UAE Corporate Tax for Free Zone Companies
Qualifying Free Zone Person Rules Explained
Yes. Free zone companies are inside UAE corporate tax and must register and file returns. A free zone company that meets every condition to be a Qualifying Free Zone Person pays 0% on qualifying income and 9% on other taxable income, under Article 3 of Federal Decree-Law No. 47 of 2022. Fail one condition and the 0% rate is lost for five tax periods.
Key points
A free zone licence does not, by itself, mean 0% tax. The 0% rate applies only to qualifying income of a Qualifying Free Zone Person (QFZP).
The qualifying activity list was reissued in Ministerial Decision No. 229 of 2025. Consulting, IT and marketing services to outside clients are not on it.
Non-qualifying revenue must stay within the lower of 5% of total revenue or AED 5 million (the de minimis test).
Every QFZP needs audited financial statements and arm's length transfer pricing, whatever its size.
If you are planning a Dubai entity as an Indian company expanding to Dubai, test the activity first, then pick the zone.
Is UAE corporate tax applicable to free zone companies?
Yes. UAE corporate tax applies to every juridical person incorporated or registered in a UAE free zone, for financial years starting on or after 1 June 2023. The Federal Tax Authority (FTA) treats such an entity as a "Free Zone Person". It must register, keep records and file a return even where the tax due is nil.
The headline rates for an ordinary taxable person are 0% on taxable income up to AED 375,000 and 9% above that, as set by Cabinet Decision No. 116 of 2022. Our guide to the UAE corporate tax rate in 2026 covers those rules in full. A Free Zone Person can access a different regime: if it qualifies as a QFZP, it pays 0% on its qualifying income and 9% on the rest.
Three points catch Indian and UK founders out:
A QFZP does not get the AED 375,000 nil band. The FTA's Free Zone Persons bulletin states that a QFZP pays 9% on its entire taxable income that is not qualifying income.
Small Business Relief is not available to a QFZP.
Corporate tax and VAT are separate systems. Being in a designated zone for VAT does not decide your corporate tax position. If you are asking whether VAT applies to free zone companies in the UAE, treat it as a separate analysis.
Large groups have one more layer. From 1 January 2025, Cabinet Decision No. 142 of 2024 imposes a Domestic Minimum Top-up Tax that brings UAE entities of multinational groups with consolidated revenue of EUR 750 million or more up to a 15% effective rate. For most mid-sized Indian and UK groups this will not apply, but check it before relying on 0%.
What is a Qualifying Free Zone Person (QFZP)?
A Qualifying Free Zone Person is a Free Zone Person that meets all the conditions in Article 18 of the Corporate Tax Law and the related Ministerial Decision. A free zone entity is treated as a QFZP unless it fails a condition or elects out under Article 19.
Condition | Legal source | What it means in practice |
|---|---|---|
Adequate substance in the State | Article 18(1)(a); Cabinet Decision No. 100 of 2023, Article 8 | Core income-generating activities, assets, qualified full-time staff and operating spend in the free zone |
Derives qualifying income | Article 18(1)(b); Cabinet Decision No. 100 of 2023, Article 3 | Income from free zone persons, qualifying activities or qualifying IP |
Has not elected into standard corporate tax | Articles 18(1)(c) and 19 | No election to be taxed at the standard rates |
Transfer pricing compliance | Article 18(1)(d); Articles 34 and 55 | Arm's length pricing with related parties and documentation on request |
De minimis test met | Ministerial Decision No. 229 of 2025, Articles 3 and 5 | Non-qualifying revenue no more than the lower of 5% of total revenue or AED 5 million |
Audited financial statements | Ministerial Decision No. 229 of 2025, Article 5; Ministerial Decision No. 84 of 2025 | Audit required for every QFZP, regardless of revenue |
The conditions are cumulative and tested throughout the tax period. Under Article 18(2), a QFZP that fails any of them "at any particular time" during a tax period stops qualifying from the start of that period.
Qualifying vs non-qualifying income: what counts?
Qualifying income is income that falls into one of four categories in Article 3 of Cabinet Decision No. 100 of 2023. Everything else is non-qualifying and, if it is too large, it disqualifies the whole entity.
The four categories are:
Income from transactions with another Free Zone Person, where that person is the "Beneficial Recipient" of the goods or services, unless the income comes from an excluded activity.
