Author: Melban Mascarenhas
Published: May 17, 2025
Updated on: Nov 27, 2025
As the UAE's business landscape continues to evolve, one of the most significant changes for entrepreneurs and established companies in 2025 is the way corporate tax applies to free zone businesses. While free zones were once synonymous with tax-free benefits, recent updates have added some complexity. If you're running a company or thinking of starting one in a UAE free zone, here's everything you need to know.
The UAE introduced corporate tax to create a more transparent and internationally aligned economy. In 2023, a 9% corporate tax rate was announced for taxable profits exceeding AED 375,000. However, free zones remained under a unique structure that allowed qualifying entities to continue benefiting from the 0% tax rate.
2025 brings stricter enforcement and clearer guidelines from the Federal Tax Authority (FTA). Free zone companies can still enjoy tax exemptions, but they must now meet more specific criteria. The distinction between qualifying and non-qualifying income is more closely monitored, and compliance requirements have tightened.
Not all income is treated the same under the new tax regime. "Qualifying income" — which may include transactions within the same or other free zones, or with foreign entities — remains eligible for the 0% rate. However, income from mainland UAE customers (non-free zone) is typically subject to 9% corporate tax unless it falls under regulated conditions.
If your free zone business deals with the mainland — even indirectly — you might be liable for tax on that portion of income. This applies to services, goods, and other commercial activities. It's essential to evaluate your transaction model and structure accordingly.
To benefit from preferential rates, your entity must be considered a "Free Zone Person" under UAE law. This means being licensed by a free zone authority, maintaining adequate economic substance within the zone, and complying with all reporting and transfer pricing requirements.
Free zone businesses are now required to register for corporate tax and submit annual returns — even if they qualify for a 0% rate. You'll need to keep financial records and meet substance requirements like having staff, office space, and assets in your respective free zone.
Failure to maintain compliant books or late filing could result in hefty fines. The FTA expects accurate record-keeping and timely submissions. If your company cannot prove that income qualifies for tax exemption, you might be taxed on the entire amount.
Smart structuring is now essential. Whether it's separating taxable and non-taxable income streams or setting up separate entities for mainland dealings, many businesses are consulting tax advisors to remain compliant while retaining their advantages.
Yes — the benefits haven't gone away. If your free zone business deals only with foreign clients or other free zone entities and meets the economic substance requirements, you can still enjoy the 0% tax. The key is ensuring your operations remain within qualifying guidelines.
Sectors such as tech, e-commerce, logistics, and digital consulting can often be structured in a way that avoids mainland exposure altogether. Many of these industries continue to operate virtually, making it easier to stay within tax-beneficial free zone criteria.
Not all free zones are the same. Some have better infrastructure, stronger regulatory clarity, and partnerships that make compliance smoother. For instance, zones like SPC Free Zone offer fast licensing, investor visas, and flexibility — all while helping you stay tax compliant.
Whether you're already operating or about to launch, now is the time to seek expert tax and legal guidance. Structuring your business correctly from the start will save you money and stress down the line.
Keep track of FTA announcements. Make sure your business is registered for corporate tax, even if you're claiming 0%. Perform internal audits and check your compliance against qualifying criteria at least annually.
2025 may not be the final stop for tax reform in the UAE. Businesses that remain agile and proactive — updating structures, digitizing operations, and engaging advisory services — will be better positioned to thrive in any future changes.
Know someone who wants to grow their business? Refer them to SPC Free Zone and earn up to AED 1,500! Simply fill our referral form and we'll handle the rest.
The corporate tax rate is 0% for qualifying free zone income and 9% for non-qualifying income, such as dealings with the UAE mainland.
No. Only those meeting the FTA's definition of a "Qualifying Free Zone Person" are eligible for the 0% rate.
It must be registered in a UAE free zone, derive qualifying income, meet substance requirements, and comply with reporting and transfer pricing rules.
Only under certain regulated circumstances. Otherwise, that portion of income is typically taxed at 9%.
The business may lose its 0% eligibility and be subject to full corporate tax. Additionally, penalties for late registration or misreporting can apply.
Yes. All businesses, even those eligible for 0%, must register and file annual returns with the FTA.
About SPC Free Zone
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