Is corporate tax applicable to free zone companies in the UAE?

Indeed, corporate tax does apply to businesses in the free zones of UAE, but according to the type of business the company undertakes, sources of income, and whether it possesses the requirements to claim tax incentives.

Corporate Tax Structure for Free Zone Companies

The UAE imposed a 9% business income tax from June 2023. Free zone companies, however, can have a 0% tax rate if they meet the UAE Ministry of Finance requirements as Qualifying Free Zone Persons (QFZP).

1. Qualifying and Non-Qualifying Free Zone Companies
   • A free zone company may be eligible for a 0% corporate tax on qualifying income if it:
     • Maintains adequate substance in the UAE.
     • Earns revenue from the sale to, or purchase from, other free zone companies or international buyers.
     • Complies with transfer pricing and accounting standards.
   • Mainland UAE business companies (beyond permitted limited activities) will, however, be subject to 9% corporate tax on respective taxable revenues.
2. Tax Treatment Based on Sources of Revenues
   • Revenues from sales among free zones – Typically eligible for a 0% corporate tax rate.
   • Cross-border transaction income – Also potentially eligible for 0% corporate tax, subject to rules.
   • Mainland UAE income – Subject to 9% corporate tax, although certain free zone activities are exempt.
3. Mandatory Tax Registration

   Even if a company is subject to a 0% rate of corporate tax, tax registration and compliance are still mandatory. Corporate tax return filing on an annual basis is mandatory for all businesses.

In conclusion

Free zone businesses must determine their tax liability based on their activities and sources of income. Compliance with taxation is required to avoid penalties and be eligible for tax incentives. Because of the potential for tax law changes, consulting a professional tax expert is strongly recommended.