New Corporate Tax Rules for Free Zone Businesses in the UAE (2025)

“Synopsis”

With the UAE’s corporate tax regime now fully implemented, free zone businesses find themselves under renewed scrutiny. While the 0% corporate tax rate still exists, it now comes with fine print. To remain tax-exempt, companies must satisfy the conditions of a Qualifying Free Zone Person (QFZP). This blog explains what’s changed in 2025 and how to remain compliant.

1. UAE Corporate Tax Framework at a Glance

As of 2025, the UAE corporate tax rate applies to most businesses as follows:

• 0% on taxable income up to AED 375,000
• 9% on income above that threshold
• 15% for large multinational groups under global Pillar Two rules

However, corporate tax in UAE free zones still allows for 0% taxation—if the company qualifies.

2. Qualifying as a Free Zone Business for 0% Tax

To become a Qualifying Free Zone Person (QFZP), a business must:

• Be incorporated in a designated UAE free zone
• Maintain adequate economic substance in UAE
• Derive qualifying income (explained below)
• Avoid electing into the regular 9% tax regime
• Keep accurate records and comply with transfer pricing rules

3. What Counts as Qualifying Income?

Qualifying income for free zone companies includes:

• Sales to or transactions with other free zone businesses
• Income from outside the UAE
• Activities in permitted sectors like reinsurance, fund management, logistics, and trading with international clients
• Dividends and capital gains from qualifying investments

On the other hand, non-qualifying income includes most revenue derived from dealing with the mainland UAE, unless it’s through a qualified arrangement or independent distributor.

4. The De Minimis Rule

Free zone companies can still retain QFZP status even if they earn some non-qualifying income, but only if:

• That income is less than 5% of their total revenue, or
• Does not exceed AED 5 million

Exceeding this threshold disqualifies the business from the 0% benefit and subjects it to the full 9% UAE corporate tax rate on all income.

5. Tax Registration & Filing Obligations

Every free zone company—qualifying or not—must:

• Register for UAE corporate tax
• Obtain a Tax Registration Number (TRN)
• File a corporate tax return annually
• Maintain audited financials
• Submit proper transfer pricing documentation, if applicable

Failing to register or file on time may lead to fines and possible loss of tax incentives.

6. Economic Substance Requirements

You can’t claim tax benefits without actual business activity. To remain compliant, your company must:

• Have a physical office in the free zone
• Employ relevant full-time staff
• Incur local operating expenses
• Conduct core income-generating activities within the UAE

Companies using just virtual or co-working setups without real presence risk losing their free zone tax benefits.

7. Trading with the Mainland: Tread Carefully

Free zone companies that deal with mainland UAE must:

• Do so through a third-party distributor or agent
• Pay 9% tax on income from such mainland activity
• Segregate revenues and maintain accurate reporting for FTA corporate tax compliance

It’s essential to align operational models to avoid classification issues or loss of corporate tax exemptions in UAE.

8. Common Pitfalls and Compliance Mistakes

Avoid the following:

• Assuming all free zone income is tax-exempt
• Ignoring corporate tax registration UAE deadlines
• Misclassifying revenue as qualifying
• Overlooking the de minimis rule
• Not keeping proper documentation for audits

In 2025, enforcement is tighter, and non-compliance is costly.

9. Strategic Steps Moving Forward

To stay ahead of the curve:

• Reassess whether your income qualifies
• Separate mainland and international operations where possible
• Monitor your revenue mix to stay below the non-qualifying threshold
• Keep your team and infrastructure in sync with economic substance UAE free zone requirements
• Seek tailored tax planning advice if your operations are complex

Conclusion

Operating within a UAE free zone still offers real advantages—but now they’re earned, not automatic. By becoming and staying a Qualifying Free Zone Person, your business can enjoy 0% corporate tax, benefit from world-class infrastructure, and access international markets—while staying fully compliant.

Done right, free zone corporate tax in UAE becomes a smart tool for scaling your business, protecting profits, and strengthening cross-border credibility.