Understanding UAE Corporate Tax for Free Zone Person

Dubai’s free zones now host thousands of regional and global groups. Dubai’s main financial free zone alone reported about 7,700 active companies by mid-2025.

In contrast, Abu Dhabi Global Market passed almost 3,000 active companies in the same period. This underlines how many regional and global groups now rely on UAE free zones for holding and service hubs. 

For boards based in Dubai, this has turned tax laws in Dubai into a structural choice. 

Basic Layout of UAE Corporate Tax

The UAE corporate tax law applies to most companies at 9 percent on taxable profits above AED 375,000.

Resident companies are taxed on worldwide income, apart from exempt items such as qualifying dividends, participation gains and some foreign branch profits.

Free zone entities are “Taxable Persons” under the same law. What changes is the rate that can apply if they meet the tests to become a Qualifying Free Zone Person, often shortened to QFZP.

For planning, this means free zone structures are no longer outside the system. They sit inside a single corporate tax framework with a different rate pattern and extra conditions.

Who Counts as a Free Zone Person

A Free Zone Person is broadly a legal entity established or registered in a UAE free zone and subject to the rules of that zone’s authority.

Key points that normally define a Free Zone Person:

• Incorporated or continued in a recognised free zone.
• Subject to the free zone’s regulatory authority and rules.
• Separate legal personality under local company regulations.

On its own, being a Free Zone Person does not guarantee any 0 percent rate. It simply opens the door to apply for Qualifying Free Zone Person status, then follow the extra conditions that keep that relief alive over time.

What is a Qualifying Free Zone Person

Under Article 3 of the corporate tax law and related cabinet and ministerial decisions, a Qualifying Free Zone Person is taxed at 0 percent on “qualifying income” and 9 percent on income that is not qualifying.

Public guidance summarises the main conditions that a Free Zone Person must meet to obtain and retain QFZP status:

• Maintain adequate substance in the UAE, matching staff, assets and expenses to activities.
• Derive qualifying income, such as certain transactions with foreign persons or other free zone entities, plus some specific regulated activities.
• Comply with transfer pricing and documentation rules.
• Not elect to be taxed at the regular 9 percent rate.

There is also a strict “de minimis” rule for non-qualifying income. If non-qualifying income is more than 5 percent of total revenue or AED 5 million, whichever is lower, the Free Zone Person can lose its QFZP status. It then becomes taxable at 9 percent on all income for that period.

This turns QFZP management into a live, year by year exercise instead of a one time registration tick box.

Typical Tax Profiles for Free Zone Persons

Once the basic rules are clear, most free zone structures fall into a few broad profiles.

Pure qualifying hubs

Some entities mainly serve foreign group companies or third party clients, or trade only with other free zone persons in ways that meet the qualifying income list. For them, most or all income may stay at 0 percent.

Mixed activity entities

Many operating companies earn a blend of local mainland income, free zone income and foreign income. In those cases, management teams often segment revenue and costs carefully so qualifying income can be ring-fenced. Non-qualifying income is taxed at 9 percent or triggers a strategic restructure.

Free zone holding companies

Holding entities that mainly own shares in other companies may rely on participation exemptions and QFZP rules together. For example, exempt dividends and gains plus 0 percent on qualifying income can make free zones attractive holding hubs for regional groups.

In each profile, the real risk is silent drift. One new local contract, one new line of service or one internal recharging policy can tilt revenue toward non-qualifying income and breach the de minimis test.

Compliance Duties and Practical Risk Points

A Free Zone Person who wants to keep QFZP relief cannot treat corporate tax as a once a year filing task. Several practical duties now matter every quarter.

• First, financial statements need to show clear segmental data that splits qualifying and non qualifying income, with matching expense allocation. Without that detail, it becomes hard to defend the 0 percent position during a review.
• Second, transfer pricing files must support margins on related party transactions, including intra group service fees, royalties and financing flows.
• Third, management must track the de minimis test continuously. Many groups now run a simple dashboard that compares non-qualifying revenue against the 5 percent or AED 5 million thresholds. This is to avoid surprises at year end.

In the middle of this, Arnifi often acts as a bridge between group finance teams and UAE regulators with our expert accounting and bookkeeping services in UAE. We map existing structures and test income against QFZP conditions.

After that, we design simple reporting packs so free zone boards see each entity’s live tax profile instead of a single percentage in a slide deck.

Strategic Questions for Free Zone Boards

With rules set, the main questions for boards and investors are strategic.

• Does the current activity mix genuinely support QFZP status, or is the entity in practice operating like a normal mainland company?
• Are there better ways to group activities so high margin qualifying income sits in a free zone hub, while local trading stays in a mainland entity?
• How will the upcoming Pillar Two and domestic minimum top up tax rules interact with any 0 percent outcomes for large multinational groups?

Answers rarely come from a single law reference. They usually come from an integrated model that links corporate tax, free zone incentives, customs rules and banking needs into one picture.

Final Thoughts for Free Zone Persons

Free zones remain an important part of the UAE’s offer, but they now work inside a detailed corporate tax system instead of sitting outside it. The label “Free Zone Person” on a trade licence is the starting point, not the final answer. Managing QFZP status means tracking substance, income mix and documentation with the same discipline other hubs apply to VAT or transfer pricing.

For many groups, Arnifi provides that discipline in a practical way. We combine technical reading of cabinet and ministerial decisions with everyday support on ledgers, contracts and EmaraTax profiles.

Handled like this, UAE corporate tax for free zone persons becomes a structured part of business design. It stops being a last minute concern after profits are already booked.

FAQs

What is the standard UAE corporate tax rate for most companies, including free zone entities?

The headline rate is 9 percent on taxable profits above AED 375,000, with a 0 percent band below that amount for resident businesses.

What is the basic tax rule for a Qualifying Free Zone Person?

A Qualifying Free Zone Person is taxed at 0 percent on qualifying income and 9 percent on any income that does not meet the qualifying list, subject to detailed conditions.

What happens if non qualifying income crosses the de minimis threshold?

If non-qualifying income exceeds 5 percent of total revenue or AED 5 million, whichever is lower, the entity can lose QFZP status and face 9 percent on all taxable income.

Do free zone companies still need full transfer pricing documentation?

Yes. Groups must prepare and maintain transfer pricing files that support related party pricing. This includes master file and local file for larger businesses in line with OECD style rules.

Why do many boards use advisers such as Arnifi for free zone tax planning?

Advisers help interpret new cabinet and ministerial decisions and monitor QFZP tests. They also align accounting data with EmaraTax returns and reduce the risk that relief is lost because structures drift over time.