UAE Corporate Tax: Free Zone 0% vs Mainland 9%

The UAE introduced a 9% federal corporate tax in June 2023.

As a foreign entrepreneur, you have two main structuring options:

• Mainland company: Subject to 9% corporate tax on taxable income exceeding AED 375,000
• Free Zone company: Potentially 0% tax if you qualify as a Qualifying Free Zone Person (QFZP)

Both structures are legitimate.

The right choice depends on your business activity, target market, and operational setup.

⚡Ready to incorporate? See our UAE Company Formation Guide

If you choose a Free Zone structure, you must meet all six QFZP conditions to benefit from 0% corporate tax:

1. Licensed Free Zone Company: Incorporated and licensed in a designated Free Zone
2. Qualifying Activities Only: Income must come from FTA-approved activities (see next section)
3. Adequate Substance: Physical presence, employees, and decision-making in the UAE
4. Proper Accounting Records: Separate books maintained per accounting standards
5. De Minimis Compliance: Maximum 5% of income can be non-qualifying
6. No Mainland Election: Cannot opt into the standard 9% tax regime All six conditions must be met simultaneously and continuously each tax year.

👉 For detailed QFZP compliance checklists and audit preparation, see our QFZP Compliance Guide.

Not all business activities qualify for 0% tax in Free Zones. This is the most important factor in your decision.

Qualifying Activities (0% tax eligible)

• Manufacturing and Production: Physical transformation of materials within the Free Zone
• Holding Company Activities: Ownership and management of shareholdings
• Commodities Trading: Physical commodities (oil, gas, metals, agricultural products)
• Logistics and Distribution: Storage, handling, distribution through Free Zone facilities
• Headquarters Operations: Regional or global HQ providing services to group companies
• Re-export Trading: Import and re-export of goods
• Fund Management: Managing investment funds for third-party investors
• IP Licensing: Only if the IP was developed or significantly enhanced in the UAE

Non-Qualifying Activities (9% tax or disqualifies QFZP)

• Services to UAE mainland clients
• Retail sales to UAE consumers
• Passive rental income
• Professional services (consulting, legal, accounting, marketing)
• Passive investment returns
• Bank interest income

Free Zone 0% tax requires genuine business presence in the UAE. This is not a paper setup.

The FTA evaluates:

• Where key management decisions are made
• Where core business activities are performed
• Number and qualifications of UAE-based employees
• Physical office and facilities
• Operating expenditures in the UAE

Your substance must be proportionate to your income and activities.

What This Means by Business:

Type Holding Companies: Board meetings and strategic decisions must happen in UAE

Trading Companies: Negotiating and concluding deals from UAE

Manufacturing: Production planning, procurement, quality control in UAE

Service Companies: Service delivery managed from UAE

IP Companies: Development and exploitation of IP conducted in UAE

👉 For detailed substance checklists and documentation requirements, see our QFZP Compliance Guide.

UAE 0% corporate tax does not mean 0% tax for you personally. This is the most misunderstood aspect of UAE Free Zone structures.

Three Key Risks to Evaluate:

1. Home Country Tax Obligations

Your home country may still tax you on UAE company profits. Many countries (US, UK, France, Germany, Australia) have Controlled Foreign Corporation (CFC) rules that attribute foreign company income to resident shareholders.

2. Permanent Establishment (PE) Risk

If you manage your UAE company from your home country, profits may be taxable there.

The question is: where are real business decisions made?

3. Personal Tax Residency

UAE tax residency requires 90+ days physical presence per year or a permanent home in UAE.

Without UAE residency, you remain tax resident in your home country.

The UAE Advantage That Does Work

The UAE has 90+ double tax treaties that can reduce withholding taxes on dividends, interest, and royalties. But treaty benefits require proper structuring.

📌 For nationality-specific guidance, see our guides:

- US Citizens: FATCA and UAE Business Banking

- British Citizens: UK Tax and UAE Structures

If you choose Free Zone, you must register for corporate tax within 3 months of incorporation. Missing this deadline disqualifies you from QFZP status permanently.

Free Zone 0% tax is not free. You need to budget for genuine substance and compliance.

Typical Annual Costs (estimates)

1/ Substance (office, employees): The largest cost. Varies widely based on your business type and size. 2/ Compliance (audit, tax filing, advisory): Required annually for all QFZP companies.

These costs should be weighed against your potential tax savings at 9%.

🧾 For detailed cost breakdowns and budgeting guidance, see our QFZP Compliance Guide.

→ Need help with ongoing compliance? See UAE Accounting & Bookkeeping

Both structures have trade-offs. Here's a balanced assessment to help you decide.

Before choosing Free Zone, be aware of these common misconceptions:

Assuming 0% Tax is Automatic

❌ Reality: Free Zone doesn't mean automatic 0% tax. You must meet 6 QFZP conditions continuously.

✅ Before deciding: Verify your business activity qualifies and you can meet substance requirements.

Underestimating Substance Requirements

❌ Reality: Virtual offices and nominee setups don't qualify. Real employees and physical presence required.

✅ Before deciding: Budget for genuine UAE operations, not just a mailbox address.

Ignoring Home Country Tax Implications

❌ Reality: UAE 0% tax doesn't cancel your home country obligations. CFC rules may tax you anyway.

✅ Before deciding: Consult a tax advisor in your home country first.

👉 For operational compliance mistakes to avoid after setup, see our QFZP Compliance Guide.

Information compiled from official Federal Tax Authority publications and professional tax guides.

• Federal Tax Authority UAE: https://tax.gov.ae (accessed 2026-01-16)
• FTA Corporate Tax Guide on Free Zone Persons: https://tax.gov.ae/Datafolder/Files/Guides/CT/Free%20Zone%20Persons%20-%2020%2005%202024%20final%20for%20GCD.pdf (accessed 2026-01-16)
• PWC UAE Tax Summaries: https://taxsummaries.pwc.com/united-arab-emirates/corporate/tax-credits-and-incentives (accessed 2026-01-16)
• DLA Piper UAE CT Guide: https://www.dlapiper.com/en/insights/publications/gulf-tax-insights/2024/gulf-tax-insights-august-2024/uae-federal-tax-authority-releases-corporate-income-tax-guide-on-free-zone-persons (accessed 2026-01-16)
• FTA Small Business Relief Guide: https://tax.gov.ae/DataFolder/Files/Guides/CT/Small%20Business%20Relief%20Guide%20-%20EN%20-%2027%2008%202023.pdf (accessed 2026-01-16)

Information accurate as of January 2026. UAE corporate tax regulations continue to evolve. Verify current requirements with the Federal Tax Authority and obtain professional advice for specific situations.