Is a free-zone company tax-free in the UAE?

Not automatically. Since 2023 all free-zone entities are taxable persons. A Qualifying Free Zone Person (QFZP) can get 0% on qualifying income, but only if it meets all conditions (substance, qualifying income, transfer pricing and more). Otherwise the 9% rate applies.

Can foreigners own 100% of a UAE company?

Yes in most cases. Free zones have long allowed 100% foreign ownership, and 2020 amendments to the Companies Law removed the majority-UAE-ownership requirement for most mainland sectors (strategic industries can differ).

What is a Qualifying Free Zone Person (QFZP)?

A free-zone entity that meets all the conditions to access the 0% Corporate Tax rate on qualifying income — adequate substance, qualifying income, transfer-pricing compliance, no election to the standard rate, and limits on excluded income.

Do free-zone companies pay customs duty?

Goods kept in a free zone or re-exported are generally free of customs duty; duty applies when goods enter the UAE mainland. The GCC common external tariff is generally 5% of CIF value, with exceptions.

How many free zones are there in the UAE?

More than 40 across all seven emirates, each governed by its own free-zone authority — some sector-focused (such as DMCC, JAFZA, ADGM and DIFC) and some generalist.

UAE free zone vs mainland: tax, ownership and the 0% Qualifying Free Zone Person rule

Choosing where to set up in the UAE — on the "mainland" or in one of the country's 40-plus free zones — is one of the first and most consequential decisions a business makes. It shapes ownership, market access, customs treatment and, since Corporate Tax arrived in 2023, the rate you pay on profits. This guide compares the two, then explains the Qualifying Free Zone Person (QFZP) regime that can deliver a 0% Corporate Tax rate on qualifying income — and the strict conditions that come with it. This explainer draws on "Navigating the UAE Tax Landscape" by Dale Barrett, reused with the author's permission.

What is the difference between mainland and free-zone companies?

A mainland company is licensed by an emirate's Department of Economic Development (DED) and can trade freely throughout the UAE domestic market. Historically mainland LLCs needed majority UAE ownership, but 2020 amendments to the Companies Law removed that requirement for most sectors, allowing 100% foreign ownership in a wide range of activities (subject to restrictions for strategic industries).

A free-zone company is set up under the rules of a specific free-zone authority. Free zones were designed to attract foreign investment with regulatory autonomy and streamlined setup. Common features include 100% foreign ownership, no restrictions on profit repatriation, simplified licensing and immigration, and exemptions from import/export duties within the zone. The main trade-off: a free-zone entity is generally limited in trading directly with the mainland without using a locally licensed distributor or a mainland branch.

Mainland: full domestic-market access; DED-licensed; 100% foreign ownership now allowed in most sectors
Free zone: 100% ownership, free profit repatriation, streamlined setup; restricted direct mainland trade
There are 40+ free zones — some sector-focused (DMCC, JAFZA, ADGM, DIFC), some generalist
Free zones are governed by their own authority, not the DED

How does Corporate Tax treat free zones now?

Under Federal Decree-Law No. 47 of 2022, all free-zone entities are taxable persons. The benefit is that those meeting the Qualifying Free Zone Person (QFZP) criteria are eligible for a 0% rate on qualifying income and 9% on non-qualifying income. The pre-2023 "tax holiday" marketing of many free zones has been replaced by this clearly defined, conditional regime.

The modern framework is set by Cabinet Decision 100/2023 (Qualifying Income), Ministerial Decision 265/2023 (Qualifying/Excluded Activities), and the FTA Free Zone Persons Guide (May 2024). These should be used in preference to older free-zone tax-holiday materials. A free-zone entity that does not meet the QFZP criteria in a tax period is taxed at 9% on all income for that period.

What are the QFZP conditions for the 0% rate?

To be treated as a Qualifying Free Zone Person, an entity must meet all of the following conditions in a tax period. Failing any one of them in a period means the standard 9% rate applies to all income for that period.

Maintain adequate substance in the UAE (sufficient employees, assets and operating expenditure in the zone)
Derive qualifying income (e.g. transactions with other free-zone persons or foreign persons, and certain regulated/distribution activities)
Comply with transfer-pricing rules and arm's-length documentation
Not elect to be subject to Corporate Tax at the standard rate
Not derive excluded income beyond permitted limits, and meet any further conditions set by the Cabinet or Ministry of Finance

What counts as qualifying vs non-qualifying income?

