Do Free Zone Companies Pay Tax in Dubai?

For many years, the UAE’s free zones were famous for offering a tax-free environment. This included no corporate tax, no income tax, and 100% foreign ownership. This model helped attract thousands of businesses and billions in foreign investment. However, everything changed when the UAE introduced a federal Corporate Tax (CT) law, effective from June 1, 2023. This new law brings a crucial question: do free zone companies now pay company tax?

The answer is yes, but with a notable advantage. Free zone companies can still qualify for a 0% tax rate on specific income if they meet the conditions to become a Qualifying Free Zone Person (QFZP). Businesses must also file their company tax online through the Federal Tax Authority (FTA) to comply.

This blog will walk you through these new tax rules, what they mean for your business, and what the eligibility criteria are.

Free zones are special economic areas in the UAE that offer various benefits to support foreign investors and entrepreneurs. Dubai has over 20 free zones, each with its own focus.

• Core Advantages: Free zones offer 100% foreign ownership, full repatriation of profits, no customs duties on goods, and simplified business setup processes. The goal is to create specialized hubs for different industries, such as technology, finance, media, and logistics.
• Typical Industry Types: Companies in free zones typically engage in international trade, services, or manufacturing. For example, Dubai Internet City (DIC) hosts technology firms, while Jebel Ali Free Zone (JAFZA) is a global leader in logistics and trading.

Free zone companies operate under the rules of their specific free zone authority. But the new corporate tax law now applies to all companies in the UAE, including those in free zones, making it important to understand the process of business setup in a free zone.    

The UAE’s new corporate tax law marks a major shift, aligning the country’s taxation framework with global standards and enhancing transparency for businesses

The law introduced a progressive tax rate

• 0% tax rate: Companies with taxable income up to AED 375,000 pay zero tax. This rate supports small businesses and startups.
• 9% tax rate: Companies with taxable income over AED 375,000 pay a 9% Dubai company tax rate.

For free zone companies, only Qualifying Free Zone Persons (QFZPs) can benefit from 0% tax on qualifying income. They must also submit company tax online to maintain compliance. They do not automatically get the AED 375,000 small-business exemption that mainland companies can use.

This tax applies to all mainland companies and some free zone companies. It is important to know which rules apply to your business and income.

Free Zone Companies and Corporate Tax

Free zone companies in the UAE no longer enjoy automatic tax exemptions. Under the new corporate tax law, these businesses can benefit from a 0% corporate tax rate, but only if they meet the criteria to become a Qualifying Free Zone Person (QFZP).

Becoming a QFZP is not automatic and requires the company to follow specific rules set by the authorities. These rules are designed to ensure that the business has a genuine presence in the free zone and conducts its main activities from there. Companies must maintain a physical office, have employees, and show that their core business operations are actually carried out within the free zone.

Even when a company qualifies, certain types of income, such as earnings from non-qualifying activities or business conducted in the mainland UAE, may still be taxed at the standard 9% rate. Therefore, understanding these rules and staying compliant is essential. Failing to meet QFZP conditions can lead to losing the 0% tax benefit, which could significantly increase the company’s overall tax liability.

Qualifying Free Zone Person—Definition

A company becomes a Qualifying Free Zone Person if it meets a set of criteria. The company must:

• Maintain Adequate Substance: The company must have a real business presence in the free zone. This includes having a physical office, employees, and conducting its core business activities from there. The FTA wants to see a genuine operation, not just a license for tax purposes.
• Derive Qualifying Income: The company’s primary income must come from “Qualifying Activities.” These activities include trading goods with other free zone or international companies, manufacturing products, providing logistics services, or offering headquarters and support services.
• Not Exceed De-Minimis Threshold: Income from non-qualifying activities must stay below AED 5 million or 5% of total revenue, whichever is lower. If it goes above this limit, the company loses its QFZP status for that tax year and the next four years, and all its income during this time will be taxed at the standard corporate tax rates.
• Comply with Transfer Pricing Rules: The company must deal with related parties at “arm’s length,” meaning transactions should be at fair market value.
• File a Corporate Tax Return: The company must register with the FTA and file a company tax report on time.
• Prepare Audited Financial Statements: The company must maintain audited financial records.

The FTA has stated that failing to meet these conditions for one year can lead to losing the 0% tax benefit for the next four years.

What Income Is Taxed at 9%?

