Dubai’s free zones have long been a magnet for entrepreneurs and international businesses seeking a tax-efficient base in the UAE. But with the introduction of the UAE’s federal corporate tax in 2023, and further clarifications issued throughout 2024 and 2025, many free zone companies are now asking a key question: do they still benefit from zero tax, or are they liable under the new regime?
The short answer is that free zone companies can still enjoy 0% corporate tax, but only if they meet specific requirements set out in the federal tax law. We explain exactly when and how tax applies to free zone companies in Dubai, covering corporate tax, VAT, customs duties, and personal income tax.
Corporate Tax for Free Zone Companies in Dubai
The UAE’s 2023 Corporate Tax Law Explained
The UAE introduced a 9% federal corporate tax on business profits for financial years beginning on or after 1 June 2023. However, free zones were not excluded from this law. Instead, the government introduced the concept of a Qualifying Free Zone Person (QFZP)—a free zone company that meets certain conditions and earns qualifying income.
These companies are eligible for a 0% corporate tax rate on profits from specific types of activities. Any income that falls outside the qualifying scope is taxed at the standard 9%.
When Free Zone Companies Pay 0% Tax
To benefit from the 0% corporate tax rate, a free zone company must:
- Earn Qualifying Income, as defined by Cabinet Decision No. 100 of 2023.
- Maintain adequate economic substance in its free zone (e.g. physical office, employees, active operations).
- Not elect to be taxed under the standard corporate tax regime.
- Comply with transfer pricing and arm’s length rules.
- Prepare and submit audited financial statements each year.
Qualifying income generally includes revenue from trading with other free zone entities, exporting goods or services internationally, certain regulated financial services, and specific activities such as holding company operations, logistics, or manufacturing.
Triggers for 9% Taxation
Free zone companies become partially or fully taxable at 9% when:
- They earn income from excluded activities such as banking, insurance, leasing (except aircraft), or retail sales to individuals.
- They engage in non-qualifying activities beyond a limited threshold. If more than 5% of total revenue (or 5 million, whichever is lower) is non-qualifying, the 0% benefit is lost for that tax period.
- They transact with the UAE mainland, unless the transaction qualifies under permitted activities such as certain types of goods distribution.
For example, a DMCC trading firm buying and selling commodities internationally could remain at 0%, but if it begins offering advisory services to local UAE clients, that revenue may be taxed at 9%.
Losing QFZP Status: Risks and Consequences
Failing to meet QFZP conditions has serious tax implications. The company is taxed at 9% on all profits for the year of non-compliance and for the four years that follow. This rule is designed to prevent companies from claiming 0% tax status while generating significant mainland or excluded income.
QFZP status is not permanent—it must be maintained through ongoing compliance, accurate reporting, and proactive tax planning.
2024–2025 Updates and Deadlines to Know
In 2024, the UAE Federal Tax Authority (FTA) issued strict deadlines for free zone companies to register for corporate tax. Businesses with financial years starting in June 2023 or January 2024 have already entered the filing cycle. The FTA’s Free Zone Tax Guide, released in May 2024, clarified many practical compliance questions, and more guidance is expected as the first filing deadlines approach in late 2025.
All free zone entities conducting business activities are expected to register, even if they ultimately qualify for the 0% rate.
VAT Obligations in Dubai Free Zones
Are Free Zone Companies Exempt from VAT?
VAT in the UAE is a federal tax applicable to both mainland and free zone businesses. All companies that exceed the registration threshold of 375,000 in taxable turnover must register and charge 5% VAT on their taxable supplies.
There is no general exemption from VAT for free zone companies.
What Are VAT Designated Zones?
Some free zones are classified as Designated Zones for VAT purposes. These are fenced areas with customs controls, typically located near ports or airports. In Dubai, examples include Jebel Ali Free Zone (JAFZA), Dubai Airport Free Zone (DAFZA), and Dubai CommerCity.
In these zones, the movement of goods is treated as outside the UAE for VAT purposes. This means:
- Importing goods into the zone is not subject to VAT.
- Transfers of goods between designated zones are also VAT-free.
- Exports of goods from these zones to other countries are zero-rated.
However, these benefits apply only to goods, not to services.
When VAT Applies Inside Free Zones
All services provided by a free zone company to clients in the UAE are subject to VAT at 5%, regardless of whether the company is in a designated zone. This includes consulting, marketing, software development, and similar services.