Qualifying income generally includes revenue from transactions with other free-zone persons, revenue from transactions with foreign persons, and revenue from certain regulated financial services or distribution activities. Notably, distribution of goods "in or from" a VAT Designated Zone can be a qualifying activity when QFZP conditions are met.

Non-qualifying income includes revenue from transactions with mainland UAE customers (unless routed through an independent distributor or specifically permitted), certain IP income where the QFZP fails nexus requirements, and any income outside the list of qualifying activities. The author flags a hidden risk: many free-zone companies inadvertently jeopardise QFZP status by making small volumes of direct sales to mainland customers — even a single such transaction, if outside permitted categories, can disqualify the entity for the year.

What does "adequate substance" really mean?

Adequate substance is not a vague concept. The FTA looks for demonstrable physical presence, qualified employees, and operational expenditure in the UAE commensurate with the nature and scale of the activities. The presence of decision-makers, the nature of operational activities carried out in the zone, and whether resources are proportionate to the business all matter.

Free-zone companies that operate largely on paper risk losing their preferential rate. Substance also intersects with the Economic Substance Regulations (ESR) and, for groups, with transfer pricing — so documentation should be maintained contemporaneously rather than reconstructed at audit.

How do VAT and customs interact with free zones?

QFZP status under Corporate Tax does not change VAT obligations. Many free zones are designated zones for VAT, meaning certain supplies of goods between designated zones can fall outside the scope of VAT — but services supplied from a free zone to the mainland are generally standard-rated at 5%.

On customs, goods imported into a UAE free zone are not subject to customs duty while they remain in the zone or are re-exported; duties apply when goods enter the UAE mainland. That makes free zones attractive for regional distribution and re-export. The GCC common external tariff is generally 5% of the CIF value, with exceptions.

This is general information, not legal or tax advice. UAE tax rules evolve quickly — confirm thresholds, rates and deadlines with the Federal Tax Authority and a qualified UAE tax professional before acting.

Step-by-step: deciding between free zone and mainland

A short decision sequence helps avoid a costly restructuring later — which, as the book notes, early tax planning at the incorporation stage can prevent.

1. Map your customers: mainland UAE, other free zones, or foreign markets?
2. If most revenue is mainland-facing, a mainland licence usually gives cleaner access.
3. If most revenue is from foreign or free-zone counterparts, test QFZP eligibility.
4. Plan for substance: employees, premises and spend proportionate to the activity.
5. Confirm your activities against the qualifying/excluded activity lists (MD 265/2023).
6. Build transfer-pricing and ESR documentation from day one.
7. Review income streams annually to confirm you still meet QFZP conditions.

Frequently asked questions

Is a free-zone company tax-free in the UAE?: Not automatically. Since 2023 all free-zone entities are taxable persons. A Qualifying Free Zone Person (QFZP) can get 0% on qualifying income, but only if it meets all conditions (substance, qualifying income, transfer pricing and more). Otherwise the 9% rate applies.
Can a free-zone company sell to the UAE mainland?: It can, but direct mainland sales are usually non-qualifying income and can jeopardise QFZP status unless routed through an independent distributor or within permitted categories. Many businesses use a mainland branch or distributor for mainland trade.
Can foreigners own 100% of a UAE company?: Yes in most cases. Free zones have long allowed 100% foreign ownership, and 2020 amendments to the Companies Law removed the majority-UAE-ownership requirement for most mainland sectors (strategic industries can differ).
What is a Qualifying Free Zone Person (QFZP)?: A free-zone entity that meets all the conditions to access the 0% Corporate Tax rate on qualifying income — adequate substance, qualifying income, transfer-pricing compliance, no election to the standard rate, and limits on excluded income.
Do free-zone companies pay customs duty?: Goods kept in a free zone or re-exported are generally free of customs duty; duty applies when goods enter the UAE mainland. The GCC common external tariff is generally 5% of CIF value, with exceptions.
How many free zones are there in the UAE?: More than 40 across all seven emirates, each governed by its own free-zone authority — some sector-focused (such as DMCC, JAFZA, ADGM and DIFC) and some generalist.