The UAE introduced a federal corporate tax regime effective from June 1, 2023, marking a significant shift in the country’s tax system. Under this framework, businesses are generally subject to a 9% corporate tax on annual profits exceeding AED 375,000, while profits up to that threshold are taxed at 0%. 

However, Free Zone Persons: entities registered in one of the UAE’s many designated free zones, can still benefit from a 0% corporate tax rate on qualifying income, provided they meet the strict conditions outlined by the Federal Tax Authority (FTA). These conditions include maintaining adequate substance in the UAE, deriving income from permitted activities, and complying with transfer pricing rules. 

Even when a free zone business qualifies for the 0% rate, it is still legally required to register for corporate tax, maintain proper accounting records, and file annual corporate tax returns. Non-compliance can lead to penalties, loss of preferential tax treatment, and potential reclassification as a mainland entity for tax purposes. 

With free zones forming a critical part of the UAE’s economy, housing thousands of companies in sectors such as logistics, technology, finance, and manufacturing, understanding how corporate tax applies to them is essential for both local and international investors. 

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Who Must File, and Why Do Free Zone Entities Still Need to Comply?

In the UAE’s corporate tax system, every juridical person, whether incorporated in the mainland or in a free zone, is required to register for corporate tax and file returns with the Federal Tax Authority (FTA). This includes companies, branches, and certain partnerships operating in free zones, regardless of whether they are eligible for the 0% preferential rate. 

Free Zone Persons are not automatically exempt from corporate tax filing simply because they operate within a free zone. While they may qualify for the 0% rate on specific types of “qualifying income”, they must still submit an annual corporate tax return declaring their income, expenses, and tax position. 

The requirement applies even in situations where:

• The business earns only qualifying income and owes zero tax. 

• The company is newly incorporated and has yet to make a profit. 

• The free zone entity operates solely as a holding company or service provider. 

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Why Should You Comply With These Obligations? 

1. Legal Obligation: Failing to file can lead to penalties starting at AED 10,000, which may increase with repeated non-compliance. 

2. Retention of Preferential Rate – Annual filing is essential to prove that the entity continues to meet the conditions for the 0% rate. 

3. Avoiding Reclassification – If a free zone company breaches FTA rules, it can lose free zone tax benefits and be taxed as a mainland entity at 9% on all profits. 

4. Maintaining Good Standing – Proper compliance ensures smooth business operations, especially during audits, license renewals, and investor due diligence. 

In short, filing is mandatory for all, and for free zone businesses, it is the key to protecting their tax advantages while avoiding unnecessary legal and financial risks. 

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Qualifying vs. Non-Qualifying Income for Free Zone Companies 

One of the most important concepts in the UAE corporate tax framework for free zone entities is the distinction between Qualifying Income (taxed at 0%) and Non-Qualifying Income (taxed at 9%). This distinction determines whether a free zone business can truly enjoy its tax advantages or end up paying the same corporate tax rate as mainland companies. 

1. What is Qualifying Income? 

According to the UAE Corporate Tax Law and the Cabinet Decision No. 55 of 2023, qualifying income generally includes income derived from: 

• Transactions with other free zone persons (that meet the qualifying conditions and are not part of mainland UAE). 

• Income from qualifying activities such as: 

• Manufacturing of goods or materials in the free zone 

• Processing of goods 

• Holding of shares and other securities 

• Ownership, management, and operation of ships 

• Fund management services for funds located in a free zone 

• Wealth and investment management services 

• Headquarter services to related parties 

• Treasury and financing services to related parties 

• Distribution of goods or materials from a designated zone to customers outside the UAE or within another free zone 

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Note: Certain income from transactions with foreign customers also qualifies for the 0% rate, provided it meets the “qualifying activity” criteria and does not create a permanent establishment in the mainland UAE. 

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2. What is Non-Qualifying Income? 

Non-qualifying income is any income that does not fall under the above categories, including but not limited to: 

• Income from transactions with mainland UAE entities that are not considered “qualifying activities”. 

• Passive income from mainland sources that does not meet qualifying conditions. 

• Any income from activities specifically excluded under the law (e.g., income from certain banking, insurance, or real estate activities in the mainland). 

Such income is taxed at the standard 9% corporate tax rate after the AED 375,000 profit threshold. 

Common Scenarios Where Filing Is Mandatory: 

• A Free Zone company engages in trading with UAE mainland customers without the use of an approved distributor. 

• A company that earns passive income (e.g., interest, royalties, dividends) from mainland entities. 

• A Free Zone business engaged in manufacturing or service activities is not listed as a "qualifying activity." 

Key Point to Remember: Even if your taxable income is 0 AED, the FTA still requires filing a corporate tax return; skipping it can lead to penalties. 

