Taxability of Free Zones and Designated Zones in UAE

Free Zone vs. Designated Zone under UAE Corporate Tax

(I). Free Zones in the UAE

Free Zones are special economic areas in the UAE that allow 100% foreign ownership, simplified business setup, and customs benefits. They were traditionally known for being “tax-free”, but under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), Free Zone entities are within the scope of Corporate Tax.

However, if a Free Zone company qualifies as a Qualifying Free Zone Person (QFZP), it can still benefit from a 0% Corporate Tax rate on Qualifying Income .

(II). Designated Zones

Designated Zones are a sub-category of Free Zones recognized for VAT purposes under UAE VAT Law. They are treated as being outside the UAE for VAT on certain goods transactions, mainly to facilitate trade and logistics.

So, For Corporate Tax, there is no separate treatment for Designated Zones. They are simply treated as Free Zones under the Corporate Tax Law.

This means a company in a Designated Zone must still meet QFZP conditions to benefit from the 0% rate.

1.Corporate Tax in Free Zones

  • Free Zone companies are subject to 9% Corporate Tax unless they qualify for QFZP status.

  • QFZPs pay 0% on qualifying income and 9% on excluded income.

  • Qualifying activities include manufacturing, logistics, distribution, treasury services, fund management, and transactions with other Free Zone Persons.

  • Excluded activities (subject to 9%) include income from immovable property in the UAE (other than Free Zone commercial property) and most transactions with the UAE mainland.

  • A QFZP is not entitled to a 0% Corporate Tax rate on its first AED 375,000 of Taxable Income.

2. Qualifying Free Zone Person (QFZP)

To enjoy 0% Corporate Tax on qualifying income, a Free Zone entity must meet all the following conditions:

  • Maintain adequate substance in the Free Zone.

  • Derive Qualifying Income as per Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023.

  • Not have elected to be subject to regular Corporate Tax.

  • Comply with Arm’s Length principle.

  • Comply with transfer pricing rules and documentation requirements.

  • Not earn excluded income (certain non-qualifying activities).

If any condition is not met, the FZ entity becomes subject to 9% CT on all taxable income.

3. Qualifying vs. Excluded Income Qualifying Income (0% CT)

  • Income from transactions with other Free Zone Persons (unless excluded).

  • Income from conducting activities considered "Qualifying Activities,"

  • such as:

    • Manufacturing and processing of goods.

    • Holding of shares and other securities.

    • Ownership, management, and operation of ships.

    • Services related to headquarters, treasury, financing, and distribution within Free Zones.

    • Reinsurance services, fund management, wealth & investment management.

    • Logistics and distribution activities.

Excluded Income (Taxable at 9%)

  • Income from transactions with UAE mainland persons (unless they are for "Qualifying Activities" or related to passive income like royalties, dividends, or capital gains).

  • Income from immovable property in the UAE (except Free Zone commercial property used for business).

  • Income from certain regulated activities not listed as qualifying.

4. De Minimis Rule

  • If non-qualifying income does not exceed 5% of total revenue or AED 5 million (whichever is lower) in a tax period, the Free Zone entity can still retain QFZP status.

5. Mainland Transactions

  • Free Zone companies can trade with the mainland, but:

    • Such income is subject to 9% Corporate Tax (unless it falls under qualifying categories like re-exports).

    • VAT implications may also apply.

6. Segregation of Qualifying Income & Expenses for QFZP

  • To maintain QFZP status and apply the 0% CT rate, the Free Zone entity must prove that it can distinguish between:

    • Qualifying Income & related expenses

    • Non-Qualifying Income & related expenses

  • This prevents cross-subsidizing and ensures that non-qualifying activities are correctly taxed at 9%. Improper segregation could result in loss of QFZP status and taxation of all income at 9%.

7. Summary:

  • Free Zone companies are within the scope of UAE Corporate Tax.

  • They can benefit from 0% CT on qualifying income if they meet the QFZP conditions.

  • Non-qualifying income (mainland trading, UAE immovable property, excluded activities) is subject to 9% CT.

  • Proper structuring and compliance are essential to preserve Free Zone tax benefits.

How AccuTx Can Assist You as a Free Zone Company in the UAE

  • Confirm QFZP eligibility,

  • Ensure revenue/expense segregation,

  • Support compliance with CT & TP rules, and

  • Provide assurance that the 0% tax benefit is legitimately maintained.

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