The short version
- Only a Qualifying Free Zone Person (QFZP) pays 0%, and only on Qualifying Income. The rest is 9%.
- A mainland company pays 0% on its first AED 375,000 and 9% above. A QFZP does not get that band.
- VAT is identical: registration at AED 375,000. Only goods inside a Designated Zone differ.
- Every QFZP needs audited financial statements for corporate tax; a mainland company only above AED 50,000,000 of revenue, although company law still requires an annual audit for every LLC.
- Same deadlines: register within 3 months, file within 9 months, keep records 7 years.
Corporate tax, VAT, filing deadlines and record-keeping apply to free zone and mainland companies alike. What differs is the 0% rate on Qualifying Income, the audit duty that comes with it, the reliefs a free zone company gives up, VAT on goods inside a Designated Zone, and how the books must prove the split.
Free zone or mainland: what actually changes for tax and accounting in 2026?
Five things change: rates, reliefs, audit duty, VAT on goods, and bookkeeping. Each row is explained and sourced below.
| Item | Mainland company | Free zone company |
|---|---|---|
| Corporate tax | 0% to AED 375,000, 9% above | QFZP: 0% on Qualifying Income, 9% on the rest, no AED 375,000 band |
| Small Business Relief | Revenue up to AED 3,000,000, periods ending by 31 December 2029 | Not for a QFZP |
| VAT | Mandatory at AED 375,000, voluntary at AED 187,500 | Same; goods within a Designated Zone outside the scope by default |
| Audit | For corporate tax only above AED 50,000,000 revenue; company law: annual audit for every LLC | Every QFZP, any revenue; zone rules on top (DMCC: 6 months) |
| Register, file, keep records | 3 months, 9 months, 7 years | Same |
| Mainland sales | Normal trading | Branch income at 9%; in Dubai a DET licence or permit plus separate records |
Does a free zone company pay 0% corporate tax?
Only if it is a Qualifying Free Zone Person (QFZP), and only on Qualifying Income. Article 3(2) of Federal Decree-Law No. 47 of 2022 sets 0% on Qualifying Income and 9% on taxable income that is not Qualifying Income (Ministry of Finance, 2022). A mainland company pays 0% up to AED 375,000 and 9% above it under Cabinet Decision No. 116 of 2022 (Ministry of Finance, 30 December 2022).
The trap is the AED 375,000 band. A QFZP does not get it: taxable income that is not Qualifying Income is taxed at 9% from the first dirham (FTA, May 2024). Income attributable to a mainland branch (a Domestic Permanent Establishment) is always in that 9% bucket and is left out of the de minimis count altogether. Income from property in a free zone is also at 9%, except commercial property let or sold to another Free Zone Person, which is Qualifying Income; property outside a free zone is an Excluded Activity whose revenue counts against the de minimis limit unless it belongs to the branch (Cabinet Decision No. 100 of 2023, Articles 3, 4 and 6; FTA, May 2024). A QFZP whose mainland branch earns AED 300,000 of profit pays AED 27,000; a mainland company with the same profit pays nothing because it sits under the AED 375,000 band.
Article 18 sets the conditions: adequate substance, which the FTA reads as substance inside a free zone, Qualifying Income, no election out, transfer pricing compliance, and any further ministerial conditions (Ministry of Finance, 2022). Only a juridical person registered in a free zone can qualify; a natural person cannot be a Free Zone Person (FTA, 2024).
There is an exit. Article 19(1) lets a QFZP elect the standard rules (Ministry of Finance, 2022), but it is not a yearly switch: the company ceases to be a QFZP from the start of that tax period and for the four following ones (FTA, May 2024). For a company that meets the QFZP conditions but whose profit is small, the election gives up the 0% rate for five tax periods in exchange for the AED 375,000 band and the reliefs below, so a company whose profit may soon outgrow the band should not make it lightly. The filing process is the same either way.
What counts as Qualifying Income, and what is the de minimis rule?
Cabinet Decision No. 100 of 2023 names four categories: income from other Free Zone Persons that are the Beneficial Recipient of the goods or services (except Excluded Activities), income from non-free-zone customers only for Qualifying Activities, qualifying intellectual property income, and other income within the de minimis limit; it applies from 1 June 2023 (Ministry of Finance, 25 October 2023).
