What free zone status does and does not remove
| Obligation | Free zone company | Mainland company |
|---|---|---|
| Corporate tax registration | Required | Required |
| Filing a return | Required | Required |
| Record-keeping | Required | Required |
| Rate on qualifying income | 0% if QFZP conditions met | Not applicable |
| Rate on non-qualifying income | 9% above AED 375,000 | 9% above AED 375,000 |
| Audited financial statements | Required for QFZP status, and usually by the zone | Depends on entity type |
| Transfer pricing compliance | A condition of QFZP status | Required where related parties exist |
| Substance requirement | A condition of QFZP status | Not a tax rate condition |
| Small Business Relief | Not available to a QFZP | Available if eligible |
Read down the first three rows. Nothing there is affected by being in a free zone, and those three are where the penalties live. The advantage sits entirely in the rate rows, and it is conditional.
The detail
The misunderstanding here is old and it predates corporate tax, which is why it is so persistent.
For decades, “free zone” in the UAE meant a package of advantages including tax exemptions under the zone’s own arrangements. Businesses were established on that basis and the language stuck. When federal corporate tax arrived in 2023, a large part of the free zone population reasonably assumed their existing position carried over unchanged.
It did not, quite. The regime brought free zone companies inside it and then created a mechanism, Qualifying Free Zone Person status, under which qualifying income is taxed at 0 per cent. That preserves much of the commercial substance of the old position, but it changes the shape of it in one crucial respect: you are now a taxable person with obligations, claiming a rate, rather than an exempt entity outside the system.
The practical consequence is that the things which generate penalties, registration and filing, apply to a free zone company paying nothing exactly as they apply to a mainland company paying a great deal.
Three positions a free zone company can be in
Not every free zone company is a QFZP, and the three positions have quite different consequences:
- QFZP with entirely qualifying income: 0 per cent across the board, registration and filing still required, conditions tested annually
- QFZP with some non-qualifying income inside the de minimis threshold: 0 per cent on qualifying income, 9 per cent above AED 375,000 on the rest, status intact
- Not a QFZP: either because a condition failed or because the status was never claimed. Taxed as an ordinary resident taxable person: 0 per cent to AED 375,000, 9 per cent above
The third position is more common than free zone companies expect, and it is not a disaster. A small free zone consultancy that cannot demonstrate substance is simply an ordinary taxable person, and may well be eligible for Small Business Relief instead, which a QFZP cannot claim. Establishing which of the three you are in is the first useful step.
The registration point, restated because it matters
A free zone company registers for corporate tax from the issue of its licence, regardless of activity, profit or expected rate.
We find unregistered free zone entities constantly, and the reasoning is always the same: the owner understood the company to be tax-free, so a tax registration seemed like a category error. Holding companies and dormant free zone entities inside larger structures are the most affected, because nobody looks at them at all.
The penalty is AED 10,000 per entity. A group with three unregistered free zone companies owes it three times, and none of them will have been trading.
Filing within 7 months of financial year end (by 31 July 2026 for a December 2025 year end) waives the AED 10,000 late-registration penalty If you have an unregistered free zone entity, that window is the thing to check before anything else.
Free zone status is not a VAT position
One further conflation worth clearing up, because it causes separate problems.
VAT and corporate tax are different regimes with different rules. Free zone status has no bearing on whether you must register for VAT, the AED 375,000 of taxable supplies and imports over the previous 12 months, or expected within the next 30 days threshold applies to a free zone company exactly as to anyone else.
What does exist in VAT is designated zone treatment, which is a narrower and entirely separate concept: a specific list of locations, requiring customs controls, affecting the place of supply for goods rather than services.
Being in a free zone does not make you a designated zone, and designated zone treatment does not extend to services. For a trading business the difference has direct consequences for what appears on the VAT return, and it is worth establishing your actual position once rather than inheriting an assumption from whoever configured the accounting system.
What people get wrong
- “Free zone means tax-free.” It means a conditional rate on part of your income.
- Not registering because no tax is expected. Registration follows the licence, not the liability.
- Assuming QFZP status applies automatically. It depends on five conditions, tested every year.
- Assuming you are a QFZP when substance or activity mix would not support it.
- Trying to claim Small Business Relief as a QFZP. The two are alternatives.
- Confusing free zone with designated zone for VAT purposes.
- Assuming free zone status affects the VAT threshold. It does not.
What to do about it
- Confirm every free zone entity is registered, including dormant and holding companies.
- Establish which of the three positions you are in: QFZP, QFZP with de minimis income, or ordinary taxable person.
- If you are not a QFZP, check Small Business Relief instead.
- Separate the VAT question: the threshold applies regardless.
- Check the waiver window if any entity registered late.
Related questions
Frequently Asked Questions
Do free zone companies pay UAE corporate tax?
They are inside the regime. A Qualifying Free Zone Person pays 0 per cent on qualifying income and 9 per cent on non-qualifying income above AED 375,000. Registration, filing and record-keeping apply regardless of the rate.
Is free zone status an exemption?
No. It is a rate on part of your income, conditional on five tests applied every year. The obligations that generate penalties, registration and filing, are unaffected by it entirely.
Does a dormant free zone company need to register?
Yes. Registration follows the licence, not the activity. Dormant and holding free zone entities are where we find unregistered companies most often, and the AED 10,000 penalty applies per entity.
What if we are not a Qualifying Free Zone Person?
Then you are taxed as an ordinary resident taxable person, 0 per cent to AED 375,000, 9 per cent above. It is a more common position than free zone companies expect, and it may open up Small Business Relief, which a QFZP cannot claim.
Can a free zone company claim Small Business Relief?
Only if it is not a QFZP. The two are mutually exclusive, so a free zone company qualifying for both is choosing between them rather than combining them.
Does free zone status affect VAT registration?
No. The AED 375,000 of taxable supplies and imports over the previous 12 months, or expected within the next 30 days threshold applies to free zone companies exactly as to anyone else. VAT and corporate tax are separate regimes with separate rules.
Is our free zone a designated zone for VAT?
Designated zone status is a separate concept defined by a specific list, requiring customs controls, and affecting the place of supply for goods rather than services. It does not follow from being in a free zone, and it is worth establishing once rather than assuming.
Do we still file a return if all our income qualifies?
Yes. A return is mandatory for every registered taxable person, including those at 0%, those electing Small Business Relief, and free zone companies with QFZP status The QFZP position is tested through the return, so filing is how the status is established rather than something separate from it.
What is the penalty if we never registered?
AED 10,000 per entity. Filing within 7 months of financial year end (by 31 July 2026 for a December 2025 year end) waives the AED 10,000 late-registration penalty If you have an unregistered free zone entity, checking whether that window is still reachable is the first thing to do.
Dormant and holding companies inside free zone structures are where we find gaps most often, and the penalty applies to each one separately.
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Last reviewed 27 July 2026. Rates, thresholds and deadlines change, the e-invoicing provider deadline has already moved once. Confirm current requirements with the Federal Tax Authority before acting, or ask us to check your position.