In addition, if goods are consumed or used inside a designated zone (rather than stored or exported), VAT becomes applicable. Businesses must also account for import VAT when goods leave the free zone and enter the local market.
Customs Duty and Trade Activity in Free Zones
Do Free Zone Companies Pay Import Duties?
Goods imported into a free zone from abroad are not subject to customs duties at the point of entry. This allows businesses to store or process goods without incurring upfront import costs.
This benefit is particularly attractive for companies using free zones as distribution or logistics hubs.
Selling to the Mainland from a Free Zone
When goods leave a free zone and enter the UAE mainland, customs duty of 5% applies, based on the value of the goods. This ensures that free zones are not used to circumvent import tariffs.
The importer of record—either the free zone company or the mainland buyer—must pay customs duty and VAT before the goods can be released.
Bonded Transfers and Supply Chain Flexibility
Goods can be transferred between free zones or from a free zone to a bonded warehouse without paying customs duty. This flexibility allows companies to optimise supply chains, delay import costs, and streamline re-export operations.
Free zone companies engaging in regular trade must register with Dubai Customs and obtain a customs code to process shipments.
Personal Income Tax for Free Zone Company Owners and Staff
Are Individual Salaries or Dividends Taxed?
No. The UAE does not impose personal income tax on salaries, bonuses, dividends, or capital gains. This applies to both UAE nationals and expatriates working in free zones or on the mainland.
If you are an employee, freelancer, or shareholder in a Dubai free zone company, your income is not taxed by the UAE government.
Implications for Foreign Nationals
While the UAE has no income tax, foreign nationals may still have reporting obligations in their home country. The UAE has numerous double tax treaties that help mitigate international tax exposure. Still, individuals should consult advisors to manage their global tax position.
From the UAE’s perspective, your personal income remains entirely tax-free.
Do Tax Rules Vary Across Dubai’s Free Zones?
Corporate Tax Treatment Across Key Free Zones
Whether you are in DUQE, DMCC, DIFC, DAFZA, or JAFZA, the federal corporate tax law applies in the same way. All free zone companies are expected to register with the FTA and assess their eligibility for QFZP status based on their activities.
For example:
- A DMCC commodities trader may qualify for 0% corporate tax if it deals in permitted commodities and meets substance rules.
- A DIFC wealth manager may remain tax-exempt if it serves institutional clients under regulatory supervision.
- A DAFZA logistics firm can benefit from zero tax by distributing goods internationally or within designated free zones.
The business model, not the free zone itself, determines tax liability.
VAT and Customs Differences by Zone Type
Only certain free zones are designated for VAT purposes. These offer the most benefits for goods-based businesses. Service companies, however, face the same VAT rules across all zones.
Customs duty is only deferred while goods remain within the free zone. Once goods are sold to the local market, standard UAE import duties and VAT apply.
Do Free Zone Companies Really Avoid Tax in Dubai?
The idea that free zone companies are completely tax-free is no longer accurate. While personal income remains untaxed, and corporate profits can still benefit from 0% tax, the UAE’s modern tax regime requires active compliance.
Free zone companies can still enjoy an extremely favourable environment, but only if they:
- Register for corporate tax and VAT
- Earn qualifying income
- Maintain proper substance and documentation
- Stay within the rules for trading with the mainland and overseas
Dubai continues to be one of the most tax-efficient business locations in the world—but the 0% rate is now a reward for meeting well-defined criteria, not a blanket exemption. Reach out to us at DUQE today for further information.
FAQs
Do all Dubai free zone companies pay tax?
No. Companies that meet the criteria for Qualifying Free Zone Person (QFZP) status can benefit from 0% corporate tax. Others may pay 9% on part or all of their income.
What is a Qualifying Free Zone Person (QFZP)?
A free zone company that earns qualifying income, maintains adequate economic substance, submits audited accounts, and complies with transfer pricing rules.
Can free zone companies do business with the mainland?
Yes, but such transactions are often taxed at 9% and may cause the company to lose its 0% tax status if limits are exceeded.
Do I need to register for VAT if I’m in a free zone?
Yes, if your annual taxable turnover exceeds 375,000. VAT applies to most services and to goods sold in the UAE, even from a free zone.
Is there personal income tax in Dubai for free zone residents?
No. The UAE does not impose personal income tax on salaries, dividends, or other personal income, regardless of where in the country you work.