What are Qualifying Free Zones? How Can You Pay 0% Tax on Your UAE Business?

The United Arab Emirates (UAE) has long attracted entrepreneurs, startups, and foreign businesses due to its tax-free arrangement and best-in-class infrastructure. But with the introduction of the UAE Corporate Tax regime in June 2023, business leaders have needed to rethink their tax planning.  

A 9% corporation tax now applies to companies earning profits above AED 375,000 annually. But not all companies feel the bite in the same manner. Thanks to specific regulations, companies operating from Qualifying Free Zones can still enjoy 0% corporate tax in UAE free zones, provided they meet certain conditions.

This article explores what Qualifying Free Zones are, the criteria your business must meet to benefit from the 0% corporate tax rate, and how to retain your tax-free status while staying compliant under the new rules.

Understanding UAE Corporate Tax and Free Zone Exemptions

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The UAE's rollout of corporate taxation was a step toward its commitment to come in line with worldwide tax evasion and transparency levels. According to the law, a 9% corporation tax is levied on profits above AED 375,000, in which the UAE joins the list of the world's lowest tax bases. Individual earnings like salaries, personal investments, and real estate gains, however, are exempt.

Moreover, the new tax law provides leeway for free zone companies. While all companies must sign up and file tax returns, not all of them are subject to paying the 9% tax. Certain free zone entities that meet special requirements, known as Qualifying Freezone Persons (QFZPs), are exempted, with a 0% corporate tax on qualifying income. Such an exemption makes the UAE highly attractive to regional and global investors.

What is a Qualifying Free Zone?

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A Qualifying Free Zone refers to a free zone that is recognized by the Federal Tax Authority (FTA) to be exempt from corporate tax, also called a designated free zone. Not all free zones are automatically eligible for tax exemptions according to the new law, and even those that enjoy such exemptions anticipate companies to adhere to onerous compliance procedures.

FTA, through Ministerial Decision No. 265 of 2023, stipulates clear requirements that make a company eligible to enjoy the 0% rate. Being located in a free zone is not enough. Your company must be licensed as a legal entity within the free zone, engage in approved activities, and comply with operational substance and reporting obligations in order to enjoy the 0% tax benefit.

Free zones like Dubai Multi Commodities Centre (DMCC), Dubai Airport Free Zone (DAFZ), Jebel Ali Free Zone (JAFZA), Abu Dhabi Global Market (ADGM), and Dubai International Financial Centre (DIFC) are considered some of the most important qualifying free zones due to regulatory power and infrastructure.  

How to Qualify for 0% Tax in UAE Freezones

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To qualify for the corporate tax exemptions offered by the UAE free zones, your business would have to be defined as a Qualifying Freezone Person (QFZP). For your organization to achieve this, your business must fulfill several primary requirements as briefly mentioned above.

1. As a starting point, your company must be an established legal free zone entity:
Mainland business branches operating out of free zones are not eligible.  

2. Your entity must also demonstrate adequate economic substance in the UAE:
Possess bricks-and-mortar office facilities, actual business operations, and necessary income-generating functions occurring on-site.  

3. Maintaining employees and operational expenses within the free zone:
This is proof that your company is not an empty shell company and helps to validate your qualifying status.

4. Another requirement that is a must is that your business must make qualifying income:
This typically refers to income from transactions with foreign customers or other companies within a free zone, and passive income in the form of interest, royalties, dividends, and capital gains earned from outside the country.  

Income from mainland UAE does not count—except in specific situations involving independent distributors.

5. Lastly, your company must maintain audited accounts of books and submit corporate tax returns to the FTA annually:  
Even if you qualify for 0% tax, you're still expected to file a return. Disobedience can attract penalties or loss of your tax-free status.

What is 'Qualifying Income'?

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All your revenue streams will not qualify for 0% corporate tax in UAE free zones. The law differentiates between qualifying and non-qualifying income, and it is worth remembering this so that you remain compliant.

Qualifying income refers to income from dealings with customers outside the UAE, dealings with other free zones or other businesses in the same free zone, and passive income of a particular nature including capital gains, dividends, and interest from non-UAE sources.  

For example, if you are running an export business in a free zone and exporting products outside the UAE, such income qualifies for a 0% tax rate.

