How new corporate tax effect Free Zone companies in the U.A.E

The UAE Corporate Tax (CT) framework preserves the nation's historical commitment to Free Zones while introducing strict compliance parameters under Federal Decree-Law No. 47 of 2022. Free Zone companies are not automatically exempt; instead, they are classified as Taxable Persons who must actively qualify to receive preferential tax rates.

The Dual-Rate Structure for Free Zones

Free Zone juridical entities that satisfy all legal compliance requirements are designated as Qualifying Free Zone Persons (QFZPs). Their income is split into two distinct tax rates:

• 0% Corporate Tax Rate: Applicable strictly to Qualifying Income. This includes income derived from transactions with other Free Zone entities, or income from specific "Qualifying Activities" when trading with the mainland or global markets (e.g., manufacturing, processing, shipping, fund management, and the wholesale distribution of goods from a Designated Zone).

• 9% Corporate Tax Rate: Applicable to Non-Qualifying Income. This includes income generated from "Excluded Activities" (such as banking, insurance, and transactions with natural persons/retail consumers) or direct retail trade with UAE mainland companies outside the approved frameworks.

The 5 Crucial Conditions for the 0% Rate

To maintain QFZP status and secure the 0% rate on qualifying income, a Free Zone company must satisfy all of the following criteria simultaneously.

The 5-Year Penalty Cliff: Failing to meet even a single one of these conditions disqualifies the entity from QFZP status for that specific tax year and the subsequent four tax years.

1.Maintain Adequate Substance:Core Income-Generating Activities.

The company must conduct its core income-generating operations within the Free Zone. This requires having an adequate number of qualified employees, sufficient physical assets, and appropriate operational expenditure incurred inside the zone.

2.Derive Qualifying Income Only:Under MD 229 of 2025.

Ensure the vast majority of revenue originates from approved Qualifying Activities. Under the strict de minimis rule, non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower.

3. Avoid Electing Standard Tax Rates: Irrevocable Decision.

The entity must not have made a voluntary election to subject itself to the standard mainland corporate tax regime under Article 19 of the law.

4. Prepare Audited Financial Statements: Under MD 84 of 2025.

Unlike small mainland businesses, preparing and maintaining audited financial statements signed by a registered auditor is an absolute statutory requirement to claim the 0% Free Zone benefit.

5.Comply with Transfer Pricing Rules:Articles 34 & 55 Compliance.

All transactions with related parties or connected persons must comply strictly with the Arm’s Length Principle, supported by contemporaneous transfer pricing documentation.

The Small Business Relief Clarification

There is a vital structural distinction regarding Small Business Relief (SBR) that businesses frequently misinterpret:

Important Compliance Rule: Under Ministerial Decision No. 73 of 2023, Qualifying Free Zone Persons are entirely ineligible to elect for Small Business Relief.

If a Free Zone entity wishes to utilize the AED 3 million revenue relief threshold to be treated as having no taxable income, it must formally opt out of the QFZP regime entirely and choose to be taxed under standard mainland rules (0% up to AED 375,000, and 9% thereafter). You cannot mix both regimes.

Summary of the Net Impact on Free Zone Entities

Business Footprint	Effective Corporate Tax Impact
Purely B2B / Export Focused	Highly favorable. Maintains a 0% tax burden provided substance and annual audit protocols are strictly met.
Mixed Mainland B2C / Retail	Increased operational cost. Requires careful segregation of books to track standard 9% exposure on mainland retail revenue.
Low-Substance / Paper Companies	High risk. Missing substance or audit metrics forces a full structural shift to a flat 9% tax on all global net profit.

Strategic Recommendation

Free Zone companies must move away from the assumption that their geographic location guarantees a tax-free status. Management should actively execute an internal transaction audit to categorize every revenue stream against the updated Qualifying Activities lists, ensure accounting practices support a full corporate audit, and verify that all transfer pricing models are robustly documented before filing deadlines arrive.

Sheikh Mohammed issues law on free zones and special development zones in Dubai

In his capacity as Ruler of Dubai, Vice President and Prime Minister of the United Arab Emirates, His Highness Sheikh Mohammed bin Rashid al Maktoum, issued Law No. 15 of 2016 on the regulations issued by the authorities of free zones and special development zones in Dubai.

The new Law is applicable to all free zones and special development zones in Dubai, including Dubai International Financial Centre, DIFC. Government entities subject to this Law will publish any bylaws or regulations on their official websites and make them available to the public free of charge.

