BUSINESS SETUP · CORPORATE TAX
The free zone 0 percent myth, corrected
A free zone company is fully inside the UAE corporate tax net. It must register. The 0 percent rate is conditional, and a typical consultancy fails the conditions without realising it.
THE BASE RULES
Rates, thresholds and deadlines.
9%
Corporate tax
Federal Decree-Law No. 47 of 2022. Confirmed
AED 375,000
0 percent band
On the first AED 375,000 of taxable income. Confirmed
3 months
Registration deadline
From incorporation, FTA Decision No. 3 of 2024. Confirmed
9 months
Return and payment
From financial year end. Confirmed
| Item | Position | Status |
|---|---|---|
| Effective date | Financial years starting on or after 1 June 2023 | ConfirmedConfirmed |
| Small Business Relief | Revenue below AED 3 million gives an effective 0 percent. Ministerial Decision No. 73 of 2023, extended by Ministerial Decision No. 131 of 2026, announced 7 August 2026, to tax periods ending on or before 31 December 2029, previously capped at 31 December 2026 | ConfirmedConfirmed |
| Late registration penalty | AED 10,000 fixed. Conditional waiver cancels or refunds it where the first return or annual declaration is filed within seven months of the first tax period end, per FTA Public Clarification CTP006 of 17 July 2025. The FTA reported on 14 May 2026 that beneficiaries had exceeded 68,600 taxable persons and were expected to reach 91,000 | ConfirmedConfirmed |
| VAT | 5 percent standard. Mandatory registration above AED 375,000 of taxable supplies over a rolling twelve months, voluntary from AED 187,500. Non-residents making taxable supplies register regardless of threshold. Late registration is AED 10,000 | ConfirmedConfirmed |
Rates, thresholds, penalties and deadlines on this page are Confirmed from federal legislation and FTA publications. Nothing here is tax advice.
Last updated 13 August 2026 Next review Q4 2026
QFZP
The seven conditions, in full. All must hold.
1. Juridical person in a free zone
A company, not a sole establishment or a natural person.
2. Adequate substance
Core income-generating activities, staff, assets and expenditure genuinely in the zone.
3. Qualifying income
Income of the type the regime recognises, tested transaction by transaction.
4. No election for standard corporate tax
Electing into the standard regime forfeits the 0 percent.
5. Transfer pricing compliance
Arm's length pricing with documentation, including for related-party and connected-person dealings.
6. The de minimis test
Non-qualifying revenue must not exceed the lower of 5 percent of total revenue or AED 5 million.
7. Audited financial statements
Not optional. This is the condition most small free zone companies fail first.
Cabinet Decision No. 55 of 2023, Ministerial Decision No. 139 of 2023 and the FTA Free Zone Persons Guide of May 2024. Qualifying income covers transactions with other free zone persons except excluded activities, income from qualifying activities with non-free-zone persons, and qualifying intellectual property income.
HOW COMPANIES FAIL
In order of frequency.
Billing the mainland
Invoicing UAE mainland companies or individuals for consultancy is non-qualifying. Above the de minimis threshold it destroys the whole 0 percent status.
No audited financials
The condition is absolute. Without an audit there is no QFZP status, whatever the income looks like.
Weak substance
A flexi-desk with no real activity, no staff and no expenditure in the zone does not carry core income-generating activities.
Simply not registering
On the assumption that free zone means exempt. It does not, and the penalty is AED 10,000 before any tax is even assessed.
The consequence is not just this year. Failing any condition costs the 0 percent for the current period and disqualifies the entity for the following five years.
SEND A MESSAGE
Rather write than read on?
THE HONEST ANSWER
No, the licence does not do it for you.
A free zone company does not automatically avoid corporate tax. A consultancy billing UAE or individual clients will pay 9 percent on that income above AED 375,000, or use Small Business Relief while under AED 3 million of revenue.
Is a free zone company exempt from UAE corporate tax?
No. A free zone company is fully inside the corporate tax net and must register. The 0 percent Qualifying Free Zone Person rate is conditional, and all seven conditions must hold.
I bill UAE mainland clients. Do I still get 0 percent?
Consultancy income from mainland companies or individuals is non-qualifying. Above the de minimis threshold, the lower of 5 percent of total revenue or AED 5 million, it destroys the whole 0 percent status for that period and disqualifies the entity for the following five years.
What happens if I registered late?
Late registration triggers a fixed AED 10,000 penalty. A conditional waiver cancels or refunds it where the first return or annual declaration is filed within seven months of the first tax period end, per FTA Public Clarification CTP006 of 17 July 2025.
Does Small Business Relief still apply in 2026?
Yes. Ministerial Decision No. 131 of 2026, announced 7 August 2026, extended it to tax periods ending on or before 31 December 2029, where revenue is below AED 3 million.
Sources
- Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
- Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023
- FTA Free Zone Persons Corporate Tax Guide, May 2024
- Ministerial Decision No. 73 of 2023 and Ministerial Decision No. 131 of 2026
- FTA Decision No. 3 of 2024 and FTA Public Clarification CTP006 of 17 July 2025
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