Ministerial Decision No. 229 of 2025 repealed Ministerial Decision No. 265 of 2023 and names 13 Qualifying Activities: manufacturing, processing, trading of qualifying commodities, holding shares, operating ships, reinsurance, fund management, wealth management, headquarter services, treasury, aircraft leasing, distribution in or from a Designated Zone, and logistics. Excluded Activities never qualify, even with a free zone customer: transactions with natural persons (narrow exceptions), banking, insurance, finance and leasing, and most immovable property (Ministry of Finance, 28 August 2025).
Notice what is missing: consulting, marketing, software and most other services sold to mainland clients. That income counts against the de minimis limit: the lower of 5% of total revenue or AED 5,000,000 per tax period. Stay inside it and the income is still treated as Qualifying Income under Article 3(1)(d) (Ministry of Finance, 25 October 2023). Cross it, or fail any other condition, and QFZP status is lost for that tax period and the four following (Ministry of Finance, 28 August 2025).
Substance is the condition most often overlooked. Article 8 of Cabinet Decision No. 100 of 2023 requires core income-generating activities in a free zone with adequate assets, qualified full-time employees and operating expenditure (Ministry of Finance, 25 October 2023).
Can a free zone company trade in the mainland, and how is that income taxed?
It can, and the mainland income is taxed at 9%. Income of a QFZP attributable to a Domestic Permanent Establishment, such as a mainland branch, is subject to the 9% rate (FTA, May 2024). The 0% stays with the free zone activity.
Executive Council Resolution No. 11 of 2025, issued 3 March 2025, lets a free zone establishment operate in mainland Dubai under a licence or permit from the Department of Economy and Tourism; DIFC financial establishments are excluded. Branch licences run one year, renewable; a temporary permit lasts up to six months. Article 3(b)(2) requires separate financial records for the mainland activity (Government of Dubai, 3 March 2025), so every entry needs a tag saying which side of the boundary it belongs to.
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Do free zone companies pay VAT?
Yes. Free zones are within the UAE for VAT and follow the normal rules unless the zone is a Designated Zone (FTA, July 2018). Registration is mandatory once taxable supplies and imports exceed AED 375,000 over the previous 12 months or are expected to in the next 30 days (FTA, 2023), and voluntary from AED 187,500 (FTA, live page).
A Designated Zone must be a fenced area with security and customs controls (FTA, July 2018). The list, set by Cabinet Decision No. 59 of 2017 (effective 1 January 2018) and amended by Cabinet Decision No. 35 of 2018, includes Jebel Ali Free Zone, Dubai Airport Free Zone and Khalifa Industrial Zone (FTA, 2018).
Even there the company is onshore and must register, report and account for VAT under normal rules. The relief is for goods only. A supply of goods within a Designated Zone is by default not subject to VAT unless the goods are to be consumed; goods taken out of the zone stay outside the scope only if the supplier holds proof of export or of import VAT paid (FTA, VAT Executive Regulation, Article 51(5), September 2025). Services supplied in a Designated Zone are taxed under the general rules; the one carve-out, added in 2021, is delivery of goods sold through an online platform by a non-resident, unregistered seller (FTA, VAT Executive Regulation, Article 51(6)-(7), September 2025). A warehouse moving goods between Designated Zone customers gains; a software house in the same zone does not.
Is an audit required for a free zone company, and can a small one use Small Business Relief instead?
An audit is required for every QFZP, however small, and it is itself a QFZP condition: a year without audited statements costs the 0% rate for that tax period and the four following (Ministry of Finance, 28 August 2025). Ministerial Decision No. 84 of 2025 requires audited financial statements from any taxable person with revenue above AED 50,000,000 (a tax group instead prepares audited special-purpose statements under FTA rules) and from every Qualifying Free Zone Person, for tax periods beginning on or after 1 January 2025 (Ministry of Finance, 25 March 2025; FTA, 2024). DMCC, for example, requires every member company, including subsidiaries and branches, to upload audited statements within six months after year-end, using an auditor on its Approved Auditors List; branches audited by a group auditor are exempt from that list rule (DMCC, 29 April 2025). A mainland company below AED 50,000,000 has no corporate tax audit duty, but company law runs its own clock: every mainland LLC or joint stock company must appoint an auditor and have its accounts audited each year under Articles 27 and 102 of Federal Decree-Law No. 32 of 2021 on Commercial Companies (UAE Legislation, 20 September 2021).
Small Business Relief is where the choice bites. Ministerial Decision No. 73 of 2023 allows it at revenue of AED 3,000,000 or less in the current and all previous tax periods, but excludes a Qualifying Free Zone Person (Ministry of Finance, 3 April 2023). The relief now runs to tax periods ending on or before 31 December 2029, from the original 31 December 2026 (Ministry of Finance, 7 August 2026). A QFZP is also shut out of tax grouping, group relief, restructuring relief and transfer of tax losses (FTA, May 2024).
