A free zone licence in the UAE does not, on its own, mean a tax-free business. With the second round of free zone corporate tax returns now filed, the rules on who actually keeps the 0% rate deserve a closer look from anyone setting up or running a company in the Emirates.
Every free zone company is a taxable person. It must register with the Federal Tax Authority and file an annual return through EmaraTax, even if its final bill is zero. The 0% rate is reserved for a Qualifying Free Zone Person, and even then it applies only to Qualifying Income. Everything else is taxed at the standard 9%.
Qualifying Income broadly covers dealings with other free zone businesses and activities on the government's official list, including manufacturing, logistics, investment management and aircraft leasing. Ministerial Decision 229 of 2025 refreshed that list, extending qualifying commodity trading to industrial chemicals, their byproducts and environmental commodities. Revenue from mainland customers or from individuals, by contrast, usually falls outside it.
Keeping the status is an ongoing test, re-run every tax period. A company needs genuine substance in the zone, meaning an office, staff and its core income-generating work there, plus audited financial statements and arm's-length, documented pricing for related-party deals. It must also keep non-qualifying revenue within the de minimis limit: the lower of AED 5 million or 5% of total revenue. Breach it and the 0% treatment is lost.
One detail catches many founders out. Mainland companies pay 0% on the first AED 375,000 of taxable profit, but a Qualifying Free Zone Person does not get that band on its non-qualifying income. For a small business selling mostly to mainland clients, a free zone structure can therefore end up costing more, not less. Advisers recommend modelling both options before choosing where to incorporate.