Even a Qualifying Free Zone Person can have some income taxed at a 9% rate. This happens when the income is from “Excluded Activities” or when it comes from non-qualifying activities that exceed the “de-minimis” threshold.

• Non-Qualifying Activities: Income from these activities is always taxed at 9%. They include transactions with individuals and income from the mainland UAE.
• Mainland UAE Income: Income a free zone company earns from the mainland is generally subject to the standard 9% tax rate. The income is taxed at 9% even if a free zone company works with a mainland branch.
• Exceeding Thresholds: If a company’s income from non-qualifying activities goes above the de-minimis threshold (AED 5 million or 5% of total revenue), the company loses its Qualifying Free Zone Person status for the entire tax period. All of its income is then taxed at the standard 9% rate.

Important Points for Businesses in Free Zones

Here are some key points free zone companies should keep in mind to stay compliant and protect their 0% tax benefit.

• Show Real Operations: Just having a mailbox isn’t enough. The FTA and recent ministerial decisions expect companies to have real business activities, including an office, staff, and ongoing operations.
• Keep Accounting Separate: Free zone companies should clearly separate qualifying and non-qualifying income. This makes it easier to prepare accurate corporate tax returns and apply the 0% tax rate correctly.
• Large Multinationals: Very large multinational companies should note the 15% global minimum tax (Pillar Two). This is separate from the free zone rules and may apply on top of UAE corporate tax.
• Seek Expert Advice: The rules for Qualifying Free Zone Persons are detailed, and recent clarifications (2024–2025) add complexity. A tax advisor familiar with UAE corporate tax and free zone structures can help ensure compliance and confirm eligibility for the 0% tax rate.

The government has provided a clear list of what counts as a “qualifying activity.” On September 3, 2025, the UAE Ministry of Finance issued Ministerial Decision No. (229) of 2025 to clarify this list further.

• Qualifying Activities (Taxed at 0%):

  • Trading: Trading of qualifying commodities with other free zone companies or internationally.
  • Manufacturing and Processing: Making and processing goods in a free zone.
  • Logistics Services: Providing warehousing, shipping, and storage services.
  • Holding Shares and Securities: Owning and managing shares in other companies for investment purposes.
  • Reinsurance Services: Providing insurance to other insurance companies.
  • Treasury Services: Managing financial operations for related companies.
  • Headquarters Services: Providing management and support services to a group of related companies.
  • Financing and Leasing of Aircraft: Providing loans or leasing aircraft to related or qualifying businesses.
  • Distribution of Goods: In or from a Designated Zone.

• Excluded Activities (Taxed at 9%):

  • Transactions with Individuals: Any income from transactions with individuals is usually excluded.
  • Banking and Insurance: These activities are generally taxed at the standard 9% rate.
  • Ownership of Real Estate: Income from owning property in the free zone is excluded unless it is a transaction with another free zone company.

All free zone companies have strict tax compliance requirements. This is true even if they have a 0% tax rate.

• Registration with FTA: Every free zone company must register for corporate tax with the Federal Tax Authority (FTA). They must do this through the FTA’s online portal, EmaraTax. During registration, the company gets a company tax number, which is a unique identification number.
• Annual Tax Return: A Qualifying Free Zone Person must file an annual company tax return. They must do this within nine months of their financial year-end. For companies with a fiscal year ending on December 31, 2024, the deadline to file their first return is September 30, 2025. This return tells the FTA how much income the company earned and proves its qualifying status.
• Substance Requirements: Companies must show they have a real presence. The FTA may audit companies to check for things like employee payroll, office lease agreements, and operational records. They want to ensure the business has adequate substance to qualify for the 0% rate.

The UAE’s new corporate tax law represents a big change. Free zone companies are no longer automatically tax-free. However, the government has provided a clear path for them to benefit from a 0% tax rate on their main business income. To get this benefit, they must meet the criteria for a Qualifying Free Zone Person. This includes having a real business presence and focusing on “qualifying activities.”

For companies in Dubai free zones, understanding these rules is essential. A single mistake, like earning too much non-qualifying income, can result in the loss of the 0% tax rate. It is important to seek professional company tax services to ensure full compliance. They can help you register with the FTA, file your company tax return online, and manage your tax obligations correctly. The new law strengthens the UAE’s position on the global stage while preserving the core benefits that make its free zones attractive. 

For expert guidance on staying compliant and maximizing your 0% tax benefits, businesses can rely on Safe Ledger’s professional services.