Company in the UAE free zone: when is zero tax applied and what to check before registration

UAE Free Zone Company Taxes: QFZP, qualifying income, de minimis, audit, registration and separate VAT rules.

The words “free zone” describe the place and mode of registration of the company, but do not confirm its tax result. To apply the benefit, the status of the company itself, the nature of the income and the fulfillment of the conditions are checked. Purchasing a registration package does not end this review: it must continue as clients and transactions become available.

It is important for an entrepreneur to separate three questions: is it allowed to carry out the chosen activity, will it be possible to organize its work, and what tax regime applies to income. The answer to one question does not replace the others. That is why the proposal “let’s open a company with zero taxes” requires analysis of the documents.

Free Zone Person and Qualifying Free Zone Person

In UAE corporate taxation, a 0% rate is provided for Qualifying Income of a company that meets the status of Qualifying Free Zone Person - QFZP. The mere fact of registration in a free zone does not mean that this status has already been confirmed for all operations.

For a QFZP, income that is taxed outside the benefit bracket may be taxed at 9%. This cannot be simplified to a rule of “all domestic customers are taxed, all foreign customers are not”: the activity, the recipient, and the applicable exceptions must be defined. It is also impossible to automatically transfer here the general regime threshold for another category of taxpayers.

If a company does not comply with the QFZP, its position is considered under the applicable general regime rather than continuing to be treated as nil tax at the registered address. Before choosing a structure, it is useful to compare the effects of both options on actual proposed operations.

What exactly will the company do?

Make a list of sources of income: merchandise sales, services, other income. For each transaction, write down the counterparty, the subject of the contract, and the place where significant functions are performed. The name of the activity on the license is useful, but tax classification requires the content of the transaction.

The list of Qualifying Activities and Excluded Activities has been updated. Ministry of Finance Decision No. 229 of 2025 replaced Decision No. 265 of 2023. Therefore, the old guidance cannot be read as an immutable list of current conditions. If the consultant is basing a conclusion on a previous list, ask to see the current basis for your transaction.

Particular attention should be paid to mixed activities. Income from different services or goods may have different classifications. Promising benefits “for the entire company” without analyzing these flows makes subsequent verification and accounting difficult.

Allowable share: why it cannot be calculated by profit

Decision No. 229 provides de minimis: the relevant non-qualifying revenue must not exceed the lesser of 5% of the qualifying total revenue or AED 5 million for the tax period. This is a test of revenue with established composition rules, rather than a share of net profit.

Not all amounts automatically go into the numerator and denominator equally. Therefore, the calculation begins with the classification of income and the exceptions provided. If you take all bank credits for revenue and then apply a percentage, the result may be incorrect even before the mathematical operation.

The practical consequence is that accounting must be able to separate flows and explain classification. It is better to carry out the check before concluding a new transaction: its income can change the company’s position over the period. A seemingly small operation is not always insignificant relative to existing revenue.

Real activities and documents

QFZP conditions include sufficient attendance and maintenance of relevant functions, as well as requirements for documentation and other elements of the regime. FTA guidance suggests that resources be assessed in relation to the nature and scale of the activity. One registration paper does not prove where the work is actually performed and by whom.

Resolution No. 229 also provides for audited financial statements in accordance with applicable requirements. It is necessary to determine in advance who keeps records, what information is collected and how the reports are prepared for verification. The contract for “accounting” should be deciphered: are the necessary tasks included or are they paid separately.

Violation of the conditions may mean loss of QFZP from the beginning of the relevant tax period and for the next four periods. Therefore, the error cannot be assessed only as an additional payment on one invoice. Before launching, it is useful to check whether the business model can withstand the consequences of loss of status.

Zero corporate tax does not cancel registration and VAT

The FTA specifies that Free Zone Persons must register for corporation tax regardless of whether they qualify for the QFZP. A preferential rate and the absence of an obligation to complete tax registration are different statements. Reporting duties should also be included in the work calendar.

VAT is considered separately. For resident businesses, mandatory registration arises when taxable supplies and imports exceed AED 375,000 in the previous 12 months or are expected to exceed AED 375,000 in the next 30 days. This is not a profit threshold and is not the same calculation as corporation tax.

The Free Zone is also not the same as the Designated Zone for VAT. The special regime of designated zones applies to certain commodity transactions and conditions; services are considered according to the general VAT rules. Therefore, the office address does not provide a universal exemption for all company accounts.

Check before paying for the package

When comparing free zones, consider the suitability of the activity and the cost of compliance, not just the registration fee. A benefit makes sense when a company can confirm the right to it in its actual work. This conclusion is based on transactions and documents; the advertising name of the package does not replace it.