Since the UAE's federal corporate tax went into effect, a lot of business owners have been asking the same thing: what does this mean for companies in free zones?
The UAE government has said that free zones will still get special tax breaks, but only if certain conditions are met. In other words, not all income is taxed the same way. Now, every business that works in a UAE free zone needs to know the difference between qualifying and non-qualifying income.
Why This Is Important for Business Owners
When the UAE put a 9% corporate tax on profits over AED 375,000, free zone companies wanted to know if they would still be able to avoid paying taxes.
The answer: yes, but only under certain conditions.
- Companies in free zones can still take advantage of the 0% corporate tax on qualifying income.
- Income that doesn't fit into the qualifying category is taxed at the normal 9% rate.
This means that entrepreneurs who want to protect their profits and stay competitive need to plan and follow the rules for taxes more than ever.
What Is Considered Qualifying Income?
The UAE Ministry of Finance has listed the types of income that companies in free zones can count as qualifying. Some important areas are:
- Transactions that happen in the same free zone (or with other free zones that meet the requirements).
- Money made by selling goods or services to customers in other countries.
- Dividends, capital gains, and royalties are some examples of passive income streams.
- Transactions with mainland UAE companies are allowed, but only under strict conditions and usually only for certain regulated activities.
What Doesn't Count
Not all types of income can get the 0% rate. Some types of income that don't qualify are:
- Income from trading directly with customers in the UAE mainland outside of the allowed activities.
- Profits from things that aren't allowed in the free zone's licensed area.
- Any money that doesn't meet the FTA's clear rules for reporting and following the rules.
The normal 9% corporate tax applies to this kind of income.

Following the Rules and Reporting
Even with the lower rates, compliance is still very strict. Companies in free zones must:
- Keep your business in the UAE (office, staff, or core operations).
- File corporate tax returns that are correct and on time.
- Keep separate records of your income to show which ones qualify and which ones don't.
- If you are part of a larger group, make sure you follow the rules for transfer pricing.
If you don't follow the rules, you could lose all of your free zone tax benefits and face fines.
Finding a Middle Ground
For international entrepreneurs, free zones are still one of the best options. They give:
- All of the ownership is foreign.
- Easier steps for getting a license.
- Strategic positioning for markets in the region and around the world.
- Continued preferential tax treatment, as long as it is set up correctly.
But the scales have changed. Just "set up in a free zone and enjoy 0% tax" is no longer enough. To be eligible, companies must now make sure that their operations, reporting, and strategy all work together.
Final Thoughts
The UAE has kept its promise to be a business-friendly place, even after the corporate tax was added. Free zones still have clear tax benefits, but only for businesses that meet the requirements for qualifying income.
Business owners in 2025 should not see paying taxes as a problem, but as a necessary part of building a business that will last. Businesses can get the most out of their free zone benefits and still follow all UAE laws if they set up their business correctly from the start.
Contact us today to ensure your UAE free zone company stays compliant and tax efficient.