But if you sell services or products to customers based on the UAE mainland, then that income usually is unqualifying unless passed through a third-party distributor. Even property income from real estate outside of the free zone or residential property does not qualify. Mixing qualifying and non-qualifying income as a mistake—not on purpose—could bar your company from 0% rate for the full tax year.

Risks of Losing Qualifying Free Zone Status

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The regulations for qualifying income and business substances are strict for a reason. If your company does not comply with any of the rules, it will no longer qualify as a Qualifying Free Zone Person. What is even scarier is that being disqualified means your entire profit for the year will be taxed at 9% rather than just the non-qualifying portion.

This renders it crucial to remain compliant with all FTA regulations. Losing status from infractions of any type—such as neglecting to have a local office, carrying out unauthorized mainland business, or failing to file a tax return on time—can lead to back taxes, penalties, and loss of exemptions. It is worth doing internal audits on a regular basis and seeking the advice of tax experts to remain eligible for corporate tax exemptions.  

How to Maintain 0% Corporate Tax Status

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If your business wants to continue benefiting from the 0% corporate tax rate for UAE Free Zones, the key is meticulous compliance and planning.

Maintaining economic substances is non-negotiable. Your company must function beyond just paperwork; it should have a physical presence, local employees, and real business operations. Keep all financial documentation in order and ensure that you’re working within the parameters of a recognized business activity in the free zone.

Keep your qualifying and non-qualifying sources of income separate and avoid holding mainland transactions except if under the approved distributor structure. Finally, sign up with the FTA for corporate tax and submit returns annually, whether or not your tax charge is zero.

Best Tax-Free Free Zones in the UAE

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If you are looking for where to set up your tax-free business, some of the free zones are known for their ease in doing business and compliance. These are mostly considered the finest tax-free free zones in UAE:

• Dubai Multi Commodities Centre (DMCC): One of the most popular free zones that is apt to businesses dealing in trading, financial, and professional services. It boasts top-grade infrastructure and a great legal framework, facilitating operations that are readily covered under the qualifying income mantle.

• Dubai Airport Free Zone (DAFZ): Appropriate for logistics, aviation, and technology business companies. Being located near Dubai International Airport, it is most appropriately designed for companies involved in international trade.

• Jebel Ali Freezone (JAFZA): An ideal destination for manufacturing and export businesses. Its direct access to Jebel Ali Port makes it a logistics hub best suited for large enterprises and warehousing.

• Abu Dhabi Global Market (ADGM): Convenient for asset management, finance, and fintech businesses. Its international recognition and common-law legal framework make it highly amenable to foreign investors.

• Sharjah Media City (Shams): Offers low-licensing fees for digital and creative freelancers. It is popular among startups, freelancers, and small agencies seeking low-cost entry and 0% tax eligibility.

How to Set Up a 0% Tax Business in a Free Zone

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Creating a company in a Qualifying Free Zone is easy but needs to be well-planned.  

1. Begin by choosing a free zone that is appropriate for your business activity and customers: Make sure the free zone allows qualifying business activities and that it is on the FTA-approved list.

2. Incorporate your company:
License your business with the free zone authority as a separate legal entity and not a branch of a mainland company.

3. Rent office space in the free zone.

4. Employ local staff:
Proving economic substance of your operations genuinely being based in the UAE.  

5. Sign up with the Federal Tax Authority:
Irrespective of your tax exposure, filing tax returns, maintaining audited accounts and economic substance are key steps to remain compliant and benefiting from the 0% corporate tax in UAE Free Zones.

The UAE is still one of the top destinations for foreign business because of its robust infrastructure, pro-investor policies, and strategic tax advantages. With the introduction of corporate tax, things have become more governed—but there are opportunities to be had for businesses that position themselves in the right places.

If you are already operating or planning to set up in the UAE, choosing a Qualifying Free Zone, understanding how to qualify for 0% tax in UAE, and maintaining compliance are crucial steps to turn your business profitable and tax efficient.

From corporate tax exemptions in UAE Free Zones to selecting the best tax-free free zones in UAE, staying current and in harmony with FTA regulations can help you protect your bottom line while expanding your business in one of the globe's most dynamic economies.

Seek our professional on-the-ground guidance, contact us via mail at info@radiantbiz.com or WhatsApp & call us at +971 55 234 7124!