Tax Exemptions in UAE Free Zones: Corporate Tax & VAT Guide for Businesses (with QFZP Rules)

When people search “Tax exemptions in UAE free zones”, they usually expect a simple answer like “Free Zone companies pay zero tax.” In reality, UAE tax benefits for Free Zone businesses are rules-based advantages—and you only keep them if you meet specific Corporate Tax and VAT conditions and can prove compliance with proper records, substance, and reporting.

In this blog, we’ll explain how UAE Free Zone “tax exemptions” work in two key areas:

• Corporate Tax: How a Free Zone company can qualify as a Qualifying Free Zone Person (QFZP) and apply a 0% corporate tax rate on Qualifying Income (while other income may be taxed differently).

• VAT: How Designated Zones work for VAT, when goods can move without VAT being due, and why services are treated differently even inside Free Zones.

This guide is written for business owners, finance teams, and Free Zone decision-makers who need clarity—not confusion.

What Tax Exemptions in UAE Free Zones actually means

Let’s correct the biggest misunderstanding:

Free Zone ≠ automatic tax exemption

A Free Zone licence does not automatically grant a permanent “tax-free” status. You must still manage:

• tax registration requirements

• accurate accounting and financial statements

• tax return filing

• documentation for transaction classification

• compliance conditions to retain preferential treatment

What the benefits usually refer to

Most of the time, this keyword refers to:

• Corporate Tax benefit: 0% rate on Qualifying Income if you qualify as a QFZP

• VAT advantage: certain goods transactions in a Designated Zone may be treated as outside the UAE for VAT purposes, only when conditions are met

So, the “exemption” is best understood as a structured tax benefit—not a blanket immunity.

Corporate Tax (Free Zone) — Entities & Attributes (explained in plain language)

Below is the exact entity framework you shared, rewritten into a practical business guide.

Entity: Free Zone Person

Attributes

• Type: A juridical person registered/incorporated in a UAE Free Zone

• Corporate Tax position: In scope of UAE Corporate Tax rules as a taxable person (but may qualify for 0% on qualifying income if it becomes a QFZP)

What this means in practice

Even as a Free Zone company, you need to behave like a tax-compliant business:

• maintain proper books of account

• classify income streams correctly

• file corporate tax returns as required

• keep records and support documents

• meet eligibility conditions if claiming preferential treatment

Key takeaway: A Free Zone company can be tax-efficient, but only with correct structuring and reporting.

Entity: Qualifying Free Zone Person (QFZP)

Core Benefit

• 0% Corporate Tax on Qualifying Income

Core eligibility attributes (conditions)

To remain a QFZP, the Free Zone business must meet a set of conditions. In practice, these are the conditions that commonly decide whether your 0% benefit is protected or at risk:

• Adequate substance in the Free Zone

  • Real operations

  • Appropriate people, space, activity level

  • Decision-making and control aligned with the Free Zone presence

• Earns Qualifying Income

  • Not all income “counts” for the 0% rate

  • You must classify revenue correctly (qualifying vs non-qualifying)

• Does not elect into the standard corporate tax regime

  • If you elect to be taxed at the standard regime, you generally give up the 0% QFZP treatment

• Applies arm’s length principle and maintains transfer pricing documentation

  • Related party pricing must be defensible

  • Intercompany charges must be commercially justified

• Maintains audited financial statements

  • Audited financials are not a “nice-to-have” for QFZP status

  • Audit readiness becomes a core compliance requirement

• Passes the de minimis test for non-qualifying revenue

  • This is one of the most common places businesses slip up

What QFZP really requires

A QFZP is not just a registration status—it’s a compliance profile. It requires:

• consistent documentation

• accurate classification of income

• controlled revenue streams (especially mixed mainland/Free Zone income)

• audit-ready reporting

Entity: Qualifying Income

Main categories (attributes)

Qualifying Income typically includes:

• Income from transactions with Free Zone Persons

  • subject to conditions

  • excluding income from excluded activities

• Income from transactions with Non-Free Zone Persons

  • only for qualifying activities

  • must not fall under excluded activities

• Income from qualifying intellectual property (where applicable)

• Other income

  • may still be treated as qualifying only if the de minimis requirements are satisfied

Entity : Practical note: “Qualifying Income” needs clean classification

Many Free Zone businesses operate with multiple revenue streams, such as:

• Free Zone-to-Free Zone invoices

• mainland clients

• e-commerce sales and delivery

• consultancy and services across the UAE

• related party support fees

Unless income is clearly tracked and categorized, the QFZP benefit becomes difficult to support.