Income from transactions with a non-free zone person, but only from qualifying activities that are not excluded activities.
Income from qualifying intellectual property (patents, copyrighted software and similar rights, not trademarks), calculated using the nexus formula in Article 4 of Ministerial Decision No. 229 of 2025.
Any other income, provided the de minimis test is met.
Some income is taxed at 9% even if it would otherwise fit a category: income attributable to a domestic or foreign permanent establishment, most income from immovable property, and income from IP that is not qualifying IP.
The qualifying activities list after Ministerial Decision No. 229 of 2025
Ministerial Decision No. 229 of 2025 was issued on 28 August 2025, repealed Ministerial Decision No. 265 of 2023, and states that it applies from 1 June 2023. Article 2(1) lists the qualifying activities:
Qualifying activities (Article 2(1)) | Excluded activities (Article 2(2)) |
|---|---|
Manufacturing of goods or materials | Transactions with natural persons, except for ship operation, fund management, wealth and investment management, and aircraft financing and leasing |
Processing of goods or materials | Banking activities |
Trading of qualifying commodities (metals, minerals, industrial chemicals, energy, agricultural and environmental commodities with a quoted price) | Insurance activities, other than reinsurance and captive insurance within headquarter services |
Holding shares and other securities for investment purposes (12-month holding) | Regulated finance and leasing, other than the qualifying financing activities |
Ownership, management and operation of ships | Ownership or exploitation of immovable property, except commercial property in a free zone let to a free zone person |
Reinsurance; fund management; wealth and investment management (regulated) | Activities ancillary to any of the above excluded activities |
Headquarter services to related parties | |
Treasury and financing services to related parties or for its own account | |
Financing and leasing of aircraft | |
Distribution of goods or materials in or from a designated zone | |
Logistics services | |
Activities ancillary to the above |
The Ministry of Finance's announcement of 3 September 2025 highlighted what changed against the 2023 list: commodity trading now covers industrial chemicals, associated by-products and environmental commodities such as carbon credits, provided a quoted price exists; treasury activity may be for the entity's own account; and distribution to public benefit entities no longer breaks the distribution activity. Commodity trading does not qualify if 51% or more of the entity's revenue comes from distribution, warehousing, logistics or inventory management.
Two practical points follow.
Most professional services are not qualifying activities. Consulting, software development for clients, marketing, recruitment and similar services do not appear on the list. When a free zone consulting company bills a mainland or overseas client, that revenue is non-qualifying. Headquarter services to related parties are the main exception relevant to services groups.
Distribution now carries a documentation burden. FTA Decision No. 6 of 2026, issued on 2 June 2026, applies to tax periods starting on or after 1 January 2026. A QFZP relying on the distribution activity must obtain an agreed-upon procedures report from its auditor showing that customers are resellers or processors and that goods entering the UAE came through a designated zone.
The report is due within 30 days after the corporate tax return deadline. If it is not filed, the distribution condition is treated as not met.
QFZP conditions: substance, de minimis and audited accounts
Each condition is a pass or fail test. These are the three that most often decide the outcome for mid-sized groups.
Adequate substance
Article 8 of Cabinet Decision No. 100 of 2023 requires a QFZP to carry out its core income-generating activities in a free zone or designated zone, with adequate assets, an adequate number of qualified full-time employees and adequate operating expenditure for each activity. Core activities can be outsourced only to another person in a free zone or designated zone, and only with adequate supervision.
The UAE's earlier Economic Substance Regulations no longer apply to financial years after 31 December 2022, so substance is now tested through corporate tax. Our note on economic substance after 2022 explains that shift.
The de minimis test
Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower (Ministerial Decision No. 229 of 2025, Article 3). Two quick illustrations:
Total revenue AED 40 million: 5% is AED 2 million, which is lower than AED 5 million, so the limit is AED 2 million.
Total revenue AED 150 million: 5% is AED 7.5 million, so the AED 5 million cap applies.
Some revenue is left out of both sides of the calculation: certain immovable property revenue in a free zone, revenue attributable to a domestic or foreign permanent establishment, and IP revenue other than qualifying IP income (Cabinet Decision No. 100 of 2023, Article 4(3)). That revenue is still taxed at 9%. It simply does not count towards the de minimis limit.
