Understanding UAE Corporate Tax Exemptions in Designated Zones
As of June 1, 2023, the UAE implemented a federal Corporate Tax at a standard rate of 9% for taxable income exceeding AED 375,000. However, businesses operating within designated zones may still benefit from a 0% corporate tax rate, provided they meet specific conditions outlined in the UAE Corporate Tax Law.
This guide will help you understand:
- What constitutes qualifying income
- Criteria for being a Qualifying Free Zone Person (QFZP)
- List of designated zones
- Compliance requirements to maintain tax exemption
- Recent updates and clarifications from the Federal Tax Authority (FTA)
What Is the UAE Corporate Tax Law?
The UAE Corporate Tax Law, enacted under Federal Decree-Law No. 47 of 2022, introduced a federal corporate tax regime applicable to business profits.
Key highlights include:
- 0% tax rate for taxable income up to AED 375,000
- 9% tax rate for taxable income exceeding AED 375,000
- Special provisions for businesses operating within designated zones
The law aims to align the UAE with global tax standards while maintaining its attractiveness as a business hub.
What Are Designated Zones?
Designated zones are specific areas approved by the UAE Cabinet that offer tax incentives to businesses. Operating within these zones can provide benefits such as:
- 0% corporate tax on qualifying income
- 100% foreign ownership
- Full repatriation of profits and capital
- Exemptions from import and export duties
Some of the prominent designated zones include:
- Jebel Ali Free Zone (JAFZA)
- Dubai Multi Commodities Centre (DMCC)
- Abu Dhabi Global Market (ADGM)
- Ras Al Khaimah Economic Zone (RAKEZ)
- Sharjah Airport International Free Zone (SAIF Zone)
Each free zone has its own regulations and permitted activities, so it's essential to consult with the respective authority or a tax consultant to ensure compliance.
What Is Qualifying Income Under UAE Corporate Tax?
Under Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023, the definition of "Qualifying Income" for a Qualifying Free Zone Person has been expanded to explicitly include income derived from the ownership or exploitation of Qualifying Intellectual Property (QIP)
A Qualifying Free Zone Person's Qualifying Income includes:
➤ Income from transactions with other Free Zone Persons, excluding income from Excluded Activities.
➤ Income from transactions with Non-Free Zone Persons, provided the income is derived from Qualifying Activities.
➤ Income derived from the ownership or exploitation of Qualifying Intellectual Property (QIP), as specified in Article 7 of Cabinet Decision No. 100 of 2023.
➤ Any other income, provided the de minimis requirements are met
Qualifying activities typically encompass:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of Qualifying Commodities (including physical and derivative trading of metals, minerals, energy, and agricultural commodities on recognized exchanges)
- Holding of shares and other securities for investment purposes
- Ownership, management, and operation of ships
- Reinsurance services
- Fund management services
- Wealth and investment management services
- Headquarter services to Related Parties
- Treasury and financing services to Related Parties
- Financing and leasing of aircraft
- Distribution of goods or materials in or from a Designated Zone
- Logistics services
- Any activities ancillary to the above Qualifying Activities
It's important to note that income from excluded activities, such as banking, insurance, finance, leasing, and ownership or exploitation of immovable property (other than commercial property located in a free zone), does not qualify for the 0% tax rate.
Criteria for Being a Qualifying Free Zone Person (QFZP)
To benefit from the 0% corporate tax rate, a free zone entity must meet the following conditions:
1. Be a Free Zone Person: A juridical person incorporated, established, or registered in a free zone, including a branch of a non-resident person registered in a free zone.
2. Maintain Adequate Substance: Conduct core income-generating activities in a free zone and have adequate assets, qualified employees, and operating expenditures.
3. Derive Qualifying Income: As defined in the relevant Cabinet and Ministerial Decisions.
4. Not Have Elected to Be Subject to the Standard Corporate Tax Regime: A QFZP must not have opted to be taxed at the standard 9% rate.
5. Comply with Transfer Pricing Rules and Documentation Requirements: Ensure that transactions with related parties are conducted at arm's length and maintain proper documentation.
6. Meet the De Minimis Requirements: Non-qualifying revenue should not exceed 5% of total revenue or AED 5 million, whichever is lower.
7. Prepare Audited Financial Statements: Maintain audited financial statements in accordance with International Financial Reporting Standards (IFRS).
Failure to meet any of these conditions will result in the entity being subject to the standard 9% corporate tax rate for the relevant tax period and the subsequent four tax periods.
Recent Updates and Clarifications
In 2025, several updates have been introduced to provide clarity and additional compliance requirements:
- 15% Minimum Tax for Large Multinationals: Starting January 2025, the UAE will implement a 15% minimum top-up tax on large multinational companies with consolidated global revenues exceeding EUR 750 million, in line with the OECD's global minimum tax agreement.
- Distribution Activities in Free Zones: The Ministry of Finance is expected to issue detailed guidance on how free zone distribution businesses can continue to benefit from the 0% corporate tax rate on qualifying income.
- De Minimis Rule: Free zone entities must ensure that non-qualifying income does not exceed the de minimis threshold to maintain their QFZP status.
Compliance Requirements
To maintain the 0% corporate tax rate, QFZPS must adhere to the following compliance requirements:
- Register with the FTA: Even if exempt, businesses must register for corporate tax with the Federal Tax Authority.
- File Annual Corporate Tax Returns: Submit returns within nine months from the end of the relevant tax period.
- Maintain Proper Documentation: Keep records of all transactions, especially those with related parties, to comply with transfer pricing regulations.
- Prepare Audited Financial Statements: Ensure financial statements are audited and prepared in accordance with IFRS.
How Flyingcolour® Tax Consultants Can Help You?
Navigating the complexities of the UAE corporate tax regime can be challenging. Flyingcolour® Tax Consultants offer expert services to help your business:
- Determine eligibility for QFZP status
- Ensure compliance with all FTA requirements
- Maintain proper documentation and audited financial statements
- Provide guidance on transfer pricing and related party transactions
- Assist with corporate tax registration and return filing
Our team of experienced professionals is dedicated to helping your business maximise tax benefits while ensuring full compliance with UAE laws.
Frequently Asked Questions (FAQs)
Q1: What happens if a company fails to meet the Qualifying Free Zone Person (QFZP) conditions?
A: The company will lose its eligibility for the 0% corporate tax rate and will be subject to the standard 9% corporate tax on all taxable income, not just non-qualifying income, for the current and next four tax periods.
Q2: Is it mandatory to register for corporate tax even if my business qualifies for 0%?
A: Yes. All businesses-including those expecting to pay 0% tax, must register with the Federal Tax Authority (FTA) and obtain a Tax Registration Number (TRN). Registration is mandatory, even if no tax is due.
Q3: What is the de minimis requirement for free zone companies?
A: If a QFZP earns non-qualifying income, it must not exceed either 5% of total revenue or AED 5 million (whichever is lower). If it exceeds this threshold, the entity will no longer be considered a QFZP for that year and the next four tax periods.
Q4: Can I hold property in the UAE through a free zone company and still enjoy tax exemption?
A: No. Income generated from real estate held (except commercial property within the free zone leased to other free zone businesses) is considered excluded income and is subject to 9% tax.
Q5: What documents are required to prove I meet the QFZP criteria?
A: You will need:
- Valid trade license from a designated zone
- Audited financial statements
- Proof of adequate substance (e.g., office lease, employee contracts, local expenses)
- Documentation of qualifying income sources
- Transfer pricing documentation, if applicable
To learn more about Does Your Business Activity Qualify for 0% Corporate Tax in UAE Designated Zones?, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.