Free Zone SMEs and the 0% Corporate Tax Rate: A Practical Guide

The UAE Corporate Tax regime offers a 0% rate for Qualifying Free Zone Persons (QFZPs) — but this incentive is subject to strict conditions. For SMEs in Free Zones, particularly in the service sector, eligibility depends not on business size, but on the nature of income, client profile, activity classification, and regulatory compliance.

Qualifying Activities and Income

To benefit from the 0% rate, a business must derive Qualifying Income through one or more Qualifying Activities, as defined in Cabinet Decision No. 265 of 2023. 

Service businesses may qualify if they operate exclusively with Free Zone entities or foreign clients and meet additional conditions. Revenue from mainland clients is generally treated as Excluded Income, subject to the standard 9% rate.

Note: What matters is where the benefit of the service is used, not merely where the client is located or the provider is licensed.

Compliance Requirements for 0% Eligibility

To be treated as a QFZP and access the 0% rate, a Free Zone business must:

• Be incorporated or registered in a UAE Free Zone

• Maintain adequate economic substance in the Free Zone

• Prepare and maintain audited financial statements

• Not elect to be subject to the standard tax regime

• Derive income only from Qualifying Activities, or remain within the de minimis threshold

The De Minimis Rule

A QFZP can still retain the 0% rate if its non-qualifying income remains within the de minimis limit — the lower of 5% of total revenue or AED 5 million in a tax period. Breaching this threshold renders all income taxable at 9% for that year.

Key Takeaway

Free Zone SMEs—especially service providers—must carefully assess whether their income qualifies under the Free Zone rules and whether their operational setup meets the QFZP criteria. The benefits are significant, but so are the risks of misclassification.

Need Help Navigating Free Zone Tax Rules?

Understanding whether your business qualifies for the 0% Free Zone corporate tax rate requires a close review of your income sources, compliance status, and operational setup. If you're unsure how the rules apply to your specific situation, contact Aston Vera for tailored advice on classification, structuring, and compliance under the UAE Corporate Tax Law.