Last updated: 24 February 2026. This guide summarises key Free Zone vs Mainland Corporate Tax implications for structuring decisions; it is not legal or tax advice.
Under UAE Corporate Tax, both Free Zone vs mainland entities are within scope. The practical difference is not “tax vs no tax” – it is whether a Free Zone entity can meet the Qualifying Free Zone Person (QFZP) conditions to access the 0% rate on Qualifying Income, and whether it can sustain those conditions year after year.
1. Corporate Tax basics (Free Zone vs Mainland)
- Standard Corporate Tax rates for most Taxable Persons: 0% on taxable income up to AED 375,000; 9% above AED 375,000.
- Large MNE groups may also be impacted by the UAE Domestic Minimum Top-up Tax (DMTT) aligned with OECD Pillar Two (minimum 15% effective tax rate for in-scope groups).
- Corporate Tax returns are filed online through EmaraTax within 9 months of the end of the Tax Period.
2. Mainland companies – tax position
Mainland companies (licensed by an Emirate DED) follow the standard Corporate Tax regime. There is no “qualifying income” concept for mainland entities.
- Tax rate: 0% / 9% based on taxable income bands.
- Small Business Relief may be available (revenue threshold AED 3 million, subject to conditions, and currently limited to tax periods ending on or before 31 December 2026).
- Transfer Pricing applies to related party/connected person transactions.
3. Free Zone companies – the QFZP regime
A Free Zone entity is not automatically exempt. It may qualify as a Qualifying Free Zone Person (QFZP) if it meets all conditions prescribed under the Corporate Tax Law and the relevant Cabinet/Ministerial Decisions.
How a QFZP is taxed
- 0% Corporate Tax on Qualifying Income.
- 9% Corporate Tax on Taxable Income that is not Qualifying Income.
- Important: the standard 0% band up to AED 375,000 does NOT apply to a QFZP’s Taxable Income that is not Qualifying Income.
4. Conditions to maintain QFZP status
- Maintain adequate substance in the UAE (including people, premises, and decision-making in the UAE).
- Derive Qualifying Income as defined in Cabinet Decision No. 100 of 2023.
- Meet the de minimis threshold for non-qualifying revenue.
- Prepare and maintain audited financial statements (mandatory for QFZPs).
- Comply with Transfer Pricing (arm’s length principle, disclosure and documentation).
- Do not elect to be taxed under the standard Corporate Tax regime.
5. Qualifying Income – what counts (high level)
Under Cabinet Decision No. 100 of 2023, Qualifying Income generally includes:
- Income from transactions with another Free Zone Person (except income from Excluded Activities).
- Income from transactions with a Non-Free Zone Person, but only for Qualifying Activities that are not Excluded Activities.
- Income from the ownership or exploitation of Qualifying Intellectual Property (subject to additional conditions).
- Other income, provided the QFZP meets the de minimis requirements.
Qualifying Activities vs Excluded Activities
Ministerial Decision No. 265 of 2023 lists Qualifying Activities (e.g., manufacturing/processing, logistics, fund management, headquarter and treasury services to related parties, distribution of goods in or from a Designated Zone, etc.) and Excluded Activities (e.g., banking, insurance, certain finance/leasing, and most immovable property activities except limited cases).
6. The de minimis rule (critical)
A QFZP must keep its non-qualifying revenue below the lower of AED 5,000,000 or 5% of total revenue in the relevant Tax Period.
If the de minimis threshold is breached (or another QFZP condition is failed), the entity generally ceases to be a QFZP from the beginning of that Tax Period and for the subsequent four Tax Periods (a “cooling-off” period).
7. Common structuring risks (where businesses get caught)
- Selling mainly to mainland customers without careful mapping to Qualifying Activities (risk of non-qualifying revenue and losing QFZP status).
- Underestimating substance requirements (insufficient people, premises, or UAE-based decision-making).
- Not planning for the mandatory audit for QFZP status.
- Transfer Pricing gaps in intra-group pricing between Free Zone and mainland entities.
- Misunderstanding “Designated Zones”: this concept is primarily VAT-related; for Corporate Tax it is relevant only in specific Free Zone rules (e.g., distribution activity), and it does not create a general Corporate Tax exemption.
8. Practical decision framework
In practice, mainland structures often provide operational certainty for UAE domestic market businesses. Free Zone structures can be efficient where revenue is export-oriented, intra-Free Zone, or clearly within Qualifying Activities and can be maintained below the de minimis threshold.
A quick comparison
| Area | Mainland | Free Zone (QFZP focus) |
| Tax rate mechanics | 0%/9% based on taxable income bands. | 0% on Qualifying Income; 9% on non-qualifying taxable income (no 0% band). |
| Audit requirement | Depends on revenue/decisions; may not be mandatory for all. | Audit is mandatory for QFZP. |
| Main compliance risk | Standard CT + TP compliance. | Qualifying income analysis + de minimis + substance + audit + TP. |
| Loss of preferential status | Not applicable. | If conditions fail, QFZP status can be lost for current and next 4 tax periods. |
Official references (selected)
- FTA Corporate Tax Guide – Free Zone Persons (CTGFZP1, 20 May 2024).
- Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person.
- Ministerial Decision No. 265 of 2023 (Qualifying Activities, Excluded Activities, de minimis requirements, and related conditions).
- Ministerial Decision No. 84 of 2025 (Audited Financial Statements).
- FTA Corporate Tax Guide – Tax Returns (CTGTXR1, 11 November 2024).
Disclaimer: This article is for general informational purposes only and does not constitute professional advice. Free Zone qualification and Corporate Tax outcomes depend on facts, contracts, activities, and the latest guidance. Seek professional advice for structuring, modelling, and compliance planning.