How free zone and mainland corporate tax differ
The difference between UAE free zone and mainland corporate tax is not that free zone companies are tax-free: it is that a free zone company can qualify for a 0% rate on defined Qualifying Income, while a mainland company is simply taxed at 0% up to AED 375,000 of taxable income and 9% above it. Both types of business register for and file corporate tax under the same federal law; a free zone licence changes the rate calculation, not whether the business is in scope.
The regime that gives a free zone company access to the 0% rate is called Qualifying Free Zone Person status, and it applies income by income, not company by company: the same free zone business can have some income taxed at 0% and other income taxed at 9% in the same tax period.
The Qualifying Free Zone Person regime
A Qualifying Free Zone Person pays 0% corporate tax on its Qualifying Income and 9% on its non-qualifying, taxable income, within the same legal person. There are two categories of Qualifying Income: income from transactions with other Free Zone Persons who are the beneficial recipient, subject to certain exceptions, and income from a defined list of Qualifying Activities, whether the free zone business performs those activities itself or outsources them to another Free Zone Person.
The Qualifying Activities list includes manufacturing, processing, and trading of qualifying commodities, holding shares and securities, ship ownership and operation, reinsurance, fund and wealth management, headquarters and treasury services provided to related parties, financing and leasing of aircraft, and distribution from a Designated Zone. These categories, and the exceptions within them, are set out in Cabinet Decision No. 100 of 2023 on Qualifying Income and Ministerial Decision No. 229 of 2025, issued 28 August 2025 to replace Ministerial Decision No. 265 of 2023; both apply retroactively from 1 June 2023.
The de minimis rule for non-qualifying income
A Qualifying Free Zone Person is allowed some non-qualifying revenue without losing its status, under a de minimis rule: non-qualifying revenue is treated as de minimis, and does not disqualify the business, if it does not exceed the lower of 5% of total revenue or AED 5,000,000 in the tax period.
Because the test uses the lower of the two figures, the 5% limit usually binds first for a business with total revenue under AED 100,000,000, and the AED 5,000,000 cap only becomes the tighter constraint for much larger free zone businesses. A free zone company should treat both limits as live at once and check whichever one is smaller for its own revenue level, rather than assuming the AED 5,000,000 figure is always the relevant ceiling.
A worked split: qualifying versus non-qualifying income
A free zone logistics company reports total revenue of AED 4,000,000 for the period. AED 3,850,000 comes from Qualifying Activities and from transactions with other Free Zone Persons who are the beneficial recipient; AED 150,000 comes from services sold directly to mainland customers, which does not fall within the Qualifying Income categories.
The de minimis check compares that AED 150,000 against the lower of 5% of AED 4,000,000, which is AED 200,000, or AED 5,000,000. The lower figure is AED 200,000, and AED 150,000 is below it, so the non-qualifying revenue stays within de minimis and the company keeps its Qualifying Free Zone Person status for the period. Its Qualifying Income of AED 3,850,000 is taxed at 0%, and its non-qualifying income of AED 150,000 is taxed at 9%, giving corporate tax payable of AED 13,500 for the period.
- Total revenue: AED 4,000,000
- Qualifying Income: AED 3,850,000 at 0% = AED 0
- Non-qualifying income: AED 150,000 at 9% = AED 13,500
- De minimis limit: lower of AED 200,000 (5% of total) or AED 5,000,000 = AED 200,000
- Check: AED 150,000 is below the AED 200,000 limit, so Qualifying Free Zone Person status holds
- Corporate tax payable for the period: AED 13,500
What happens near the de minimis limit
If that same company's non-qualifying revenue had instead been AED 250,000, it would sit above the AED 200,000 de minimis limit for its AED 4,000,000 revenue level. What follows from breaching the limit is a consequence for Qualifying Free Zone Person status that a business should confirm with a licensed tax adviser or directly with the Federal Tax Authority for its own facts, since the exact treatment depends on rules this guide has not verified in detail; the safer planning assumption is that a free zone business tracking its non-qualifying revenue through the year, rather than discovering the figure at year end, avoids the question altogether.
The practical lesson either way is the same: a free zone business earning any income from mainland customers, or from anyone who is not another Free Zone Person, needs to monitor that income against the de minimis threshold continuously, not just once at filing time.
Free zone VAT rules are a separate list
It is a common and costly mix-up to treat corporate tax Free Zones and VAT Designated Zones as the same list, and they are not. Corporate tax's Qualifying Free Zone Person regime covers a broad set of recognised free zones under its own Cabinet Decision. VAT's Designated Zones are a narrower, specifically listed set of fenced zones, such as Jebel Ali Free Zone, Dubai Airport Free Zone, Khalifa Industrial Zone Abu Dhabi and Hamriyah Free Zone, covering around 20 or more zones under Cabinet Decision No. 59 of 2017 and its amendments.
A free zone can be a corporate tax Free Zone without being a VAT Designated Zone, and vice versa; a business should check both lists separately rather than assuming one status implies the other. Even within a genuine VAT Designated Zone, the relief is narrow: it can treat qualifying supplies of goods between Designated Zones or persons within them as outside the scope of VAT, but services supplied within or into a Designated Zone stay subject to normal UAE VAT rules. There is no blanket VAT exemption for a Designated Zone.
Choosing between a free zone and a mainland set-up
The choice between registering a UAE business in a free zone or on the mainland is rarely only a tax question, but the tax difference is real enough to plan for deliberately. A business whose customers are mostly other free zone businesses, or whose activity sits squarely inside the Qualifying Activities list, stands to gain the most from a free zone structure, because a larger share of its income has a realistic path to the 0% rate, and its accounting team has a genuinely simple qualifying-income split to maintain rather than a marginal one.
