UAE Corporate Tax for Free Zone Companies: 2026 Calculation Guide | Ghalib Consulting

How to Calculate UAE Corporate Tax for Free Zone Companies: A Practical 2026 Guide

Introduction

I remember sitting with a client in his Dubai office last month—let’s call him Ahmed. He’d built a successful trading business in a free zone over five years, and like many entrepreneurs, he was anxious. “Everyone keeps talking about this 9% tax,” he said, staring at his financial statements. “But I’m in a free zone. Do I pay it or not? And if I do, how do I actually calculate what I owe?”

Ahmed’s confusion is understandable. When the UAE introduced Corporate Tax in 2023, many free zone business owners assumed the 0% rate would simply disappear. But the reality is more nuanced—and more promising for those who understand the rules.

The truth is, UAE corporate tax for free zone companies isn’t a one-size-fits-all calculation. It depends on who you trade with, what activities you perform, and whether you meet specific conditions. And here’s the good news: with proper structuring and compliance, many free zone businesses can continue enjoying 0% tax on significant portions of their income.

In this guide, I’ll walk you through exactly how to calculate your tax liability, using real-world examples and the latest 2026 regulations. No jargon, no fluff—just practical steps to give you clarity and confidence.

Understanding the Free Zone Tax Landscape in 2026

Before we dive into calculations, let’s get one thing straight: the 0% Corporate Tax rate for free zone companies isn’t dead. It’s just become more… selective.

The UAE’s tax framework distinguishes between two types of free zone entities: those that qualify for the 0% rate (called Qualifying Free Zone Persons or QFZPs) and those that don’t . Think of it like a VIP section at a concert—the main floor is open to everyone at 9%, but if you meet the right criteria, you get access to the 0% lounge.

As of 2026, over 45 free zones operate across the UAE, housing more than 55,000 companies . Each of these businesses must now evaluate its tax position based on five key conditions :

1. Maintaining adequate substance in a free zone
2. Deriving qualifying income
3. Not electing to be subject to the standard 9% regime
4. Complying with transfer pricing rules
5. Keeping non-qualifying revenue within the de minimis limits

If you meet all these conditions, congratulations—you’re a QFZP, and you can calculate your tax using a dual-rate system: 0% on qualifying income and 9% on non-qualifying income .

Step 1: Determine Your Qualifying vs. Non-Qualifying Income

This is where most free zone businesses get stuck. What exactly counts as “qualifying income”?

Qualifying Income Includes:

Transactions with other Free Zone Persons
If you do business with another company located in any UAE free zone, that income generally qualifies for 0% tax—unless the activity itself is “excluded” . This applies even across different free zones, so a DMCC company trading with a JAFZA company can both enjoy 0% on that transaction.

International Trade
Income from customers outside the UAE typically qualifies . This includes exports, international services, and B2B transactions with foreign companies.

Specific Qualifying Activities
The UAE government has identified certain sectors that qualify for the 0% rate :

• Manufacturing and processing
• Trading of qualifying commodities (metals, minerals, energy, agriculture)
• Holding shares and securities for investment
• Ship ownership and operation
• Logistics and distribution (with specific rules)
• Headquarters services to related parties
• Treasury and financing services to related parties

Qualifying Intellectual Property
Income from patents and copyrighted software can qualify, calculated using a special “nexus ratio” that considers your R&D expenditures .

Non-Qualifying Income Includes:

Transactions with Mainland UAE Businesses
If you sell to a mainland UAE company, that income is generally non-qualifying and subject to 9% tax .

Excluded Activities
Certain activities automatically disqualify income from the 0% rate, even if conducted with free zone persons :

• Banking and insurance activities
• Ownership of immovable property (except commercial property in free zones)
• Transactions with natural persons (B2C), with limited exceptions

Domestic Permanent Establishments
If you have a physical presence outside the free zone within the UAE (like a mainland branch), income attributable to that presence is taxed at 9% .

Step 2: Apply the De Minimis Rule

Here’s where things get interesting—and where many businesses can breathe a sigh of relief.

The de minimis rule allows QFZPs to have some non-qualifying income without losing their 0% status entirely. The threshold is the lower of :

• 5% of total revenue, or
• AED 5 million

Let me illustrate with Ahmed’s trading company:

Scenario A: Ahmed’s Total Revenue = AED 10 million

• 5% threshold = AED 500,000
• If his non-qualifying income is AED 400,000, he’s within the limit
• Result: He remains a QFZP, pays 0% on qualifying income, and 9% only on that AED 400,000

Scenario B: Ahmed’s Total Revenue = AED 10 million

• Non-qualifying income = AED 600,000 (exceeds 5%)
• Result: He loses QFZP status for this year and the next four years, paying 9% on all income 

Important Exclusions from the Calculation:
Certain revenues don’t count toward either non-qualifying or total revenue in the de minimis test :

• Income from commercial property in free zones (transactions with non-free zone persons)
• Income from non-commercial property in free zones (any transactions)
• Income attributable to domestic or foreign permanent establishments
• Income from intellectual property (except qualifying IP income calculated separately)

Step 3: Calculate Your Tax Liability

Now let’s walk through a complete calculation example.

Case Study: Gulf Trading FZE

Business Profile:

• Dubai free zone company (Designated Zone)
• Activities: International commodity trading + some UAE mainland sales
• Total Revenue for 2026: AED 15 million

Income Breakdown:

Step 3.1: Check De Minimis

• Total Revenue: AED 15 million
• Non-Qualifying Revenue: AED 2 million
• 5% of Total Revenue: AED 750,000
• Since AED 2 million > AED 750,000, de minimis threshold is exceeded

Result: Gulf Trading FZE loses QFZP status for this tax period and the next four years .

