The proposition that a free zone company pays no Corporate Tax remains widely held, and it is not what the legislation provides. The 0% rate applies to qualifying income earned by a Qualifying Free Zone Person. Income that does not qualify is taxed at 9%. More significantly, failing any of the conditions does not merely tax the offending revenue — it removes the regime entirely for the current period and the four that follow.
The consequence is asymmetric: a modest amount of misclassified revenue can convert an entire profit stream from 0% to 9% for five years. This makes the classification of revenue, and the evidence supporting it, a materially more important exercise than the arithmetic suggests.
A Free Zone Person qualifies for the 0% rate on qualifying income where it satisfies all of the following (Article 18, Federal Decree-Law No. 47 of 2022, and Cabinet Decision No. 100 of 2023):
Qualifying income broadly comprises transactions with other Free Zone Persons where the counterparty is the beneficial recipient, income from qualifying activities irrespective of the customer's location, income from qualifying intellectual property subject to conditions, and other income where the de minimis requirement is met — the latter subject to the exclusions and special treatment prescribed by Cabinet Decision No. 100 of 2023.
Non-qualifying revenue is permitted up to the lower of 5% of total revenue or AED 5,000,000. The threshold is a ceiling on revenue, not on profit, and it is tested for the tax period as a whole.
The denominator is not simply total accounting revenue. Certain categories are excluded from both non-qualifying revenue and total revenue for the purposes of the test — including revenue attributable to immovable property in specified cases, to a domestic permanent establishment, to a foreign permanent establishment, and revenue from qualifying intellectual property subject to its own calculation. The excluded categories must be removed before the percentage is applied; performing the test on the accounting revenue figure will produce the wrong answer.
| Total revenue | 5% of revenue | Applicable threshold | Comment |
|---|---|---|---|
| AED 40,000,000 | AED 2,000,000 | AED 2,000,000 | the percentage test binds |
| AED 200,000,000 | AED 10,000,000 | AED 5,000,000 | the absolute cap binds |
Companies with substantial revenue frequently assume the 5% test applies to them; above AED 100 million of revenue it is the AED 5 million cap that governs, and it is considerably tighter.
Where a condition is not met, the person ceases to be a Qualifying Free Zone Person from the beginning of that tax period and for the four subsequent tax periods. During that time all income is subject to the standard regime — 9% above AED 375,000 — including income that would otherwise have qualified.
A company with AED 6,000,000 of taxable income therefore moves from nil to approximately AED 506,000 of tax for the period in question, and remains outside the regime for four further periods. Eligibility may be retested thereafter, and all conditions must be satisfied afresh.
Ministerial Decision No. 229 of 2025, issued on 3 September 2025, replaced Ministerial Decision No. 265 of 2023 in respect of qualifying and excluded activities, and applies retrospectively from 1 June 2023. Amendments include an expanded definition of qualifying commodities to cover industrial chemicals, associated by-products and environmental commodities such as carbon credits, and the extension of treasury and financing services from related parties to include activity for the person's own account.
Two practical consequences follow. First, classifications settled against the 2023 list should be revisited, since the current list applies to periods already closed. Second, guidance published before September 2025 — including a considerable amount of material still in circulation — may reference a list that no longer applies.
Distribution of goods or materials is the activity most often assumed to qualify simply because the entity holds a free zone licence. It does not. The decision attaches conditions to the activity itself, and each of them can fail independently:
The activity may include importation, storage, inventory management, handling, transportation and exportation, provided the conditions above hold throughout.
The practical point: registration in a free zone tells you nothing about whether distribution qualifies. The zone must be a designated one, the import route must run through it, and the customer must be doing something onward with the goods. Which of these is satisfied is a question of fact about your own operations, and it is the kind of question a tax adviser has to answer and sign. We are not that adviser: what we do is implement the classification once it has been made, so that the data and the return say the same thing.
A calculator applying the de minimis test to your figures, including the applicable threshold, remaining headroom and the estimated cost of a breach, is available at involane.com/tools/de-minimis-calculator.
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Regulatory statements on this page come from the sources above. Anything about how long work takes, what it costs, or what companies typically do is our own estimate — it is not in any of them, and it carries no more weight than an estimate.
This material is provided for general information only and does not constitute tax, legal or accounting advice. Requirements and thresholds change; positions depend on individual circumstances. Consult a qualified adviser before acting. Position as at July 2026.