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How Free Zone Companies Can Preserve Their 0% UAE Corporate Tax Rate

Introduction

In June 2023 the UAE introduced a 9% corporate tax on profits above AED 375,000. To keep the country attractive for investors, free zone companies that meet certain conditions can still pay 0% on their qualifying income. In other words, if your company operates in a UAE free zone and follows all the rules, you can benefit from the 0% tax. However, the law only grants 0% on eligible free zone activities. All other income is taxed at 9%. For example, a free zone company gets the 0% rate on revenue from allowed deals (like sales to other free zone firms or permitted activities in the zone). Selling to mainland UAE companies or earning income outside the free zone is non-qualifying and normally taxable. You must also show that your business really takes place in the free zone (with local staff, offices, and expenses). If you miss any rule or condition, you lose the 0% benefit and must pay the standard 9% rate instead.

In the sections below, we explain the core compliance topics you need to know, give practical planning recommendations, and show how working with experts like AccuTrace can help you keep your free zone company on the 0% tax rate.

Core Compliance Topics

  • Qualifying vs non-qualifying income: income from eligible free-zone activities gets 0% tax. Qualifying income generally means revenue earned inside the free zone or from transactions with other free zone entities. All other income for example, sales to mainland UAE customers or income from outside the zone is non-qualifying and will be taxed at 9%. It’s important to separate these clearly in your accounts. Any non-qualifying income above the 5% threshold (or AED 5 million) forces you to pay tax on all your profits (see below).
  • Adequate substance in the UAE: Your free zone company must have a real local presence. This means having sufficient assets, full-time staff, and operating expenses in the free zone. You should lease a proper office, hire UAE-based employees, and conduct the actual business activities there. If you only have a mailbox or all your operations, really take place outside the zone, you won’t qualify for 0%. In other words, “showing up” for business in the free zone is required by law to apply the 0% on its profit.
  • Small-amount rule: The tax law limits how much “outside” income you can have. Non-qualifying revenue must stay under 5% of your total revenue (up to AED 5 million). If you go over this limit, your company loses the free zone 0% benefit and will pay 9% on all profits. (For example, if a company earns more than 5% of its revenue from the mainland, it must pay corporate tax on everything.) Keep non-qualifying activities – like onshore sales or excluded activities – small enough to stay below this threshold.
  • No election to ordinary tax: Free zone companies must not opt in to the standard tax system if they want the 0% rate. Free zone firms have the choice to remain under the special free zone rules or switch to the mainland tax rules. If you voluntarily elect to be taxed as a regular UAE company (at 9%), you give up the 0% privilege. In practice, to keep the 0% rate you should simply not file any special election, just follow the free zone regime.
  • Fair pricing and record-keeping: If you deal with related companies (for example, sister companies in other jurisdictions), make sure those transactions are priced as if they were between independent parties (“arm’s length” pricing). Keep detailed documentation and audited financial statements. The tax authorities expect you to record how you set prices for intra-group deals and to keep all paperwork on hand. Good records prove you are following the rules and help avoid disputes.

Planning Recommendations

  • Separate your activities: Keep your free zone business and any mainland business in separate legal entities or accounts. For example, use your free zone company for exports or trading with other free zones, and use a different company for onshore UAE sales. This separation makes it easier to ensure that most revenue stays within the free zone entity, helping you meet the 0% requirements.
  • Track income closely: Set up your accounting so you can clearly see which revenue comes from qualifying free zone activities versus other sources. Use different codes or bank accounts for different income streams. This way you can make sure non-qualifying income stays below 5% (or AED 5 million) of total sales. By watching your numbers during the year, you can adjust your business if the limit is getting close.
  • Build real substance: Give your free zone company a genuine presence in the UAE. Rent a suitable office in the free zone, hire permanent staff there, and incur actual local expenses. Show that most of your operations are done inside the zone. For example, hold meetings in the office, keep inventory or equipment at that location, and pay local rents and salaries. These actions demonstrate compliance with the “adequate substance” rule.
  • Follow transfer pricing: If your business has transactions with related parties, set prices that reflect fair market value. Document how you arrive at those prices (for example, using comparable market rates). Proper transfer pricing practice helps prevent auditors from adjusting your income between related companies, which could otherwise cause you to fail the free zone tests.
  • Regular compliance checks: Plan periodic reviews of your free zone status. A mid-year “tax health check” can spot issues early – for example, rising non-qualifying income or missing documentation – so you can fix them in time. Update your records and reevaluate your structure if your business changes. Keeping everything organized and checked reduces the chance of a last-minute surprise during tax season.

How AccuTrace Can Help

  • Expert guidance: Our team understands the UAE free zone rules. We can explain the conditions for 0% in simple terms and advise on your specific case. We review your company’s structure and suggest ways to organize transactions so more income qualifies for the 0% rate.
  • Tax health check: We audit your situation for gaps. For example, we’ll verify that your non-qualifying income is below the limit and that you have proper substance and documentation. Our goal is to catch any problem (like bookkeeping gaps or transfer pricing issues) before you file your return.
  • Filing and compliance support: We handle the technical work so you stay on track. This includes tax registration, preparing and filing corporate tax returns. We also help maintain audit-ready records and ensure deadlines are met, reducing the risk of penalties.

Conclusion

Keeping the 0% corporate tax rate for your free zone company is a great advantage, but it requires careful compliance. Follow the rules on qualifying income, substance, and the De Minimis threshold to stay eligible.

Plan ahead by organizing your operations and bookkeeping so that you clearly meet every requirement. Remember: even a brief lapse can be costly. FTA guidance makes it clear that missing a requirement for even one day can invalidate the 0% rate for that tax year and the next four years. In other words, mistakes can be very expensive.

Working with tax professionals like AccuTrace can help you avoid pitfalls and keep your free zone benefits intact. With proper planning and support, you can confidently take advantage of the 0% tax rate for your qualifying free zone income.