0% Corporate Tax in UAE Free Zones:
Are You Truly Eligible?

Tax
2 min read
Powered by Gulf Bridge
14 Jul 2025

Since the introduction of the UAE’s corporate tax in 2023, many business owners believe that establishing a company in a free zone guarantees a 0% tax rate. However, strict eligibility criteria apply, and failing to meet even one requirement can result in a 9% tax rate along with a five-year penalty.

Qualified vs. Non-Qualified Status

Free zone companies are categorized as either “qualified” (eligible for 0% tax) or “non-qualified” (subject to a 9% tax rate). Simply establishing a company is not enough; you must demonstrate genuine business substance and operational activity. Any compliance failure can result in a five-year loss of tax benefits.

Physical Presence Requirements

Authorities require proof of actual operations at your registered free zone location, which includes: 

  • Office space within the zone 
  • Core business activities being conducted there 
  • Operational expenses and full-time skilled staff 

A mailbox or virtual office is insufficient.

What Qualifies You for 0% Tax?

Only businesses located in five specific free zones qualify for the 0% tax rate: 

  • JAFZA – logistics and manufacturing 
  • DAFZA – aviation and e-commerce 
  • DMCC – global trade and commodities 
  • Dubai Silicon Oasis (DSO) – technology and innovation 
  • Dubai South – the latest addition to this exclusive group

Popular zones like Dubai Internet City or Media City do not offer this benefit.

The 95/5 Income Rule

At least 95% of revenue must come from “qualifying activities,” such as: 

  • Manufacturing, processing, or logistics 
  • Financial services to other free zone entities 
  • Intellectual property management 
  • Headquarters services for related companies

Exceeding the 5% threshold for non-qualifying income results in immediate disqualification.

Compliance and Documentation

To maintain qualification, companies must: 

  • Prepare audited financial statements 
  • Follow transfer pricing regulations 
  • Provide evidence of genuine operations

Losing qualification status at any point during a tax period results in a five-year exclusion from the 0% rate. This includes the current period as well as the following four tax periods.

Conclusion

The UAE’s 0% corporate tax rate for free zone businesses is a powerful incentive — but only if you fulfill the full set of legal and operational requirements. Before setting up, ensure that your business model, location, and activities align with the current tax framework. Careful planning today can save you years of tax exposure tomorrow.