The introduction of the federal corporate tax in the United Arab Emirates (UAE) has brought significant changes to the landscape for businesses operating in free zones. Under the regime, eligible companies can benefit from a 0 % corporate tax rate on their qualifying income — provided they meet certain conditions. This article will examine who qualifies and who doesn’t for this incentive, with a focus on what it means for businesses in the UAE, and why professional tax compliance and advisory services are vital in this environment.

What Is the 0 % Corporate Tax Rate and How It Applies

The default corporate tax rate in the UAE is 9 % on taxable income above AED 375,000, while income up to AED 375,000 may be subject to 0 %. However, the more attractive regime for free-zone entities is one where a company qualifies as a Qualifying Free Zone Person (QFZP) and thereby benefits from 0 % tax on its qualifying income.

For businesses operating within approved free zones, this offers a powerful competitive edge in terms of lower tax burden and enhanced profitability. That said, the path to qualifying is structured and requires adherence to a number of rules — and here is where tax compliance and advisory services play a key role.

Who Qualifies: Criteria for Being a Qualifying Free Zone Person (QFZP)

To secure the 0 % rate on qualifying income, an entity must meet all of the following core criteria:

1. Free Zone Person: The entity must be a juridical person (for example a company) incorporated, established or registered in a recognised free zone or designated zone under the corporate tax law.
2. Substance Requirements: The business must maintain adequate substance in the free zone — meaning the core income-generating activities must be carried out in the zone, with sufficient assets, employment and operating expenditure.
3. Derive Qualifying Income: The income must come from approved “qualifying activities” as defined under the law and not from excluded or non-qualifying activities.
4. No Election for Standard Rate: The entity must not have elected to be taxed under the standard corporate tax regime (i.e., at 9 %) instead of the free-zone regime.
5. Transfer Pricing/Arm’s Length Compliance: For related-party transactions and cross-border arrangements, arm’s length pricing and documentation must be maintained in accordance with the corporate tax law.
6. De Minimis Rule for Non-Qualifying Income: If the entity generates income from non-qualifying activities, that amount must not exceed the lesser of AED 5 million or 5 % of total revenue for the tax period. Exceeding this will result in losing the 0 % benefit.

When a free-zone entity satisfies all these conditions, it may be eligible for 0 % corporate tax on its qualifying income. Importantly, many businesses assume “being in a free zone = automatic 0% tax” but this is not correct — the rigorous criteria must be met.

In context, using tax compliance and advisory services from the outset helps ensure that all these eligibility criteria are understood and embedded into your free-zone business structure, thereby minimising risk of disqualification or unexpected tax liabilities.

What Qualifies as Qualifying Income — and What Doesn’t

Understanding what counts as qualifying income is essential because even if you are a QFZP, only the “qualifying” portion of income gets the 0 % rate; any non-qualifying income is subject to the standard 9 % rate.

Qualifying Income typically includes:

• Income derived from transactions with other free zone persons, provided the recipient is the beneficial recipient.
• Income from qualifying activities (that are permitted) even if the counterparty is outside the free zone, provided the activity is designated as “qualifying”.
• Income from the ownership or exploitation of eligible Intellectual Property (if covered under the regime).

Non-Qualifying Income includes (but is not limited to):

• Income from excluded activities such as banking, insurance, leasing, or real estate not located in the free zone.
• Income derived from clients in the mainland UAE (i.e., outside the free zone) in certain contexts.
• Passive income or income that fails the beneficial-recipient test or falls outside the definitions of “qualifying activity”.

If a QFZP earns non-qualifying income beyond the de minimis threshold, it risks losing the 0 % rate — the result being taxation at 9 % on its full taxable income for that year and the following four tax periods.

Hence, careful structuring of business activities, contracts, trading counterparties and revenue streams is critical. Engaging tax compliance and advisory services helps map qualifying vs non-qualifying income, maintain documentation and ensure reporting is accurate.

Who Doesn’t Qualify — Common Pitfalls & Risks

Despite being located in a free zone, a company may not qualify for the 0 % tax regime if it fails to meet any one of the core criteria. Key risks include:

• Insufficient substance: If the free zone entity is essentially a shell, lacks sufficient employees, office, assets or activities in the zone, it may fail the substance test and be disqualified.
• Earnings from excluded/non-qualifying activities: For example, a free zone company providing domestic consulting services to UAE mainland clients may generate non-qualifying income and thus lose the benefit.
• Exceeding non-qualifying revenue threshold: If non-qualifying income > AED 5 million or > 5 % of total revenue, the entity loses its 0 % status.
• Electing for standard regime: If the entity opts into the standard tax regime (9 %) then the special free zone benefit is foregone.
• Failure to register or file returns: Some companies assume that because they have no income or are dormant they don’t need to follow the rules — this is incorrect. Even dormant entities must register and file the corporate tax return.

Hence, not all free-zone businesses automatically benefit from 0 % corporate tax; eligibility is conditional. This is where robust tax compliance and advisory services become not just useful but essential — to ensure risk is managed, eligibility is maintained, and the business remains aligned with evolving regulations.

Practical Implications for UAE Free Zone Businesses

For businesses operating in the UAE free zones, the availability of a 0 % corporate tax rate on qualifying income is a powerful incentive — but only when the structure is properly set up and maintained. Here are key implications:

• Planning matters: From the moment of company incorporation, consider the nature of your business activities, your target clients (free zone vs mainland vs international), and ensure that substance is physically and operationally established in the free zone.
• Income segmentation is critical: Businesses must identify and track income streams clearly — separating qualifying from non-qualifying income, and monitoring the de minimis threshold.
• Ongoing compliance burden: Annual returns, audited financial statements, transfer pricing documentation, beneficial‐owner disclosures and other compliance obligations must be met to retain the benefit.
• Revenue from mainland clients is a red flag: Income from UAE mainland clients often triggers non-qualifying income classification. Businesses need to structure contracts and operations to avoid jeopardising the 0 % rate.
• Risk of losing benefit for multiple years: If eligibility is lost, the entity may be subject to standard tax (9 %) for the current year and four subsequent years — a major cost implication.
• Engage professional support: Forming and maintaining eligibility for this regime is complex; accessing expert tax compliance and advisory services helps you navigate the rules, implement robust systems, and manage submissions to the Federal Tax Authority.

Also Read: How Corporate Tax Affects Business Restructuring in UAE