Entity: Qualifying Activities

Meaning (attribute)

• Qualifying Activities are specifically listed in Ministerial Decisions and related regulatory instruments, and they determine whether certain income (especially transactions with Non-Free Zone Persons) can still be treated as qualifying.

Practical business impact

This is where your licensing and activity model matters.

If your Free Zone company deals with mainland clients, the question becomes:

• Are you conducting a qualifying activity under the defined list?

• Or are you generating revenue that will be treated as non-qualifying?

This classification directly affects:

• the 0% treatment eligibility

• de minimis compliance

• your year-end tax position

Entity: Excluded Activities

Meaning (attribute)

• Excluded Activities are carved out by Ministerial Decisions; income from these is generally treated as non-qualifying.

Why excluded activities matter so much

Excluded activities can create two major risks:

• Tax rate risk: income becomes non-qualifying and could be taxed differently

• Status risk: too much non-qualifying revenue can breach de minimis and affect QFZP eligibility

Common real-world issue: businesses assume they remain QFZP because they are in a Free Zone, but their actual activity mix pushes them into non-qualifying territory.

Entity: Non-Qualifying Revenue (and De minimis test)

Threshold (attribute)

To keep QFZP status, non-qualifying revenue must not exceed the lower of:

• AED 5,000,000, or

• 5% of total revenue

Why this matters in real business life

This rule is the “guardrail” that allows limited non-qualifying revenue—but not too much.

If you cross the threshold, the outcome can be serious because it can impact:

• QFZP status

• 0% benefit continuation

• how the business must treat its corporate tax position for the period

How businesses accidentally breach de minimis

Here are common patterns:

• taking one large mainland contract late in the year

• mixing service income and trading income without tracking the activity classification properly

• billing related parties without arm’s length analysis

• incorrectly assuming all Free Zone-to-mainland revenue is still “qualifying”

Best practice: monitor de minimis quarterly, not annually.

Entitly : Transfer Pricing / Related Parties

Attributes

• Arm’s length outcomes

• Transfer pricing documentation

• Related-party disclosures

• Commercial rationale for intercompany charges

Why it’s critical for Free Zone businesses

Many Free Zone companies operate as part of a group structure, with:

• management fees

• head office charges

• shared service cost allocations

• intercompany licensing fees

• group treasury / financing

These are high-risk areas because they directly affect:

• profit allocation

• taxable income composition

• compliance defensibility

Practical advice: don’t treat TP as a “big-company problem.” Free Zone regimes can require strong documentation.

Entity : Permanent Establishment (Domestic / Foreign PE)

Attributes

• Presence or operations outside the Free Zone can affect classification and tax treatment

• A domestic footprint can influence whether income remains within the Free Zone preferential framework

How this affects your Free Zone tax benefits

If your Free Zone business has:

• a fixed place of business in mainland

• operational control and delivery happening outside the Free Zone

• employees working permanently outside the Free Zone

• contract conclusion and management from mainland offices

…you may be exposed to Corporate Tax implications that reduce Free Zone advantages.

Entity: VAT (Value Added Tax)

Attribute

• VAT applies to supplies of goods and services in the UAE, subject to specific rules—especially for Designated Zones.

Practical implication

Even Free Zone entities must:

• register when thresholds apply

• issue tax invoices correctly

• record VAT on eligible supplies

• manage input VAT recovery

Entity: Designated Zone

Legal treatment (attribute)

• A Designated Zone can be treated as outside the UAE for VAT purposes only when conditions are met, and the treatment mainly affects goods scenarios.

