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Free Zone Corporate Tax in UAE

Corporate Tax in UAE Free Zones – What You Need to Know

For decades, UAE free zones have been a major draw for global investors, offering full foreign ownership, streamlined business setup, and attractive tax incentives. With the introduction of corporate tax in the UAE, many business owners wondered whether the benefits of operating in a free zone would remain.

The good news is that the UAE government has maintained its commitment to supporting free zones. Qualifying free zone companies can still enjoy 0% corporate tax on qualifying income — provided they meet certain conditions and comply with the new regulations.

Understanding Free Zone Corporate Tax in UAE

The UAE’s new Corporate Tax Law came into effect to align with international tax standards and enhance transparency. The general corporate tax rate is 9%, but free zone entities can benefit from a 0% rate on income that meets the Federal Tax Authority’s (FTA) definition of qualifying income.

This dual system allows the UAE to maintain its competitive free zone environment while ensuring responsible business practices across the country.

Key Takeaways

  • 0% corporate tax on qualifying income earned by eligible free zone companies

  • 9% corporate tax applies to non-qualifying income, including most mainland transactions

  •  Companies must maintain audited financial statements, economic substance, and transfer pricing compliance to retain the 0% benefit

What Is Qualifying Income?

Under the rules for Free Zone Corporate Tax in UAE, qualifying income may include:

  • Income from transactions with other free zone entities

  • Foreign-sourced income and export-related activities

  • Certain passive income, such as dividends, capital gains, and interest from qualifying investments

By contrast, income derived from mainland UAE customers or non-qualifying activities will be taxed at the standard 9% rate. Businesses must clearly segregate qualifying and non-qualifying income in their accounting and reporting.

Compliance Requirements for Free Zone Companies

The 0% tax rate for free zone entities is not automatic — businesses must meet ongoing compliance obligations, including:

  • Preparing audited financial statements annually

  • Demonstrating economic substance in the UAE

  • Maintaining transfer pricing documentation for related-party transactions

Failure to meet these requirements can result in disqualification from the 0% tax benefit, leading to a 9% corporate tax on all income.

How to Prepare Your Business for Free Zone Corporate Tax in UAE

To make the most of the new framework, businesses should:

  • Conduct a tax impact analysis to determine qualifying income

  • Review contracts and operational structures for compliance with FTA guidelines

  • Engage professional tax advisors to support reporting, documentation, and compliance

The implementation of Free Zone Corporate Tax in UAE represents an evolution in the country’s business landscape. While the new tax system introduces more structure and accountability, it preserves the key advantages that make UAE free zones globally competitive.

With the right structuring, compliance, and expert guidance, free zone businesses can continue to enjoy 0% tax on qualifying income, ensuring long-term growth and stability.

At PFA Global, we help businesses navigate the complexities of the UAE’s corporate tax framework. Our team of experts ensures that your free zone operations remain compliant, tax-efficient, and strategically aligned with the latest FTA regulations.

 

 

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