| Free zone (QFZP) | Mainland | |
|---|---|---|
| Rate | 0% on qualifying income, 9% on the rest | 0% up to AED 375,000, 9% above |
| Conditions | Substance, qualifying income within de minimis, transfer pricing compliance, audited accounts, tested annually | None beyond ordinary compliance |
| Mainland customers | Generally non-qualifying income; counts towards de minimis | No restriction |
| Consequence of breach | Status lost for the period and typically the following four | Not applicable |
| Small Business Relief | Not available to a QFZP | Available where revenue is at or below AED 3,000,000 |
| Audit | Audited financial statements required | Depends on entity type and licence |
| Substance requirement | Adequate people, premises and expenditure in the zone | Ordinary business presence |
| Transfer pricing | Compliance is a condition of the status | Required, but not status-critical |
| Registration and filing | Required regardless of rate | Required |
| Compliance cost | Higher: annual testing, documentation, audit | Lower for a small business |
The comparison people actually need
The question is almost never “which is better” in the abstract. It is whether your specific revenue mix supports QFZP status, and what it costs to maintain if it does.
A free zone company selling entirely to customers outside the UAE, or to other free zone entities, with genuine operations in the zone, is well placed: 0 per cent on effectively all its income, in exchange for an annual testing and documentation burden.
A free zone company whose customers are increasingly UAE mainland businesses is in a different position entirely. That revenue is generally non-qualifying, it counts towards the de minimis threshold, and crossing that threshold does not cost you tax on the excess. It costs you the status, for that period and typically the following four.
And a small business making modest profits may find the comparison irrelevant: under mainland treatment, taxable income inside the 0 per cent band, or Small Business Relief where revenue is at or below AED 3,000,000, may produce a nil liability without any of the free zone conditions to maintain.
When free zone is genuinely better
The conditions where QFZP status is worth having and worth maintaining:
- Customers predominantly outside the UAE, or other free zone entities
- Substantial profits: enough that 9 per cent on them exceeds the compliance cost of maintaining the status
- Genuine operations in the zone: people, premises and expenditure proportionate to the activity
- Activities that fall within the qualifying categories
- Willingness to maintain transfer pricing documentation and audited accounts annually
- A revenue mix that is stable, or at least monitored
When mainland is the better answer
More often than the 0 per cent headline suggests, and these cases are specific:
- Your customers are UAE mainland businesses. That revenue is generally non-qualifying, and free zone status adds conditions without delivering the rate
- Profits are modest. Taxable income inside the 0 per cent band, or Small Business Relief at or below AED 3,000,000, may produce a nil liability without any conditions to maintain
- Substance in the zone is nominal. A flexi-desk with the operation running elsewhere is the position least likely to survive scrutiny
- The compliance cost exceeds the saving. Annual testing, transfer pricing documentation and audit are real costs, and for a small business they can exceed 9 per cent of a modest profit
- You want operational freedom. Mainland licensing removes the trading restrictions that come with a free zone licence
We have advised free zone clients to elect out of QFZP status and be taxed at standard rates, because the cost of maintaining and documenting the status exceeded the tax it saved. That is an uncomfortable recommendation to make and it has been the right one more than once.
The structure that usually resolves it
Where a business has both a genuine international revenue stream and a growing mainland customer base, the answer is frequently neither one nor the other. It is both, in separate entities.
The free zone company retains the international business and keeps its QFZP status intact. A mainland company takes the UAE domestic business and is taxed at standard rates on it, which is what would have happened to that revenue anyway.
That is not free of cost. Two entities mean two licences, two sets of accounts, two returns, and intercompany arrangements that require arm’s length pricing and documentation. It is worth it where the mainland revenue is material and growing; it is not worth it where the mainland business is incidental and could simply be kept inside de minimis.
The decision needs the numbers, and it needs to be made before the year end, because once de minimis has been breached, the structuring option has already expired for that period.
What we see go wrong most often
Where businesses get caught:
- Choosing free zone for the 0 per cent headline without checking whether your customers make the income qualify.
- Assuming free zone means exempt. Registration and filing apply at any rate.
- Letting mainland revenue grow untracked against the de minimis threshold.
- Substance on paper, in a test that is specifically about substance.
- Ignoring the compliance cost, which for a small business can exceed the tax saved.
- Assuming last year’s QFZP conclusion still holds. The conditions are tested annually.
- Reviewing after the year end, when the structuring option no longer exists.
Timing and deadlines
The review belongs with at least two months of the financial year remaining, while the revenue mix can still be influenced and a structuring decision is still available.
After the year end the analysis can only report what happened. Corporate tax follows at 30 September 2026 for a December year end, but that deadline is not the one that matters for this decision.
What you get
- Revenue mapped to qualifying and non-qualifying with the basis documented
- De minimis headroom quantified, with the projected breach date
- A substance assessment against the activity actually carried on
- Compliance cost weighed against tax saved
- A recommendation, including where that is to elect out of QFZP status
- Where relevant, a structuring option with its cost
Documents we will ask for
What we ask for up front:
- Trade licence and permitted activities
- Revenue analysis by customer type and location
- Details of premises and headcount in the zone
- Profit level, to weigh compliance cost against tax saved
- Related party transactions and intercompany agreements
- Prior year audited financial statements
- Any prior QFZP assessment
Related
Frequently Asked Questions
Is a free zone company better for corporate tax?
Only if your income qualifies. A QFZP pays 0 per cent on qualifying income, broadly income from outside the UAE or from other free zone entities. Revenue from UAE mainland customers is generally non-qualifying, so a free zone company selling domestically gets the conditions without the rate.
What happens if we exceed the de minimis threshold?
You lose QFZP status for that period and typically the following four, not merely the tax on the excess. That asymmetry is why the review has to happen before the year end, while the mix can still be influenced.
Can a mainland company get 0 per cent?
On the first AED 375,000 of taxable income, yes, and where revenue is at or below AED 3,000,000, Small Business Relief may produce a nil liability. For a small business that is frequently the same outcome as QFZP status with none of the conditions to maintain.
Would you ever advise electing out of QFZP status?
Yes, and we have. Where the cost of maintaining and documenting the status (annual testing, transfer pricing documentation, audit) exceeds the tax it saves, standard treatment is the better answer. It is an uncomfortable recommendation and it has been right more than once.
We sell to both international and UAE mainland customers. What should we do?
Frequently the answer is two entities: the free zone company keeps the international business and its status, a mainland company takes the domestic business and is taxed at standard rates on revenue that would have been taxed anyway. It costs two licences and intercompany documentation, so it is worth it where mainland revenue is material and growing.
Do free zone companies still register and file?
Yes, regardless of rate. QFZP status is a rate on qualifying income, not an exemption from the system, and the AED 10,000 late-registration penalty applies to free zone companies exactly as to anyone else.
How often is QFZP status tested?
Every tax period. Qualifying last year does not mean qualifying this year, substance, activity mix, transfer pricing compliance and audited accounts are all tested annually, which is why we treat the review as recurring rather than a one-off opinion.
That single number decides most of this. Send us a revenue split by customer type and we will quantify the headroom.
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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.