Tax Calculation:

• Taxable Income: AED 15 million (all income now taxed at 9%)
• Less: AED 375,000 threshold (0% on first AED 375,000) 
• Net Taxable: AED 14,625,000
• Tax Payable: AED 14,625,000 × 9% = AED 1,316,250

But what if Gulf Trading had structured differently?

Revised Case Study: Gulf Trading FZE (Optimized)

Same company, but this time they’ve kept mainland sales under control:

• Total Revenue: AED 15 million
• Non-Qualifying Revenue (mainland sales): AED 700,000
• 5% threshold: AED 750,000
• ✅ De minimis satisfied

Tax Calculation:

• Qualifying Income (AED 13 million): 0% tax = AED 0
• Non-Qualifying Income (AED 2 million): 9% tax
• Less: AED 375,000 threshold allocated appropriately
• Tax Payable on Non-Qualifying: (AED 2,000,000 – AED 375,000) × 9% = AED 146,250

Tax Savings from Optimization: AED 1,170,000

Step 4: Verify Substance Requirements

Numbers alone don’t secure your 0% rate. You must also demonstrate adequate economic substance in the free zone .

This means:

• Assets: Sufficient physical assets for your activities
• Employees: Adequate qualified full-time staff in the free zone
• Expenditures: Adequate operating expenditure in the free zone
• Core Activities: Your core income-generating activities must occur in the free zone (or be properly supervised if outsourced) 

Outsourcing Rules:
You can outsource core activities to another free zone entity, provided you maintain adequate supervision . For qualifying IP, you can even outsource to mainland UAE or unrelated parties abroad .

Step 5: Consider Special Cases

Distribution from Designated Zones

If you’re in the distribution business, pay close attention. Distribution from a Designated Zone qualifies for 0% tax if :

• The activity occurs in or from a Designated Zone
• Goods entering the UAE are imported through the Designated Zone
• Goods are supplied to customers that resell, process, or alter them

This creates opportunities for re-export businesses. Goods that never enter the UAE mainland can enjoy full 0% treatment .

Qualifying Commodities Trading

Recent 2025 updates expanded qualifying commodities to include :

• Industrial chemicals and by-products
• Environmental commodities (carbon credits, renewable energy certificates)

However, if your revenue from distribution, warehousing, logistics, or inventory management exceeds 51% of total revenue, you may lose commodity trading benefits .

Holding Companies

For holding companies, shares must be held for investment purposes for at least 12 uninterrupted months to qualify for 0% treatment .

Common Pitfalls to Avoid

Through my work with free zone clients, I’ve seen several recurring mistakes:

1. Assuming all free zone income is automatically 0%
Reality: The 0% rate is conditional. You must actively qualify and comply.

2. Ignoring the de minimis limit
That 5% threshold isn’t a target—it’s a limit. Exceeding it once costs you four years of benefits.

3. Neglecting transfer pricing
QFZPs must comply with all transfer pricing rules and documentation requirements . The FTA expects arm’s length transactions and proper records.

4. Overlooking domestic PE exposure
If you have a mainland presence, even a small office, income attributable to that presence is taxable at 9% .

5. Failing to maintain substance
A “paper company” with no real activity won’t satisfy the adequate substance test. You need genuine operations in the free zone.

Practical Steps for 2026

As we move through 2026, here’s what free zone companies should do:

Review Your Revenue Sources
Map every income stream and classify it as qualifying or non-qualifying. Don’t guess—document your rationale.

Monitor Your De Minimis Position
Track non-qualifying revenue throughout the year. If you’re approaching the 5% limit, consider whether you can restructure certain transactions.

Document Your Substance
Maintain records of your free zone assets, employee contracts, lease agreements, and operational expenditures. If audited, you’ll need to prove substance.

Prepare Audited Financial Statements
QFZPs must prepare audited IFRS financial statements . This isn’t optional.

Consider Your Mainland Strategy
If you need mainland presence, structure it properly. A domestic PE is taxable but won’t disqualify your free zone operations .

The Bottom Line

Calculating UAE corporate tax for free zone companies doesn’t have to be overwhelming. Think of it as a simple three-step process:

1. Classify your income as qualifying or non-qualifying
2. Check your de minimis position
3. Calculate tax at 0% on qualifying income and 9% on non-qualifying income (or all income at 9% if you exceed the limit)

The businesses that thrive under the new regime won’t be those that hide from compliance—they’ll be those that embrace clarity, maintain proper substance, and structure their operations intelligently.

Ahmed, the client I mentioned earlier? After walking through these steps together, he realized his mainland sales were pushing him close to the de minimis limit. We restructured a few relationships, and he now comfortably enjoys 0% on 94% of his income while fully complying with all regulations. His anxiety has been replaced by confidence—and a much clearer picture of his tax position.

How Ghalib Consulting Can Help

Navigating the complexities of UAE corporate tax for free zone companies requires both expertise and practical experience. At Ghalib Consulting, we’ve been helping businesses like yours since 2013.

Our free zone tax services include:

• Tax Health Checks: Review your current income streams and classify qualifying vs. non-qualifying revenue
• De Minimis Monitoring: Track your position throughout the year to avoid unexpected disqualification
• Substance Documentation: Help you establish and document adequate economic substance
• Transfer Pricing Compliance: Prepare documentation that meets FTA requirements
• Audited Financial Statements: Connect you with trusted auditors who understand free zone nuances

Founded by Ghalib Kazmi, PwC alumnus and CPA, FMVA-certified professional with 17 years of experience, we bring Big Four rigor with personalized attention.

📞 Contact us today