Corporate tax: everyone registers
Every free zone company must register for corporate tax and file a return, exactly like a mainland LLC. The difference is the rate that can apply. A free zone company that meets the conditions to be a Qualifying Free Zone Person (QFZP) pays 0% on qualifying income and 9% on the rest. One that does not meet them pays the standard rates: 0% up to AED 375,000 of taxable income and 9% above, as explained in the corporate tax guide.
Qualifying Free Zone Person: the conditions
- Maintain adequate substance in the free zone: real staff, premises and activity there, not a flexi-desk and a mailbox.
- Earn qualifying income: broadly, income from transactions with other free zone persons, income from a list of qualifying activities (manufacturing, holding shares, fund and wealth management, headquarters services, logistics, and others), and income from mainland customers only for those listed activities.
- Not have elected to be taxed at the standard rates.
- Comply with transfer pricing rules and documentation.
- Prepare audited financial statements.
- Keep non-qualifying revenue within the de minimis limit: the lower of 5% of total revenue or AED 5 million.
Fail any condition in a tax period and QFZP status is lost for that period and the following four. That is why the bookkeeping matters: you need to be able to show, per customer and per revenue stream, what was qualifying and what was not.
The trap for small free zone companies
Many small free zone companies sell services to mainland UAE customers. Most services to the mainland are not qualifying income, so a consultancy or agency in a free zone with mainland clients typically breaches the de minimis limit in its first quarter and is simply a normal taxpayer at standard rates.
That is often fine. A free zone company that is not a QFZP can elect Small Business Relief if its revenue is AED 3 million or less, which a QFZP cannot. For a small services business, standard rates plus SBR usually means zero tax and no audit requirement, which beats chasing QFZP status you cannot meet.
VAT: the same thresholds apply
A free zone licence does not change VAT registration. The mandatory threshold is AED 375,000 of taxable supplies and imports over 12 months, and the voluntary threshold is AED 187,500, for free zone and mainland alike. See the threshold guide.
What can differ is the treatment of goods in a designated zone. A designated zone is a fenced free zone listed by Cabinet Decision (parts of JAFZA, KIZAD, Dubai Airport Free Zone and others) that is treated as outside the UAE for certain transactions in goods. Goods moved between designated zones, or held there before export, may be outside the scope of VAT. Services supplied in a designated zone are taxed normally, and most free zones (DMCC, IFZA, Meydan, RAKEZ and the majority of others) are not designated zones at all.
Audit and licence renewal
Separate from tax, most free zone authorities require companies to submit audited financial statements at licence renewal (DMCC, JAFZA, DIFC and ADGM among them), while others do not or only above a size threshold. Check your authority's rules. If an audit is required, your auditor will want a trial balance, general ledger, bank reconciliations and supporting documents for the year, all of which should come straight out of your accounting system.
What your books need to show
- Revenue by customer with each customer flagged as free zone, mainland or foreign, so qualifying and non-qualifying income can be totalled.
- A profit and loss and balance sheet under IFRS (or IFRS for SMEs) for the tax period.
- A general ledger and bank reconciliation for the audit, if one is required.
- Payroll records that satisfy WPS, or the free zone's own salary payment rules where WPS does not apply.
- Seven years of supporting documents.
Mainland versus free zone: a short comparison
| Mainland LLC | Free zone company | |
|---|---|---|
| Corporate tax registration | Required | Required |
| Standard rates (0% to AED 375k, then 9%) | Yes | Yes, unless QFZP |
| 0% on qualifying income | No | Only as a QFZP meeting all conditions |
| Small Business Relief (revenue up to AED 3m) | Yes | Yes, if not claiming QFZP status |
| VAT thresholds | AED 375,000 / 187,500 | Same |
| Audit for corporate tax | Only above AED 50m revenue | Above AED 50m, or always if QFZP |
| Audit for licence renewal | Generally no | Depends on the free zone authority |
| Payroll | WPS mandatory | WPS or the zone's own regime |
Frequently asked questions
My free zone company has no mainland customers. Am I automatically a QFZP?
No. You still need adequate substance, audited accounts, transfer pricing compliance and qualifying income. Income from foreign customers is only qualifying for the listed qualifying activities.
Can a free zone company claim Small Business Relief?
Yes, if it is not a Qualifying Free Zone Person and its revenue is AED 3 million or less. Many small free zone service companies are better off this way.
Is my free zone a designated zone for VAT?
Only if it is on the Cabinet's list of designated zones. Most are not. Designated zone status affects goods only; services are taxed normally.
Do I have to use WPS in a free zone?
Most free zones now require WPS or an equivalent salary protection system. Check your authority; Midnight Ledger produces WPS SIF files and handles non-WPS staff too.
Sources
- Federal Tax Authority: Corporate Tax FAQs
- PwC Tax Summaries: UAE tax credits and incentives (free zones)
- Ministry of Finance: decision on Small Business Relief
This guide is general information for UAE small businesses, not tax or legal advice. Rates, thresholds and deadlines are checked against Federal Tax Authority and Ministry of Finance publications on the date above, but the rules change. Confirm anything that matters with the FTA or a registered tax agent.