Corporate Tax for Free Zone Companies

The introduction of Corporate Tax (CT) in the UAE has raised many questions, especially among free zone businesses. Many entrepreneurs and investors wonder: Are free zone companies required to pay corporate tax? This article explains how corporate tax applies to free zone entities, their eligibility for tax benefits, and how to remain compliant while maximizing incentives.

Do Free Zone Companies Have to Pay Corporate Tax?

The UAE government has introduced a 9% corporate tax, effective from June 1, 2023. However, free zone businesses may still benefit from a 0% tax rate, provided they meet specific conditions.

Key Considerations for Free Zone Corporate Taxation:

1. Qualifying Free Zone Persons (QFZP):

   • A free zone company can enjoy 0% corporate tax if it qualifies as a QFZP under UAE tax regulations.

   • To qualify, the business must:

     • Maintain adequate substance in the free zone.

     • Derive income from transactions within the free zone or outside the UAE.

     • Not conduct business with the mainland (exceptions apply).

2. Non-Qualifying Free Zone Companies:

   • If a free zone company earns taxable income from mainland UAE, it will be subject to the 9% corporate tax on those earnings.

   • Certain activities, such as providing services to mainland clients, could result in losing tax benefits.

3. Mixed Income Scenario:

   • Companies earning both qualifying and non-qualifying income may be subject to partial taxation, depending on their business structure.

Who Can Benefit from 0% Corporate Tax in Free Zones?

Free zone entities that meet QFZP criteria can continue to enjoy the 0% corporate tax rate on qualifying income. Some common businesses that benefit include:
✅ Holding companies managing investments
✅ E-commerce businesses serving international clients
✅ Manufacturing and export-oriented firms
✅ Consultancy firms that operate strictly within free zones

How to Ensure Compliance with UAE Corporate Tax Regulations?

To maintain corporate tax benefits, free zone businesses should:
✔ Register for corporate tax with the UAE Federal Tax Authority (FTA)
✔ Maintain proper accounting records and financial statements
✔ Avoid non-qualifying activities that may trigger taxation
✔ Seek professional tax advisory to ensure compliance