Free Zone vs. Mainland Corporate Tax in the UAE

Free Zone vs. Mainland Corporate Tax in the UAE: Key Differences Explained

After the introduction of the UAE Corporate Tax, one of the most common questions among business owners is: “Is it better to operate from a Free Zone or the Mainland from a Corporate Tax perspective?”

While both Free Zone and Mainland companies are subject to the UAE Corporate Tax Law, the tax treatment, compliance obligations, and benefits differ significantly.

In this blog, we explain the key Corporate Tax differences between Free Zone and Mainland companies in the UAE.

 Disclaimer: The examples and companies mentioned in this blog are fictional and used solely for educational purposes only.

Legal Framework

Corporate Tax in the UAE is governed by the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, its relevant Cabinet and Ministerial Decisions, along with the FTA Public Clarifications and Guides.

Both the Free Zone and Mainland entities are governed by the same law.

Corporate Tax for Mainland Companies

The Corporate tax rate in the UAE for Mainland companies is subject to:

• 0% Corporate Tax on taxable income up to AED 375,000

• 9% Corporate Tax on taxable income exceeding AED 375,000

Points to be noted for Mainland Companies

✔ There is no concept of “qualifying” or “non-qualifying” income

✔ Entire taxable income subject to Corporate Tax

✔ No geographic or activity-based tax benefits can be availed

✔ Simpler classification compared to Free Zone rules

Corporate Tax for Free Zone Companies

Compared to the Mainland Companies, the Free Zone companies may benefit from a 0% Corporate Tax rate, subject to meet the following conditions of a Qualifying Free Zone Person.

Qualifying Free Zone Person (QFZP)

A Free Zone company that satisfies the below-mentioned conditions are termed a Qualifying Free Zone Person (QFZP), and they can enjoy 0% Corporate Tax on its Qualifying Income:

• Maintains adequate economic substance in the Free Zone

• Earns Qualifying Income only

• Does not conduct Excluded Activities

• Complies with transfer pricing rules

• Files Corporate Tax returns annually

Tax Rates for Free Zone Companies

Since there is a classification of free zone companies and qualifying and regular, the Corporate Tax rate also differs accordingly:

• 0% on Qualifying Income

• 9% on Non-Qualifying Income

Free Zone vs. Mainland – Corporate Tax Comparison

Practical Examples

Example 1 – Free Zone Trading Company

A Free Zone company trades goods outside the UAE and only with Free Zone entities.

• Entire income qualifies as Qualifying Income and qualifies for the 0% Corporate Tax

Example 2 – Free Zone Company Dealing with Mainland

A Free Zone consultancy provides services directly to Mainland clients.

• Income generated will be considered as Non-Qualifying Income and the tax rate of 9% will be applicable.

Example 3 – Mainland Company

A Mainland logistics company earns AED 1 million in taxable profit.

With regard to the tax applicability, taxable profit up to AED 375,000 will be taxed at 0% and the portion above that will be taxed at 9%

Common Misconceptions

Despite of various guides and clarifications, there are certain misconceptions rolling around, like:

• All Free Zone companies enjoy 0% tax

• Free Zone means total tax exemption

• Mainland companies are always worse off

• No Corporate Tax filing required for Free Zones

Make a note that all of the above are incorrect statements.

Which Is Better: Free Zone or Mainland?

The answer to this question depends on the following aspects:

• Nature of your business activity

• Location of customers

• Revenue sources

• Cross-border transactions

• Compliance capability

However in general Free Zones are suitable for:

• Export-oriented businesses

• Holding companies

• International trading & services

And Mainland is suitable for:

• UAE-focused businesses

• Government contracts

• Retail and local service providers

How Flyingcolour Tax Consultant Can Help?

We being one of the market experts, we assist businesses with:

• Free Zone Vs Mainland Tax Analysis

• Corporate Tax registration & filings

• Qualifying Income Assessment

• Transfer pricing compliance

• Business restructuring & advisory

Frequently Asked Questions (FAQs)

1 Are Free Zone companies exempt from Corporate Tax?

Free zone companies are not exempt from Corporate Tax, however, subject to qualifying for the conditions of Qualifying Income they can enjoy 0% tax.

2 Do Free Zone companies need to file Corporate Tax returns?

Yes. Annual tax filing is mandatory for all free zone entities, even if their tax payable is zero.

3 Can a Free Zone company do business with Mainland companies?

Certainly Yes, but income may be taxed at 9% unless structured correctly.

4 Are Mainland companies eligible for 0% Corporate Tax?

The tax rate applicable for mainland companies is 9%; however if the taxable income is less than AED 3750,000, yes they enjoy a 0% tax.

5 Can a company switch from Free Zone to Mainland for tax reasons?

Yes, but restructuring requires proper tax and legal planning.

To learn more about Free Zone vs. Mainland Corporate Tax in the UAE, 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.