The myth
"We're in DMCC / JAFZA / DIFC, so corporate tax doesn't apply to us." This was never quite true, and since June 2023 it is definitively false.
Free zone is not tax free
The most expensive myth in UAE tax: that a free zone licence means no corporate tax. Free zone companies must register and file every year — and the 0% rate for Qualifying Free Zone Persons only applies if every condition is met. Here's how it actually works.
Start here
Plenty of free zone businesses still operate on pre-2023 assumptions. The law changed; the assumptions didn't.
"We're in DMCC / JAFZA / DIFC, so corporate tax doesn't apply to us." This was never quite true, and since June 2023 it is definitively false.
Free zone companies must register for corporate tax and file a return every year — including years where the tax bill is zero.
A Qualifying Free Zone Person (QFZP) pays 0% on qualifying income. But "qualifying" is a defined term with real conditions — not a label you claim and hope.
We prepare workings, schedules and compliance-ready records. For regulated representation before the FTA we work with registered UAE tax partners.
The conditions
All of these must hold, every year. Fail one and the 0% is gone for that period:
The key distinction
The 0% doesn't attach to the company — it attaches to the income. The same company can have both kinds in one year.
| Qualifying income | Non-qualifying income | |
|---|---|---|
| Typical source | Transactions with other free zone persons; defined qualifying activities | Mainland (non-free-zone) customers; excluded activities |
| Tax rate (QFZP) | 0% | 9% above the AED 375,000 threshold |
| Example | A JAFZA logistics firm serving other JAFZA companies | The same firm delivering to mainland Dubai clients |
This is where free zone businesses get surprised: a company can be a QFZP and still owe 9% on part of its profit. The mainland portion of the business is taxed like any mainland business — the AED 375,000 0% band applies to it, then 9% above. Income classification is a workings exercise, not a feeling: it needs to be documented from your sales records, which is another reason clean monthly books matter.
Worked example
Take a JAFZA logistics company: AED 5 million revenue from other free zone clients, plus AED 1.2 million from mainland customers.
| Stream | Taxable income (AED) | Tax |
|---|---|---|
| Free zone clients (qualifying) | 2,000,000 | 0% → AED 0 |
| Mainland clients (non-qualifying) | 600,000 | 0% on first 375,000; 9% on 225,000 → AED 20,250 |
| Total corporate tax | AED 20,250 | |
The company is a QFZP, keeps audited accounts, maintains substance — and still pays AED 20,250, because the mainland stream is taxed normally. Two practical notes: first, the split between the streams has to be real and documented — you can't just declare the profitable half "qualifying." Second, if the mainland stream grows year after year, the company's effective tax position drifts toward a mainland company's. Revisit the classification every year; don't copy last year's workings.
Avoid these
"We're free zone" is not a registration strategy. The AED 10,000 late-registration penalty applies to free zone companies too.
Claiming QFZP status without audited statements fails one of the core conditions. Budget for the audit — it's part of the 0%, not optional.
Revenue from mainland customers doesn't become qualifying because you'd like it to. Misclassification is exactly what a review will find.
A licence with no real operations behind it is the fastest way to lose QFZP status. Substance means people and activity in the zone.
Even a fully qualifying, 0%-tax year needs a filed return. Zero tax and zero filing are different things — see our penalties guide.
Income mix changes: a new mainland contract shifts the qualifying/non-qualifying split. Re-do the classification every year from the actual sales ledger.
A strategic question
Not every free zone company should chase the 0%. Run this decision honestly.
Most of your income is genuinely qualifying, you already keep audited accounts, and you have real substance in the zone. Then the 0% is worth protecting — the compliance cost is mostly behind you already.
Your mainland revenue is growing fast, your "substance" is a flexi-desk, or an audit would cost more than the tax saved. Compare the audit and compliance cost against 9% on the non-qualifying portion before committing.
Claiming QFZP status without meeting the conditions doesn't defer the tax — it converts it into tax plus penalties when reviewed. If the conditions don't fit, file as a regular taxpayer and sleep well.
Keep the 0%
Not sure your income is genuinely qualifying? That's a workings review, not a guess — we'll look at it free in a Finance Review.
Review my free zone position
FAQs
Yes. Every free zone company must register for corporate tax and file a return annually — including years where the tax due is zero. The filing obligation is separate from the tax bill.
Broadly, income from transactions with other free zone persons and from defined qualifying activities. Income from mainland customers is generally non-qualifying and taxed at 9% above the threshold. The exact boundaries are detailed — confirm your streams against the FTA guidance rather than assuming.
Yes — the 0%/9% bands apply to taxable income that isn’t covered by the QFZP 0%, such as non-qualifying mainland income. The first AED 375,000 of that taxable income is taxed at 0%, and 9% applies above it.
Possibly — QFZP status is about meeting all the conditions, not about where most revenue comes from. But your mainland income will be non-qualifying and taxed at 9% above the threshold. Get the classification done properly before you rely on any 0%.
Real operations in the free zone: people, premises and activity commensurate with the business you’re running there. It’s assessed in substance, not on paper — a licence alone isn’t it. If you’re unsure, document what you have and get it reviewed.
No. Qualifying Free Zone Persons are excluded from Small Business Relief — the two 0% regimes don’t combine. See our Small Business Relief guide for how that regime works.
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