A business that expects most of its revenue from mainland UAE customers gets far less benefit from a free zone licence: that revenue will usually fall outside Qualifying Income, pushing more of the business toward the 9% rate regardless of where it is licensed, while still carrying the cost and substance requirements of operating in a free zone. In that case, the compliance simplicity of a straightforward mainland set-up, taxed at 0% up to AED 375,000 and 9% above it with no Qualifying Income test to run, can outweigh a free zone licence's headline appeal.
Why this split matters for the accounts
Because Qualifying Income and non-qualifying income of the same legal person are taxed at different rates, the underlying books need to distinguish the two clearly enough to support the split on the return, not just record one combined revenue figure. That typically means tagging revenue by customer type, counterparty Free Zone status, and activity, so that at year end the qualifying and non-qualifying totals, and the de minimis check itself, can be produced directly from the ledger rather than rebuilt by hand.
Substance still matters too: a Qualifying Free Zone Person is expected to demonstrate adequate substance in the UAE to retain its 0% rate on Qualifying Income, a requirement that now sits inside the corporate tax regime itself rather than in the separate Economic Substance Regulations, which were abolished for financial years ending after 31 December 2022. Bookkeeping currency and language add a further layer businesses sometimes overlook: records are generally kept in UAE dirhams, and while daily records may be kept in English, the Federal Tax Authority retains the right to request an Arabic translation of any record at any time.
What a free zone business should check before filing
Before a free zone business relies on the 0% rate for a tax period, it is worth working through a short checklist rather than assuming last year's classification still holds, since Qualifying Activities, Excluded Activities and the de minimis position can all shift as a business's customer mix changes.
- Confirm the licence is with a free zone recognised for the Qualifying Free Zone Person regime, not only for VAT Designated Zone purposes
- Classify each revenue stream against the Qualifying Activities list and the transactions-with-other-Free-Zone-Persons test
- Recalculate the de minimis limit, the lower of 5% of total revenue or AED 5,000,000, against the current period's actual figures
- Check that adequate substance in the UAE is maintained and documented for the period
- Confirm registration and filing deadlines are being tracked the same way as for any other resident juridical person
Splitting qualifying and mainland income in Skyline Nexus ERP
Skyline Nexus ERP does not classify income into Qualifying and non-qualifying categories automatically, but its Fiscal Authority module gives a free zone business the pieces needed to build and support that split. Each journal line can carry a cost centre and a project, and each sale is stamped with the branch it was made from, so a business can tag transactions with Free Zone customers separately from mainland transactions, then filter the Trial Balance, Profit and Loss and Balance Sheet by location or cost centre to produce a qualifying-versus-non-qualifying breakdown from the ledger itself.
At installation, a business can start from a UAE chart of accounts template with VAT accounts already in place, alongside the Saudi and generic templates, and every account carries both an English and an Arabic name. Automatic classification of Qualifying Free Zone Person income, and filing the corporate tax return itself, are being rolled out market by market: tell us your country and we will confirm your go-live date.
Common questions
Are UAE free zone companies exempt from corporate tax?
No, UAE free zone companies are not exempt from corporate tax. A free zone company that qualifies as a Qualifying Free Zone Person pays 0% on its Qualifying Income and 9% on any non-qualifying, taxable income within the same legal person, and it registers and files under the same corporate tax law as a mainland company.
What counts as Qualifying Income for a UAE free zone company?
Qualifying Income for a UAE free zone company covers income from transactions with other Free Zone Persons who are the beneficial recipient, subject to some exceptions, and income from defined Qualifying Activities such as manufacturing, trading qualifying commodities, fund and wealth management, and headquarters or treasury services to related parties, under Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025.
What is the de minimis rule for Qualifying Free Zone Persons?
The de minimis rule lets a Qualifying Free Zone Person earn some non-qualifying revenue without losing its status: that revenue is treated as de minimis if it does not exceed the lower of 5% of total revenue or AED 5,000,000 in the tax period. Exceeding that limit puts Qualifying Free Zone Person status at risk for the period, so a business should confirm the consequence with a tax adviser for its own facts.
Is a VAT Designated Zone the same as a corporate tax Free Zone?
No, a VAT Designated Zone and a corporate tax Free Zone are different lists and should never be conflated. Designated Zones are a narrower set of fenced zones for VAT goods treatment under Cabinet Decision No. 59 of 2017, while corporate tax Free Zones are a broader list under the Qualifying Free Zone Person regime; a zone can appear on one list without appearing on the other.
Do Designated Zones get a VAT exemption on services?
No, services supplied within or into a VAT Designated Zone remain subject to normal UAE VAT rules; there is no blanket VAT exemption for services in a Designated Zone. The relief is narrow and applies only to qualifying supplies of goods between Designated Zones or persons within them, treated as outside the scope of VAT when the conditions are met.
Can a UAE free zone company be taxed at both 0% and 9% in the same year?
Yes, a Qualifying Free Zone Person can be taxed at both rates in the same tax period: 0% applies to its Qualifying Income and 9% applies to any non-qualifying, taxable income earned by the same legal person, as long as the non-qualifying income stays within the de minimis limit and does not disqualify its Qualifying Free Zone Person status altogether.
This guide is general information, not tax, accounting or legal advice. Rules differ from country to country and change over time; confirm the current position with your tax authority or a qualified adviser before acting on anything here.
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