UAE Free Zone Tax Guide
0% tax is not automatic. Miss one condition and you pay 9% for 5 years. Here's how QFZP really works.
The biggest misconception in UAE tax
"I'm in a free zone, so I don't pay tax." — This is wrong. Free zone companies ARE subject to corporate tax. Only those meeting ALL 5 QFZP conditions pay 0%.
Free Zone Tax Basics
Are free zone companies exempt from corporate tax?
No. Free zone companies are subject to corporate tax — but those qualifying as QFZP pay 0% on qualifying income. This is NOT automatic.
Source: Federal Decree-Law No. 47 of 2022, Article 18
What happens if I lose QFZP status?
You pay 9% on ALL income for the current period AND the next 4 tax periods — 5 years total at 9%.
Source: Federal Decree-Law No. 47 of 2022, Article 19
The 5 QFZP Conditions
ALL 5 REQUIREDCondition 1: Adequate Economic Substance
Real operations in the free zone — employees, office space, expenditure proportional to activities. A shell company with a PO Box will fail.
Source: Ministerial Decision No. 265 of 2023
Condition 2: Qualifying Income
Income from qualifying activities OR transactions with other free zone persons. Revenue from mainland UAE clients is generally NOT qualifying.
Source: Cabinet Decision No. 55 of 2023, Article 3
Condition 3: De Minimis Test
Non-qualifying revenue must not exceed the LOWER of AED 5 million OR 5% of total revenue.
Source: Federal Decree-Law No. 47 of 2022, Article 18
Condition 4: No Mainland Election
Must NOT have elected to be subject to 9%. Once you elect out, cannot re-elect for 5 years.
Source: Federal Decree-Law No. 47 of 2022, Article 19
Condition 5: Transfer Pricing
All related party transactions must be at arm's length (market price). Must maintain transfer pricing documentation.
Source: Federal Decree-Law No. 47 of 2022, Articles 34-36
Mandatory Audit
NEW 2025Do I need an audit?
Yes. ALL free zone entities claiming QFZP must undergo mandatory audit regardless of revenue, starting tax periods from 1 January 2025.
Source: FTA Guide CTGFZP1, 2025 update
How much does an audit cost?
Small entity: AED 15,000-40,000. Larger: AED 50,000-150,000+. Some advisors suggest calculating whether 9% is cheaper than QFZP compliance.
Source: Industry estimates
Qualifying Activities
What are qualifying activities?
Manufacturing, processing, holding shares/securities, fund management, wealth management, headquarter services, treasury/financing, logistics, distribution in/from designated zones.
Source: Cabinet Decision No. 55 of 2023
Is software development qualifying?
Not explicitly listed. Software sold to mainland clients = likely non-qualifying. IP licensed to free zone persons or exported internationally = may qualify. Grey area — get professional advice.
Source: Cabinet Decision No. 55 of 2023, FTA Clarifications
Last verified: 1 May 2026
Sources: Federal Decree-Law No. 47/2022, Cabinet Decision No. 55/2023, Ministerial Decision No. 265/2023, FTA Guide CTGFZP1. Always check tax.gov.ae.