Corporate Tax in the UAE: how to correctly calculate tax for a free zone company

UAE free zone companies are in a special position: subject to certain conditions, they can apply a 0% Corporate Tax rate to qualifying income instead of the standard 9%. But this relief doesn't apply automatically. Qualifying Free Zone Person (QFZP) status needs to be confirmed, and calculating the tax requires clearly separating income into qualifying and non-qualifying categories. Getting that split wrong is one of the most common reasons for additional tax assessments during FTA audits.

What is Qualifying Free Zone Person status

QFZP is a status granted to a free zone company when several conditions are met at the same time: the company conducts business and has sufficient economic substance specifically in the free zone, earns income predominantly from qualifying activities, doesn't exceed the set threshold for non-qualifying income, keeps audited financial statements, and hasn't elected to apply the standard tax regime.

Qualifying and non-qualifying income

Qualifying income typically includes income from transactions with other free zone companies, income from goods and services exported outside the UAE, and income from certain activities listed in the legislation (such as manufacturing, processing goods, holding shares and securities, shipping, and a number of others). Income earned from transactions with UAE mainland companies or from non-qualifying activities is taxed at the standard 9% rate, even if the company as a whole retains QFZP status.

• Income from transactions with companies in other free zones — generally qualifying.
• Income from sales to the UAE mainland — generally non-qualifying and taxed at 9%.
• The de minimis threshold — non-qualifying income must not exceed the lesser of 5% of total revenue or AED 5 million; exceeding the threshold strips the company of QFZP status for the entire tax period.

How to correctly calculate the tax

The calculation is built in several steps: first the company's total taxable profit is determined under the Corporate Tax rules, then the profit is split between what relates to qualifying and non-qualifying income, after which the 0% rate is applied to the qualifying portion and 9% to the non-qualifying portion (accounting for the AED 375,000 threshold, if applicable). For companies with several business activities, it's critical to keep separate records of income and expenses for each line of business — without that, correctly splitting the tax base is impossible.

Typical calculation mistakes

Companies most often go wrong in three places: they don't track whether the de minimis threshold for non-qualifying income is exceeded during the year, they don't confirm sufficient economic substance in the free zone (the substance requirements), and they confuse "income earned in a free zone" with "qualifying income" — these are different categories, and not every dirham earned in a free zone automatically counts as qualifying.