The UAE introduced a 9% corporate tax in June 2023, but free zone companies can still enjoy 0% tax on qualifying income. Understanding the rules is critical — get it wrong and you lose the exemption. This guide explains exactly what qualifies and what doesn't.
The 0% Free Zone Tax Exemption
Free zone companies pay 0% corporate tax on 'qualifying income'. This includes: income from transactions with other free zone entities, income from activities that are not excluded (financial services need extra conditions), and income from transactions with entities outside the UAE (exports). Non-qualifying income is taxed at 9%.
What Doesn't Qualify
Income from transactions with mainland UAE entities (unless it's passive income like royalties/dividends). Income from excluded activities (varies by zone). Revenue exceeding AED 375,000 from UAE mainland customers. Any income generated from a permanent establishment on the mainland.
Maintaining Your Exemption
To keep 0% status: maintain adequate substance in the UAE (real employees, real office), keep proper accounting records, don't exceed de minimis non-qualifying revenue threshold, file annual tax returns with FTA, and avoid transactions designed solely for tax avoidance.
Transfer Pricing
The UAE follows OECD transfer pricing guidelines. Transactions between related parties must be at arm's length. Free zone companies dealing with mainland affiliates need proper transfer pricing documentation. Penalties for non-compliance can be severe.
Frequently Asked Questions
Do free zone companies pay tax in the UAE?
Free zone companies pay 0% corporate tax on qualifying income (transactions with other free zones, exports, etc.). Non-qualifying income (mainly mainland UAE transactions) is taxed at 9%. The key is structuring your business to maximize qualifying income.
What is the AED 375,000 threshold?
Companies with total taxable income under AED 375,000 pay 0% corporate tax regardless of structure. Above this threshold, the 9% rate applies to non-qualifying income. This means very small businesses effectively pay no corporate tax.
Do I need to file tax returns from a free zone?
Yes. All UAE businesses must register for corporate tax and file annual returns, even if your qualifying income means 0% tax. Failure to register or file carries penalties of AED 10,000+ and can jeopardize your free zone exemption.
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