Audited financial statements and transfer pricing
Ministerial Decision No. 84 of 2025 requires every QFZP to prepare audited financial statements for tax periods starting on or after 1 January 2025, with no revenue threshold. Ministerial Decision No. 82 of 2023 continues to govern earlier periods.
A QFZP must also price related-party transactions at arm's length under Article 34 and meet the documentation rules in Article 55. For an Indian or UK subsidiary, the transactions with the parent are usually the largest related-party flows, so the transfer pricing file has to support both the UAE and the home country position.
What happens if you lose QFZP status?
A free zone company that fails any condition stops being a QFZP from the beginning of that tax period and for the following four tax periods (Ministerial Decision No. 229 of 2025, Article 5(2)). That means five years under the standard corporate tax rules, even if the problem is fixed the following month.
The same five-period effect applies if the entity elects under Article 19 to be taxed under the standard rules. That election can make sense where the business has little qualifying income anyway, because the standard regime gives the AED 375,000 nil band and access to reliefs a QFZP cannot use. Model both outcomes before deciding.
Common triggers:
a new revenue line, such as consulting to mainland clients, that pushes non-qualifying revenue over the de minimis limit;
sales to individuals by a distribution business;
a missing audit or a missing distribution agreed-upon procedures report;
staff and decision-making that, in practice, sit in India or the UK rather than the free zone.
Examples: an Indian trading subsidiary and a Dubai consulting firm
These examples are simplified to show how the rules work. They are not a conclusion on any real business.
Example 1: a ₹180 Cr Gujarat chemicals exporter. The company sets up a subsidiary in a Jebel Ali free zone. The subsidiary buys from the Indian parent, imports through the zone and sells to distributors across the GCC.
Selling to resellers in or from a designated zone can fall within the distribution activity, so that income can be qualifying. The subsidiary must confirm with its free zone authority that the zone is a designated zone, keep reseller evidence, and obtain the agreed-upon procedures report from 2026.
If it starts selling directly to mainland end users who consume the product, that revenue is non-qualifying and counts towards de minimis. If its products are industrial chemicals with a quoted price, the commodity trading activity may also be relevant, subject to the 51% test.
The purchase price from India must be at arm's length on both sides of the border. For the commercial case for a trading hub, see our guide to setting up an Indian company in Dubai as an exporter or distributor.
Example 2: a ₹60 Cr Bengaluru consulting firm. The firm opens a free zone company in Dubai to serve clients in Dubai mainland and Saudi Arabia, with AED 8 million of annual fees. Consulting is not a qualifying activity, and the clients are not free zone persons, so almost all the revenue is non-qualifying.
That is far above the de minimis limit, so the company is not a QFZP and is taxed under the standard rules: 0% on the first AED 375,000 and 9% above. That can still be a sound structure.
The free zone may have been the right choice for licensing, visas and cost, and the Dubai mainland vs free zone decision turns on much more than tax. The mistake is to project 0% in the business plan.
The Greenwolf view: commercial design first, tax follows functions
Never assume free zone means zero tax. The QFZP regime rewards specific activities carried out with real substance in a free zone. It does not reward a licence address.
Our approach starts with what the UAE entity will actually do:
What is the UAE entity for? Market access, a GCC hub, regional headquarters or contracting. The answer decides the activity.
Is that activity on the qualifying list? If not, plan for 9% and test whether the structure still makes commercial sense. Often it does.
Where do the people and decisions sit? Substance, Indian place of effective management and permanent establishment risk all follow the same facts.
What does the UAE entity pay India or the UK, and why? Transfer pricing has to reflect real functions, assets and risks in both countries.
How is it owned and funded? For an Indian parent: ODI under FEMA, the funding mix, and how cash comes back as dividends or service fees.
Can it keep qualifying every year? One new revenue line, a late audit or a missing distribution report can cost five years of status.
A UAE entity is worth setting up when it does a real commercial job. Tax follows from that, not the other way round.
Planning a move?
The free zone question is one piece of a larger design. If you are taking an Indian business into the Gulf, read our corridor guide on expanding an Indian services business to Dubai before choosing a zone, and follow Greenwolf Advisors on LinkedIn for updates as the FTA issues new decisions.
This article is general information, not advice for a specific case. Take advice on your own facts before acting.
Author – Team Greenwolf
10 October, 2026 | 14 Min Read
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