Key attributes/conditions (high level)

A Designated Zone needs specific governance/controls and features set out in VAT guidance, including controls over goods movement.

Real-world meaning

• If your Free Zone is not a Designated Zone, the VAT “outside the State” concept does not apply.

• If it is a Designated Zone, VAT treatment can still differ depending on the transaction type.

Transfer of Goods between Designated Zones

VAT attribute

• Goods may be transferred without VAT becoming due—subject to prescribed procedures/conditions.

Why this is important

This is one of the strongest VAT “benefits” associated with certain Free Zones. But it’s also an area where documentation failure can create serious VAT exposure.

To manage it properly, companies typically need:

• evidence of movement

• warehouse and customs documentation (where relevant)

• transaction traceability

Entity : Supply Type Split — Goods vs Services

Attribute

• VAT treatment can differ materially depending on whether the transaction is a supply of goods or a supply of services, especially in/around Designated Zones.

Practical explanation

Many businesses assume:

“Because we are in a Designated Zone, VAT does not apply.”

That’s not how VAT works.

For example:

• goods stored and moved under Designated Zone rules may benefit in defined cases

• services provided to UAE customers generally remain within VAT rules, even if the service provider is in a Designated Zone

Key takeaway: Your VAT position depends on what you supply (goods/services), to whom, and where the supply is treated as taking place.

Common mistakes Free Zone businesses make (and how to avoid them)

Below are the mistakes we see most often when businesses aim for “tax exemptions in UAE free zones.”

Mistake 1: Treating Free Zone status as automatic 0%

• Reality: 0% is tied to QFZP rules and qualifying income classification.

Mistake 2: Failing de minimis without noticing

• Reality: one large non-qualifying contract can breach the threshold.

Mistake 3: Mixing qualifying and non-qualifying activity revenue in the same bucket

• Reality: revenue must be tracked and defensible.

Mistake 4: Weak transfer pricing and unsupported intercompany fees

• Reality: related party transactions need commercial rationale and documentation.

Mistake 5: Assuming VAT doesn’t apply in a Free Zone

• Reality: VAT has special rules, but registration/compliance often still applies.

Mistake 6: Lack of audit-ready accounting

• Reality: audited statements and clean books protect your tax position.

How Young & Right can help with Tax Exemptions in UAE Free Zones

At Young & Right, we support Free Zone businesses with structured, compliance-first planning so your tax advantages are earned, retained, and defensible.

Here’s how we typically help:

Corporate Tax (QFZP) support

• QFZP eligibility assessment

  • activity review

  • revenue stream mapping

  • de minimis risk visibility

• Qualifying vs non-qualifying income framework

  • classification guide tailored to your operations

  • practical transaction rules your finance team can follow

• Substance alignment advisory

  • operational alignment checks

  • governance structure review

  • documentation readiness

• Transfer pricing support

  • related party transaction review

  • arm’s length justification assistance

  • documentation support for compliance

• Audit assistance (not “audit services”)

  • audit readiness preparation

  • schedules, reconciliations, working papers support

  • working alongside appointed auditors to reduce delays

VAT support for Free Zones

• Designed Zone VAT scenario review

• goods movement documentation guidance

• supply-type (goods vs services) and tax invoice checks

• input VAT recovery review and compliance support

If your goal is to benefit from Free Zone tax advantages without future disputes, our role is to make your compliance clean, clear, and ready.

Conclusion

“Tax exemptions in UAE free zones” is best understood as tax advantage through compliance.

• For Corporate Tax, the main Free Zone benefit is the 0% rate on qualifying income through QFZP status—supported by substance, audits, income classification, and de minimis control.

• For VAT, Designated Zones can provide advantages for certain goods movements, but VAT treatment depends heavily on supply type and compliance steps.

If you want a safe, defensible approach that protects the benefit year after year, the key is to build a compliance structure that matches the rules—not assumptions.