Introduction
Special Economic Zones (SEZs) have proven to be powerful engines for national economic growth. Take Shenzhen, China, for example. In the late 1970s, it was a small fishing town with roughly 30,000 residents. After becoming one of China’s first SEZs in 1980, Shenzhen’s economy transformed dramatically — its GDP per capita rose by more than 33,000% between 1979 and 2019. During the same period, China’s overall GDP expanded over 50 times, highlighting how SEZs can significantly accelerate development.
From the first SEZ established at Shannon Airport in 1959 to nearly 7,000 zones across 145 countries today, SEZs continue to drive international trade and investment.
The United Arab Emirates (UAE) has capitalized on this concept effectively. According to fDi Intelligence, six of the top ten global free zones in 2023 were in the UAE, with the Dubai Multi Commodities Centre (DMCC) holding the title of Global Free Zone of the Year for nine consecutive years. These achievements have strengthened the UAE’s reputation as a top destination for international investors.
To maintain this competitive advantage, the UAE introduced a 0% Corporate Tax rate for eligible free zone companies. This article explains who qualifies for this benefit and the conditions that must be met to enjoy the zero-tax regime.
Who Can Benefit from the 0% Corporate Tax Rate?
The UAE introduced Corporate Tax in 2022 as part of its fiscal reform. Under this law, two types of businesses can benefit from the 0% rate:
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Mainland or free zone companies with taxable income below AED 375,000
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Qualifying Free Zone Persons (QFZPs) earning Qualifying Income
This article focuses on the second category — QFZPs, which are eligible for zero tax on certain types of income.
Who Is a Qualifying Free Zone Person (QFZP)?
A Free Zone Person is any legal entity, such as a company or branch, incorporated or registered within a UAE free zone. The 0% Corporate Tax benefit, however, applies only to income that meets qualifying criteria as defined by the law.
What Is Qualifying Income?
Qualifying Income refers to revenue derived from Qualifying Activities with other free zone entities or non-free zone businesses. It may also include earnings from Qualifying Intellectual Property (IP), such as patents or copyrighted software.
Companies must also adhere to the de minimis rule, which limits non-qualifying income to the lower of AED 5 million or 5% of total revenue.
According to Ministerial Decision No. (265) of 2023, Qualifying Activities include manufacturing, processing, logistics, investment management, and related support services.
Conditions to Maintain QFZP Status
To retain eligibility for the zero-tax benefit, a company must meet all of the following requirements:
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Adequate Substance in a Free Zone
Core business operations must be conducted within the free zone and supported by sufficient staff, physical assets, and operating expenses. -
Earn Qualifying Income
The majority of revenue should come from Qualifying Activities or transactions with other free zone businesses. Income from domestic or international permanent establishments is taxed at 9%. -
Comply with the De Minimis Rule
Non-qualifying revenue must not exceed AED 5 million or 5% of total income — whichever is lower. -
Avoid Electing Regular Corporate Tax
Opting for the standard corporate tax regime under Article 19 disqualifies a company from the zero-tax benefit. -
Follow the Arm’s Length Principle
Related-party transactions must be priced as if between independent parties. Proper transfer pricing documentation must be maintained. -
Maintain Audited Financial Statements
All free zone entities, regardless of income, must keep audited financial statements reviewed by an independent auditor.
Failure to meet any of these conditions results in losing QFZP status for the current and next four tax periods, making the company ineligible for the zero-tax benefit during that period.
Why UAE Free Zones Are Vital for Investment
Free zones have been central to the UAE’s economic diversification and competitiveness. Between 2015 and 2021, free zone exports contributed over 60% of the UAE’s total exports, while re-exports exceeded 55% in 2020.
According to Middlesex University Dubai, the UAE’s FDI-to-GDP ratio surpasses major economies like the US, China, and India. Programs like NextGenFDI continue to attract digital-first, technology-driven enterprises to UAE free zones.
In 2022, the UAE attracted $22.7 billion (AED 83 billion) in foreign direct investment — a 10% increase from 2021 — accounting for 47.1% of West Asia’s total FDI inflows and 32.4% of MENA’s, reinforcing its status as a global business hub.
Conclusion
The UAE’s corporate tax framework is one of the most investor-friendly worldwide. Even the standard 9% tax rate is lower than many advanced economies. However, the 0% Corporate Tax regime for QFZPs remains a key incentive for foreign investors.
Meeting all compliance requirements — including calculating qualifying income, maintaining transfer pricing documentation, and preparing audited financial statements — is crucial. Losing QFZP status can result in forfeiting the zero-tax benefit for up to five years, highlighting the importance of professional guidance.
At AKW Consultants, our team of corporate tax experts helps free zone companies navigate UAE tax laws, ensure compliance, and maximize the advantages of the 0% Corporate Tax regime with confidence.
