UAE Free Zone 0% Tax: What You Need to Know

Since the UAE corporate tax regime began on 1 June 2023, the headline rate is 9% for most companies. However, certain free zone companies can still benefit from a 0% corporate tax rate on qualifying income provided they satisfy a clear set of conditions. This guide explains those conditions, what counts as qualifying income, which activities are excluded, and the practical steps free zone entities should take to preserve the 0% treatment.

Who Can Get 0% Corporate Tax?

A free zone entity can benefit from a 0% corporate tax rate only if it is a qualifying free zone person and meets a set of statutory requirements. Note that eligibility can depend on the specific free zone authority, so entities should confirm status with their free zone regulator.

Six Conditions to Qualify for 0% Corporate Tax

To be treated as a qualifying free zone person and apply the zero rate to qualifying income, an entity must meet all of the following:

1. Be established or registered in an eligible free zone. Confirm eligibility with the relevant free zone authority.
2. Maintain adequate substance in the UAE. Core income-generating activities must be carried out in the free zone, supported by assets, staff, and operating expenditure.
3. Derive qualifying income. Qualifying income generally includes income from qualifying activities and certain transactions with other free zone persons and non-free zone persons (subject to exclusions).
4. Not elect to be taxed at the standard 9% rate. The entity must not have opted into the mainland/regular tax regime for that income.
5. Comply with the arm’s length principle and transfer pricing documentation rules. Transactions with related parties must be at market terms and properly documented.
6. Prepare audited financial statements. Audited accounts must be maintained and used for corporate tax purposes.

A Quick Checklist

• Confirm free zone eligibility with the relevant authority.
• Ensure core activities are actually performed in the free zone.
• Maintain employees, assets, and operating spend consistent with the business scale.
• Keep transfer pricing policies and documentation up to date.
• Prepare and retain audited financial statements.

What Does “Adequate Substance” Mean?

Adequate substance is not just a buzzword. It means the company genuinely operates in the free zone and has the physical, human, and financial presence to support the income it reports there. Typical indicators include:

• Core income-generating activities performed within the free zone.
• An appropriate level of assets located in the UAE for the business activity.
• A sufficient number of qualified employees based in the UAE for the scale and nature of the activity.
• Operating expenditure that reflects actual local operations.
• Outsourcing of activities is permitted but generally only to related parties or third parties that themselves have the necessary substance (and usually located in a free zone).

Qualifying Income and Qualifying Activities

Qualifying income is income derived from qualifying activities carried out by the free zone entity. The scope is intentionally focused on activities commonly performed in free zones:

• Manufacturing and processing of goods and materials
• Holding shares and other securities (holding companies)
• Headquarter services provided to related parties
• Logistics and distribution (subject to conditions)
• Reinsurance services
• Ownership, management and operation of ships
• Financing and leasing of aircraft and engines (certain types)
• Fund management and wealth/investment management where regulated by UAE competent authorities
• Distribution in or from a designated zone that meets the relevant conditions
• Activities that are ancillary or complementary to the above

Activities That are Excluded from Qualifying Income

Certain activities are treated as excluded and do not benefit from the 0% rate even if conducted by a free zone entity. Key exclusions include:

• Banking activities subject to regulatory oversight.
• Insurance activities under regulatory supervision (reinsurance is typically excluded from this exclusion).
• Finance and leasing activities subject to regulatory oversight, except for specific treasury services to related parties and financing/leasing of aircraft in defined circumstances.
• Ownership or exploitation of immovable property other than commercial property located in a free zone that is transacted with other free zone persons.
• Ownership or exploitation of intellectual property assets (IP income is generally excluded from the qualifying list).
• Income from transactions with natural persons (individuals) is generally excluded, unless those transactions relate directly to qualifying activities.

The De Minimis Test (Non-Qualifying Revenue Limit)

Even where a company derives mostly qualifying income, it will also often have some non-qualifying revenue. The de minimis rule limits how much non-qualifying revenue a qualifying free zone person can earn in a tax period and still keep the 0% rate on qualifying income.

De Minimis Threshold: Non-qualifying revenue must not exceed the lower of:

1. 5% of the entity’s total revenue for the tax period, or
2. A fixed amount of AED 5,000,000.

Examples

• If total revenue = AED 100,000,000, 5% = AED 5,000,000 → allowable non-qualifying revenue = AED 5,000,000 (the lower of 5% or AED 5m is AED 5m).
• If total revenue = AED 50,000,000, 5% = AED 2,500,000 → allowable non-qualifying revenue = AED 2,500,000 (this is lower than AED 5m).

Transfer Pricing and Documentation

Qualifying free zone persons must comply with the arm’s length principle when transacting with related parties and must keep transfer pricing documentation. This includes:

• Supporting evidence that related-party transactions are priced at market terms.
• Transfer pricing studies and policies are proportionate to the size and complexity of the taxpayer.
• Records needed to justify the allocation of income between jurisdictions.

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