30 Sep 2025
By Vista CorpWhen the UAE introduced corporate tax, many businesses, especially those in free zones, were caught off guard. For years, free zones were marketed as tax-friendly havens, leading to the assumption that they would remain completely exempt. But the reality under the UAE corporate tax law free zone framework is more nuanced.
While some free zone companies can still enjoy 0% corporate tax, this is not automatic. It depends on whether the company qualifies as a “qualifying free zone person,” the type of income earned, and whether certain compliance obligations are met. Failing to understand these rules has already led to costly mistakes, penalties, and compliance risks for businesses.
In this blog, we’ll go step by step through the biggest UAE free zone tax myths and reveal the real facts every business owner should know.
What is Freezone Corporate Tax in the UAE?
Freezone corporate tax refers to the way companies registered in UAE free zones are taxed under the new UAE corporate tax law (Federal Decree-Law No. 47 of 2022).
For years, UAE free zones were seen as “tax-free” hubs. But since the introduction of corporate tax in 2023, free zone companies must now follow specific rules. While some companies can still enjoy a 0% tax rate, it isn’t automatic. They must qualify as a “Qualifying Free Zone Person” (QFZP) and meet strict compliance conditions.
Key Points:
- All free zone companies must register for corporate tax with the Federal Tax Authority (FTA) and file annual returns.
- A Qualifying Free Zone Person can enjoy 0% corporate tax on “qualifying income,” such as trading with other free zone businesses or companies outside the UAE.
- Any non-qualifying income (like providing services to UAE mainland clients) is taxed at the standard 9% rate.
- To claim the benefit, the company must maintain adequate substance in the UAE, keep audited financial statements, and follow transfer pricing (arm’s length principle).
Example:
- A free zone trading company that sells goods to Europe through JAFZA may qualify for 0% tax.
- But if the same company sells directly to mainland UAE customers, that income will be taxed at 9%.
Myth 1: Free Zone Companies are Always Exempt from Corporate Tax
Fact: This is one of the most common misconceptions. All free zone companies are subject to the UAE freezone corporate tax framework. However, some may enjoy a 0% tax rate on specific income if they qualify as a qualified free zone person.
To qualify, a company must:
- Maintain adequate substance in the UAE.
- Earn qualifying income as defined by the FTA.
- Prepare and submit audited financial statements.
- Comply with transfer pricing and arm’s length rules.
- Meet additional reporting and record-keeping requirements.
If even one condition is missed, the company loses its eligibility and its entire taxable income may be subject to 9% tax. So, free zone benefits are available, but only if you play by the rules.
Myth 2: Free Zone Companies Don’t Need to Register or File Corporate Tax Returns
Fact: All free zone companies, regardless of their status as a Qualifying Free Zone Person, must register with the FTA. Even if you qualify for the 0% tax rate, you must still file a corporate tax return to declare your eligibility.
As per Federal Decree-Law No. 47 of 2022, all free zone companies must file their corporate tax return within nine months from the end of their financial year. For example, if your tax year ends on 31 December 2024, your first corporate tax return must be filed by 30 September 2025.
Not registering or filing on time can result in hefty penalties and even suspension of your trade license. So, compliance is not optional; it’s mandatory.
Myth 3: All Trading Companies in Designated Free Zones Enjoy 0% Tax
Fact: Simply being located in a designated free zone does not guarantee 0% corporate tax in the UAE free zones. A trading company must prove that it is conducting qualifying activities (like trading with businesses outside the UAE or within the same free zone).
If the company trades directly with mainland clients, the income earned will be considered non-qualifying income, free zone tax, and taxed at 9%.
This means each business must carefully check whether its activities fall within the qualifying income category before assuming it qualifies for the UAE free zone 0% corporate tax conditions.
Myth 4: Free Zone Companies can Form Tax Groups with Mainland Companies
Fact: A free zone company that is a Qualifying Free Zone Person (QFZP) cannot be part of a tax group. However, a free zone company that does not qualify for the 0% regime and is subject to the standard 9% rate can form a tax group with a mainland company if all other conditions are met.
- If a free zone company opts for the 0% corporate tax regime, it cannot form a tax group with a mainland entity.
- Tax grouping is only allowed if the free zone company gives up its 0% tax benefit and shares at least 75% common ownership with the mainland company.
This makes the choice between free zone vs mainland corporate tax in the UAE a strategic one. Businesses must weigh the benefits of grouping versus the advantage of retaining the 0% benefit.
Myth 5: Arm’s Length Rules Don’t Apply to Free Zone Companies
Fact: Even if a free zone company qualifies for 0% tax, it must still follow transfer pricing and the arm’s length principle.
This means all transactions with related parties or connected persons must be conducted as if they were independent, fair-market transactions. This prevents companies from shifting profits artificially to claim more UAE freezone corporate tax exemptions.
In practice, this means more documentation, careful pricing, and possible audits to ensure compliance.
Myth 6: Audited Financial Statements are Only Required if Turnover Exceeds AED 50 Million
Fact: While the AED 50 million turnover threshold applies to mainland businesses, all Qualifying Free Zone Persons (QFZP) must prepare and submit audited financial statements, regardless of their revenue.
For example, even a small consulting firm in a free zone must prepare audited accounts if it wants to claim the UAE free zone 0% corporate tax conditions. Additionally, the auditor’s details must be declared in the corporate tax return.
Myth 7: Income from Mainland Clients is Exempt Under Free Zone Rules
Fact: Professional services and consulting provided by free zone companies to mainland clients do not qualify for 0% tax. They are treated as non-qualifying income and taxed at 9%.
For example, if a free zone IT consultancy earns AED 2 million from mainland clients, that portion will be fully subject to free zone companies and 9% tax in the UAE. Only income from qualifying activities can enjoy the 0% rate.
Takeaways
The UAE’s corporate tax law has reshaped the free zone landscape. Here’s what businesses need to remember:
- Every free zone company must register and file returns. There are no blanket exemptions.
- Only a qualifying free zone person can access the UAE free zone’s 0% corporate tax conditions.
- Non-qualifying income free zone tax (like mainland consulting services) will always be taxed at 9%.
- Compliance means more than just filing returns. It includes audited accounts, transfer pricing, and detailed reporting.
Failing to separate fact from fiction can cost businesses heavily in fines, reputational damage, and loss of tax benefits.
How Vista Global Business Setup Can Help
We help businesses cut through the myths and focus on facts. Our team guides you through every step of freezone tax compliance in the UAE, from FTA registration and tax return filing to eligibility checks for the 0% corporate tax rate and preparing audited statements.
With our expertise in the UAE corporate tax law free zone, we make sure your company not only stays compliant but also maximises available benefits.
Book your FREE consultation today and let us simplify corporate tax compliance for your free zone business.