Pursuant to the Law, authorities of free zones and special development zones in Dubai may publish their regulations in Arabic or any other language. The regulations published in any authority’s official website is binding and considered effective within 30 days of the date of publication unless stated otherwise.

All regulations issued by authorities of free zones and special development zones in Dubai prior to Law No. 15 of 2016 remain valid and obligatory and must be communicated by the authorities through their official websites within 30 days of the date of activation of the new Law.

The new Law shall be published in the Official Gazette and is effective from the date of publication.

Mandatory benefits to employees in Jebel Ali Free Zone

Employees working in firms operating under the jurisdiction of the Jebel Ali Free Zone Authority (Jafza) are entitled to mandatory termination benefits as per the laws of the free zone. If the dismissal is deemed to be arbitrary, the employee shall be entitled to compensation in addition to severance payments due that are governed by the employment contracts in Jafza.

Compensation you are entitled to: According to Rule 11.8.7 of Jafza employment law, the amount of compensation that will be payable to a terminated employee shall be decided by the deemed authority here and will not exceed three times the total of the basic monthly wage and allowances as specified in the employment agreement.

Gratuity payment at termination: An employee whose service exceeds one year shall be entitled to a gratuity payment on termination of service at the rate of 21 calendar days pay of the last month’s basic salary (or more if the employment agreement so specifies) for each year of service for the first 5 years.

For each additional year, the amount increases to 30 calendar days of the last month’s basic salary, provided that the maximum payment does not exceed two years’ basic salary.

After the first year, payment will be pro-rata for the period served. The regulation clarifies that gratuity shall be calculated at the basic pay rate as defined in the employment agreement.

Airfare to home country: When an employee’s services are terminated, airfare to the international airport nearest to the employee's home should be offered. This is applicable at the expiry of the employment agreement or when the employment agreement is terminated by the client prior to its expiry.

If an employee’s annual contract is automatically renewed in accordance with the employment agreement, the employee is entitled to airfare either in the event of submitting a resignation or on dismissal, whenever this occurs.

However, if the employee has already availed the ticket for the completed contract period, s/he will not be entitled to an additional airfare for the same period.

A free service certificate :If the terminated employee wishes for some kind of record, he can request a service certificate, which is to be provided free of charge. The certificate will have details of the employee such as period of service, work performed while employed, final rate of pay and bonus, if any, and a character reference. These things can come in handy while applying for a new job elsewhere.

Unified Labour Contract for Employees in Dubai’s Free Zones

Employees in all the free zones of Dubai will have a unified employment contract under a new proposal discussed by a higher body.Chaired by Sheikh Ahmed bin Saeed Al Maktoum, Chairman of Dubai Free Zone (DFZ) Council, the meeting debated unifying of labour contracts for workers in these hubs in accordance with the labour laws of the UAE.

Sheikh Ahmed directed the Council members to put together a sample contract for working within the free zone areas. Starting January 1, 2016, the UAE implemented new labour contract that standardizes employment terms.

The Dubai Free Zone Council was established in April 2015 to develop and qualify Dubai’s free zones to attract investments and establish an advanced investment environment that contributes to promoting industry, commerce, tourism and the services sectors in Dubai.The Council comprises senior officials of the various free zones in Dubai as well as the Director General of Dubai Municipality and the Director-General of State Security in Dubai.

Ease of Company Transfer

The Dubai Free Zone Council approved a decision to facilitate the transfer of companies among the free zones in the emirate of Dubai.

A company that is looking to relocate to a new free zone can now transfer its complete registration and record to the new hub without having to cancel its outstanding registration and/or liquidating the business. This will give companies wishing to relocate to a more appropriate environment in Dubai the necessary financial and administrative stability to do so.

Following in-depth research and analysis of various measures within the UAE and abroad, the legal committee has developed a framework that will allow seamless transfer of companies between free zones, as directed by Sheikh Ahmed bin Saeed Al Maktoum.

Preventing Double Taxation

The members of the Dubai Free Zone Council also underlined the need to cooperate with the Ministry of Finance (MoF) in abiding with the international agreements signed by the UAE with regard to preventing double taxation.

The Council committed to providing the Ministry with necessary information and data to improve the classification of the UAE - as per the standards of the Global Forum on Transparency and Exchange of Information.

For its part, the Ministry of Finance presented the UAE’s obligations in the prevention of double taxation. Till date, the UAE has ratified 97 agreements for the prevention of double taxation and four agreements for the exchange of information for tax purposes.  The Council discussed ways to attract more investments through identifying appropriate solutions to some of the challenges highlighted in the feedback received on the UAE’s free zones.