The claim, and the reality
Ask around the Dubai setup market and you will hear the same sentence repeated: “Free zone companies pay
0% corporate tax.” It is repeated often enough that founders build plans on it. It is also, as a general
statement, wrong.
Free zone companies are within the scope of UAE corporate tax. They must register with the Federal Tax
Authority. They must file returns. The 0% rate applies only to qualifying income of a
Qualifying Free Zone Person, and both of those terms carry conditions that a great many
companies do not meet.
The five conditions
To be a Qualifying Free Zone Person, a company must:
- Maintain adequate substance in the free zone — core income-generating activities
carried out there, with appropriate people, premises and expenditure. - Derive qualifying income as defined in the relevant Cabinet decisions.
- Stay within the de minimis threshold for non-qualifying revenue.
- Comply with transfer pricing rules and documentation for related-party transactions.
- Prepare audited financial statements.
Fail any one of them and the standard regime applies: 0% to AED 375,000, 9% above. In some circumstances
qualifying status is lost for the current period and several following ones.
Four ways companies lose it
1. The flexi-desk problem
Substance means the income-generating activity happens in the zone. A company whose only UAE footprint is
a shared workstation, while the founder works from Manchester or Mumbai, is difficult to defend as having
adequate substance.
2. Mainland revenue
Income from mainland UAE customers is frequently non-qualifying. A consultancy that drifts into serving
mostly Dubai mainland clients can breach the de minimis threshold without anyone in the business noticing.
3. No audit
Audited statements are a condition of qualifying status regardless of whether your zone requires them.
Companies in zones with no audit requirement often skip it, and lose the rate by omission.
4. Related-party pricing
Charging your own foreign company an arbitrary management fee is not transfer pricing compliance. If
related-party transactions are material, they need documented arm’s-length support.
What to do about it
If the 0% rate genuinely matters to your economics, treat it as a structural decision rather than a
marketing claim. That means choosing a zone and an office format that can support substance, keeping your
revenue mix under review, budgeting for an audit from year one, and documenting related-party arrangements
before the FTA asks.
If it does not matter much — and for many small consultancies the 9% on profit above AED 375,000 is a
modest figure — then do not distort the structure chasing it. Pay the tax, keep the setup simple, and
spend the energy on the business.
Send us your licence, your zone and a rough
revenue split by customer location. We will tell you whether qualifying status is realistic for you, and what
it would take to get there. See corporate tax registration.
