate Tax Treatment for Dubai Multi Commodities Centre companies.
• DIFC Corporate Tax Treatment for Dubai International Financial Centre entities.
• ADGM Corporate Tax Treatment for Abu Dhabi Global Market firms.
• JAFZA Corporate Tax Treatment for Jebel Ali Free Zone businesses, including designated zone trading.

Designated zones and why they matter

A designated zone is a free zone listed in Cabinet Decision 59 of 2017 for VAT, with extra rules for goods. For corporate tax, designated zone status matters for distribution. To get the 0% rate on distribution of goods to non-free zone customers, the activity must take place in or from a designated zone, and goods must be imported into the UAE through that zone.

Trading from a non-designated free zone to mainland customers usually creates non-qualifying income. Plan your supply chain around this before signing leases.

Substance, audit, and transfer pricing

The 0% rate is not automatic. You earn it by running a real business in the free zone. Three operational tests matter most.

Adequate substance

You must perform your core income-generating activities in the free zone, with enough qualified staff, operating expenses, and physical assets. Outsourcing within the free zone or to related parties is allowed, provided you supervise it.

Audited financial statements

Every QFZP must prepare audited financial statements under IFRS. This is a hard requirement, not a best practice. No audit, no 0% rate.

Transfer pricing

Transactions with related parties and connected persons must follow the arm's length principle. You need a transfer pricing disclosure form with the tax return, plus a master file and local file if you cross the revenue thresholds.

Filing, deadlines, and penalties

Corporate tax returns are due within 9 months of the end of the financial year. A free zone company with a December year end files by September 30 of the following year. The same deadline applies whether you pay 0% or 9%.

Failure to register, file, or pay on time triggers administrative penalties under the FTA (Federal Tax Authority) penalty regime. Separately, e-invoicing penalties under Cabinet Decision 106 of 2025 range from AED 2,500 to AED 50,000 per violation once mandatory e-invoicing begins on January 1, 2027 for businesses with revenue of AED 50M or more.

You can confirm current guidance on the UAE Ministry of Finance site and the Federal Tax Authority portal.

A worked example

Assume a Dubai free zone trading company with the following figures for the year:

• Total revenue: AED 40,000,000.
• Sales to other free zone persons (qualifying): AED 30,000,000.
• Distribution from a designated zone to UAE mainland (qualifying): AED 8,500,000.
• Services to a mainland customer that are not a qualifying activity (non-qualifying): AED 1,500,000.

Non-qualifying revenue is AED 1,500,000. The de minimis cap is the lower of 5% of AED 40M (AED 2,000,000) or AED 5,000,000, so AED 2,000,000. The company is inside the cap and keeps QFZP status.

Tax outcome: 0% on the AED 38,500,000 of qualifying income, and 9% on the AED 1,500,000 of non-qualifying income, which is AED 135,000 of tax.

If the non-qualifying revenue had been AED 2,500,000, the company would breach the cap, lose QFZP status, and pay 9% on the full taxable income above AED 375,000 for five years.

Checklist before claiming the 0% rate

1. Confirm your free zone entity is a juridical person, not a branch of a foreign company without separate legal personality.
2. Check your licensed activities against the qualifying activities list.
3. Map every revenue stream to qualifying or non-qualifying.
4. Measure non-qualifying revenue against the de minimis cap.
5. Document substance: headcount, payroll, lease, and operating costs in the zone.
6. Engage an auditor early and prepare IFRS financial statements.
7. Complete the transfer pricing disclosure with your return.
8. File within 9 months of year end through the FTA EmaraTax portal.

Get help with UAE compliance

Free zone 0 percent corporate tax sits next to VAT and the upcoming e-invoicing mandate. If you want a single view of your tax and invoicing obligations, including how the UAE Corporate Tax rules interact with Peppol-based e-invoicing, talk to our team. Get UAE e-invoicing pricing from EInvoice Direct and see how we package an accredited service provider with the software at no extra charge.