The practical test. If you keep QFZP status, income from a mainland branch is taxed at 9% with no AED 375,000 band and is ignored when the de minimis figure is computed; non-qualifying revenue earned by the free zone entity itself, such as services sold to mainland customers, stays Qualifying Income only within the lower of 5% of revenue or AED 5,000,000; and the mandatory audit applies at any revenue. A mainland branch, however large, does not cost QFZP status. What loses the status for five tax periods is the free zone entity's own non-qualifying revenue above that limit; then the standard rules, the band and, if revenue is within AED 3,000,000, Small Business Relief apply instead.
What records must you keep, and what are the deadlines and penalties?
The federal deadlines are identical. A company incorporated on or after 1 March 2024, including a Free Zone Person, applies for corporate tax registration within 3 months (FTA, 22 February 2024). Late registration costs AED 10,000 under Cabinet Decision No. 10 of 2024 (Ministry of Finance, 27 February 2024). The return and payment are due within 9 months of the end of the tax period, and corporate tax records are kept for 7 years (Ministry of Finance, 2022). Free Zone Persons file a return, including a QFZP that owes nothing; the FTA guide notes one narrow exception for certain non-resident branches (FTA, May 2024). VAT records run on a second clock: 5 years, 15 for real estate records, plus 4 in a dispute or audit (FTA, Cabinet Decision No. 74 of 2023, Article 3, effective 1 August 2023; FTA, VAT Executive Regulation, Article 71(2), September 2025), and two more from 1 April 2026 where a refund claim is pending (Ministry of Finance, 1 April 2026).
A QFZP needs no separate financial statements for its qualifying income, but must document how Qualifying Income was calculated (FTA, May 2024). A set-up checklist:
- Tag every customer: Free Zone Person (and whether it is the Beneficial Recipient), other business, or natural person.
- Tag every revenue line with its activity, so Qualifying Activity income is separable.
- Track the de minimis figure monthly against the lower of 5% of revenue or AED 5,000,000.
- Keep a substance file: zone payroll, lease, assets, operating spend.
- Separate the mainland branch and lock the audit trail: who posted and changed each entry.
An accounting system carries most of this. Xrero keeps an audit trail on every entry, prepares VAT return figures ready to file on EmaraTax and produces reports that help prepare the corporate tax return. Whatever you choose, ask whether revenue can be tagged by customer type and activity. Xrero costs AED 99 per user per month, setup from AED 2,999, 15-day trial included (pricing).
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Frequently asked questions
Do free zone companies in the UAE really pay 0% corporate tax?
Only a Qualifying Free Zone Person pays 0%, and only on Qualifying Income. Other taxable income is taxed at 9% with no AED 375,000 band. A free zone company that fails a condition pays the mainland rates.
My free zone company sells to mainland UAE customers. Is that income taxed at 9%?
It depends. Income from non-free-zone customers is Qualifying Income (0%) for a listed Qualifying Activity such as manufacturing or logistics. Other services sold to mainland clients stay at 0% only while total non-qualifying revenue is within the lower of 5% of revenue or AED 5,000,000; income of a mainland branch is always taxed at 9%.
Must a free zone company register for corporate tax and file a return if it owes nothing?
Yes. Every Free Zone Person, including a QFZP, applies for registration within 3 months of incorporation and files a return within 9 months of the end of each tax period, even when nothing is due. Late registration costs AED 10,000.
Is an audit required for a free zone company, even a small one?
For a QFZP, yes, at any revenue; Ministerial Decision No. 84 of 2025 restates this for tax periods starting on or after 1 January 2025. A mainland company needs audited statements for corporate tax only above AED 50,000,000 of revenue, although company law still requires an annual audit for every LLC. DMCC wants the audit uploaded within six months of year-end.
Do free zone companies pay VAT?
Yes. All free zones are inside the UAE for VAT: registration is mandatory at AED 375,000 of taxable supplies and voluntary from AED 187,500. Only a Designated Zone changes the treatment, and only for goods; services follow the normal rules save for one narrow e-commerce delivery exception.
About the publisher: Xrero (xrero.com; in Arabic اكسريرو) is a Dubai-based business software company. Xrero is not Xero and is not connected to it. This article is general information, not tax advice.
Page updated 12 September 2026.