A UAE free zone company is a legal entity registered by the authorities of a specific zone and operating under that zone's license. The UAE federal corporate tax also applies to free zone companies, so whether such a company pays 0% depends on its Qualifying Free Zone Person status and the type of income. Entrepreneurs looking for an alternative to a classic offshore company often learn about these conditions only after buying a license; the rules worth checking in advance are set out below.
This article covers the taxes and operating conditions of a free zone company. How a RAK ICC or JAFZA Offshore international company differs from a free zone company, and how buying a shelf company in AFZA, Creative City or RAK works, is explained on the page offshore company in the UAE.
Corporate tax rates
For an ordinary taxpayer, the rates are set by Cabinet Decision No. 116 of 2022:
- 0% on the portion of taxable income up to AED 375,000 per tax period, regardless of the number of business activities;
- 9% on income above AED 375,000.
For a free zone company that meets the conditions of the Qualifying Free Zone Person (QFZP) regime, the UAE Federal Tax Authority (FTA) sets out two rates:
- 0% on Qualifying Income;
- 9% on taxable income that does not meet the definition of Qualifying Income.
Registering a company in a UAE free zone does not by itself give a 0% rate on all income. First you need to break down the future revenue by activity and counterparty and check which part of it qualifies.
Conditions for QFZP status
The FTA lists four basic conditions. The company must:
- maintain adequate substance in the UAE;
- derive Qualifying Income within the meaning of the Cabinet Decision;
- comply with transfer pricing rules and keep transfer pricing documentation;
- not elect to be subject to the general corporate tax regime in full.
Ministerial Decision No. 229 of 2025 adds two more conditions: non-qualifying revenue stays within the de minimis threshold, and the company prepares audited financial statements. The de minimis threshold is met if non-qualifying revenue for the tax period does not exceed 5% of total revenue or AED 5,000,000, whichever is lower.
The cost of a mistake is high. A company that fails to meet the conditions at any point during a tax period loses QFZP status from the beginning of that period and for the four subsequent tax periods. Decision 229 of 2025 replaced Decision 265 of 2023 and applies from June 1, 2023, so the conditions must be checked against the current version.
Activities and the license
A license is issued for specific activity codes. Wording such as "consulting", "IT" or "trading" in a package advertisement tells you little: what matters is which activities are written into the license, whether they are permitted in the chosen zone and whether they need additional approvals. Before choosing a zone, draw up a list of the real operations: who is invoiced, whether there are goods supplies and a warehouse, whether there will be employees, whether sales to the UAE mainland are needed.
The owner's visa, Emirates ID and bank account are obtained through separate procedures, each with its own timelines and grounds for refusal. They are worth seeing as separate lines in the provider's quote.
Substance and the owner's tax residency
For the QFZP regime and for the bank, what matters is which functions are performed in the UAE: where decisions are made, where people work, what costs the company incurs locally. A bare address in a zone while the company is managed from another country raises questions about the company's place of management and about the owner's taxes at home. How substance is assessed is explained in more detail in the guide on economic substance.
If your main market is Southeast Asia, compare the UAE with Singapore: see UAE vs Singapore and the page Singapore company incorporation.
Bank account
A bank in the UAE examines the beneficial owners, their country of residence, the industry, the turnover forecast, the counterparties and the source of funds. Trading requires supplier and buyer documents; IT requires the product, a website and contracts with clients. A current account, multi-currency transfers and card acquiring are different products, and each is reviewed separately. How to prepare a KYB package is described in the guide to a corporate bank account.
A two-year budget
The estimate should separate:
- registration and a license for the required activities, renewal for the second year;
- an office or flexi desk, if the zone requires one;
- an establishment card, visas and medical procedures, if needed;
- bookkeeping, tax registration and the corporate tax return;
- an audit of the financial statements, mandatory for QFZP status;
- banking support.
Ask the provider for two calculations: without a visa and with the owner's visa. The general logic of a two-year budget is explained in the guide how much a foreign company costs.
Three scenarios
IT services for clients in the Gulf states. A free zone works well if the team or management actually work in the region and the revenue has been checked for qualification.
A holding company for foreign subsidiaries. You need to assess the nature of the income, withholding taxes in the subsidiaries' countries and whether QFZP applies.
A consultant living in another country. A UAE license will add annual costs, while the tax questions in the country of residence will remain.
Regimes for crypto projects in Dubai and other centres are compared in the guide to a structure for a crypto project. A European alternative with real presence is covered in the guide to a company in Cyprus.
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