How are free zone companies taxed in UAE once corporate tax applies?

A free zone person that meets the Article 18 conditions is a qualifying free zone person. It pays 0% on qualifying income and 9% on taxable income that is not qualifying income. A free zone person that does not meet the conditions is taxed like a mainland company, with the AED 375,000 band at 0% and 9% above it.

A qualifying free zone person cannot elect small business relief, and it can also choose to opt out of the regime and be taxed at the standard rates under Article 19. Some service businesses with mostly mainland or individual customers end up better off doing that.

Article 18 sets the conditions, and they are tested every period rather than once at licence issue.

• Maintain adequate substance in the UAE: people, premises and decision-making in the free zone
• Derive qualifying income as defined by Cabinet Decision No. 100 of 2023
• Not elect to be subject to the standard corporate tax rates
• Comply with the arm's length rules and transfer pricing documentation requirements
• Prepare audited financial statements, required for every qualifying free zone person by Ministerial Decision No. 84 of 2025
• Meet the de minimis test on non-qualifying revenue

Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower. Revenue from certain immovable property transactions is left out of both sides of the calculation.

Example one: a JAFZA trading company has total revenue of AED 30 million, of which AED 1.2 million is non-qualifying. 5% is AED 1.5 million, which is lower than AED 5 million, so the limit is AED 1.5 million and the company passes. Example two: a DMCC company with AED 120 million of revenue has AED 5.5 million of non-qualifying revenue. 5% would be AED 6 million, but the lower figure is AED 5 million, so the company fails and stops being a qualifying free zone person from the start of that tax period.

Broadly, income from transactions with other free zone persons qualifies, provided the activity is not excluded and the other party is the beneficial recipient. Income from transactions with mainland or foreign parties qualifies only if it comes from a listed qualifying activity, such as manufacturing, qualifying commodity trading, logistics, holding shares, headquarters services to related parties or distribution from a designated zone.

Excluded activities include most transactions with natural persons, banking, insurance other than reinsurance, most finance and leasing, and owning or exploiting immovable property other than certain free zone commercial property. A Dubai Silicon Oasis IT firm selling software support directly to mainland companies needs to check carefully which side of that line its revenue falls.

A qualifying free zone person can elect to be taxed at the standard rates. That can suit a company whose revenue is mostly non-qualifying and small. Example: a free zone marketing agency with AED 2.4 million of revenue, nearly all from mainland clients, and taxable income of AED 350,000. Its non-qualifying revenue is far above the de minimis limit, so qualifying status would be lost in any case; under the standard rules, its income sits inside the AED 375,000 0% band and the position is certain from the start.

Opting out also removes the audit requirement that comes with qualifying status, although the free zone authority may still require audited accounts for licence renewal. The election has lasting effects, so model at least three years before making it.

The test lives in your revenue lines. Every sales invoice needs a customer classified as free zone, mainland, foreign or individual, and an activity type. HelloBooks lets you tag customers and revenue accounts this way; the AI agent applies the tag to each invoice it drafts and flags a sale to a natural person or a mainland customer outside your qualifying activities.

Ask 'what share of this year's revenue is non-qualifying?' and HelloBooks shows the running percentage against the 5% and AED 5 million limits. Your auditor and tax agent make the final call on qualifying status. Free zone groups that want their own classification rules built in can arrange it by emailing hello@hellobooks.ai.