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Step-by-Step Guide to Filing Free Zone Corporate Tax Returns via EmaraTax 

Filing your corporate tax return through the FTA’s EmaraTax portal is straightforward, but getting it right means following a well-planned sequence. Here’s what it looks like: 

Determine Your Tax Period 

• Most Free Zone companies follow the calendar year (Jan–Dec), but your tax period may depend on your business license or incorporation date. 

• The filing deadline is 9 months after the end of your financial year. 

• Example: If your financial year ends on 31 Dec 2024, you must file before 30 Sept 2025. 

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Confirm Your Status: Qualifying or Non-Qualifying 

• Review FTA criteria to confirm whether your company is a Qualifying Free Zone Person (0% rate) or Non-Qualifying (9% rate). 

• If you carry out both qualifying and non-qualifying activities, maintain separate accounts for each. 

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Log in via UAE Pass 

• Access the FTA website and log in through EmaraTax, using your UAE Pass credentials. Registration through UAE Pass is mandatory (FTA UAE). 

• Once logged in, your Corporate Tax Dashboard will display your registered entities, tax periods, and pending actions, providing a clear navigation point. 

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Select Your Tax Period and Click “File Return” 

• Your current tax period, usually your financial year, should appear automatically. 

• Click on “File Return” to start the corporate tax return process. 

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Enter Income and Expense Details 

• Accurately declare your income streams, separating them into qualifying (0% tax) and non-qualifying income (9% tax). 

• Include relevant categories such as trading, treasury, IP licensing, or related-party transactions. 

• Make sure all figures align with your audited financial statements, as discrepancies can result in audit flags. 

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Attach Required Supporting Documents 

• Upload mandatory attachments: 

• Audited financial statements (IFRS-compliant). 

• Transfer Pricing Disclosure Form (if applicable). 

• Economic Substance documentation. 

• Any local or master files as required. 

• Ensure these documents match the amounts and entries you've made—mismatches cause immediate alerts. 

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Validate, Review, and Submit 

• Thoroughly review each section for accuracy. 

• Verify your tax calculation—most of it is automated, but it depends entirely on your correct entries. 

• Once satisfied, click Submit. The system will generate an acknowledgement confirming your filing. 

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Pay Tax (If Due) 

• If there’s any tax payable (for non-qualifying income or profit beyond the threshold), you can pay directly via EmaraTax using bank transfer, credit card, or other supported methods. 

• Ensure payment is completed by the deadline to avoid penalties. 

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Keep Records for 7 Years 

• After filing, securely store your return, audit documents, and any supporting files for at least seven years, as required by the FTA. 

• You may need them in case of an audit or future enquiries. 

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Key Compliance Requirements for Free Zone Corporate Tax Filing in the UAE 

Filing corporate tax returns as a Free Zone business in the UAE is not just about meeting deadlines; it’s about ensuring you tick all the boxes that the Federal Tax Authority (FTA) expects. The corporate tax framework for Free Zone Persons comes with its own set of compliance obligations, and missing any could result in penalties or even the loss of your 0% tax benefits. 

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Here are the key compliance requirements that every Freezone company needs:

1. Maintain Proper Accounting Records 

• Every Free Zone business must prepare and maintain audited financial statements. 

• These should follow International Financial Reporting Standards (IFRS) unless the FTA specifies otherwise. 

• Keeping accurate records is critical because your corporate tax liability (or exemption status) will depend on your documented income sources and expense deductions. 

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2. Separate Qualifying and Non-Qualifying Income 

• You must clearly distinguish between Qualifying Income (eligible for the 0% rate) and Non-Qualifying Income (taxable at 9%). 

• This separation requires proper accounting categorization and detailed documentation. 

• Mixing them up in your books can cause the FTA to treat more income as taxable. 

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3. File Your Corporate Tax Return on Time 

• Corporate tax returns are filed annually, typically within nine months after the end of the relevant tax period. 

• The return must be submitted online via the FTA’s portal. 

• Even if your qualifying income means you owe 0% tax, you still must file, and exemption from tax does not mean exemption from filing. 

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4. Ensure Substance Requirements Are Met 

• Free Zone entities must show they have adequate economic substance in the UAE to enjoy the Free Zone tax benefits. 

• This includes having a real physical office, qualified staff, and active operations in line with your licensed activities. 

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5. Keep Transfer Pricing Documentation 

• If you have related-party transactions (e.g., with group companies or connected entities), you must comply with the UAE’s transfer pricing rules. 

• This means maintaining a Transfer Pricing Disclosure Form and, in some cases, a Master File and Local File. 

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6. Pay Tax on Non-Qualifying Income 

• Any part of your revenue that comes from non-qualifying activities or non-qualifying locations will be taxed at the standard 9% rate. 

• The tax payment must be made in full within the same nine-month deadline as the return filing. 

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In summary, free zone companies can benefit from a 0% corporate tax rate, but only on qualifying income. Understanding and tracking this split is crucial to maintaining compliance and protecting tax advantages. If you need further clarification on this, then don't hesitate to contact Metaworld Consultant for help. 

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