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Dubai’s free zones offer a highly attractive tax environment. Unlike the mainland where companies have to pay 9% corporate tax for all income as per the corporate tax law free zones have a special income threshold where corporate tax is exempted for Qualifying income persons which we will discuss later.
Companies operating in these zones benefit from 100% customs and VAT exemptions with certain criteria. However, overall the taxation framework of free zones in Dubai offers significant benefits to the investors. It helps them repatriate their profit without extra burden from the Federal taxation authority.
A 9% tax on taxable income exceeding AED 375,000 will be applied by Federal Corporate Tax (FCT) from June 1, 2023, as per Federal Decree-Law on Corporate Income Tax to the non-qualified free zone persons. While on the other hand businesses earning below this threshold remain at a 0% tax rate as per that law. Additionally, multinational corporations with global revenues above a certain limit are subject to a 15% tax under the OECD Base Erosion and Profit-Sharing (BEPS) framework.
Companies/Investors are divided into 2 different categories in Dubai free zones by the Tax Regulations Authority. One is called Qualifying Free Zone Person (QFZP) criteria While the other is known as Non-qualifying income. This division is based on the compliance status of the companies.
Furthermore, companies in the free zone must follow Value-Added Tax (VAT) regulations. A 5% VAT applies to most goods and services. The exception is those that are specifically zero-rated or exempted under Federal Decree-Law Number 8 of 2017. Companies with an annual taxable turnover exceeding AED 375,000 are required to register for Value-Added Tax (VAT) as per the Federal Tax Authority of UAE.
Additional taxes, including municipal fees, customs duties, and industry-specific levies, may also apply. Proper tax planning and adherence to Ministerial Decisions No. 139 and No. 265 of 2023 are essential to maintaining compliance. Businesses planning to operate in a free zone should consult tax professionals to navigate the complexities of Dubai’s tax framework and get the lowest possible company set-up cost.
What Taxes Do Free Zone Companies Pay in Dubai?
Free zone companies pay corporate taxes, VAT, municipal taxes, customs duties, and other applicable taxes. However, free zone companies enjoy tax incentives and exemptions after fulfilling certain criteria. Our experts have a detailed analysis of everything you need to know to maximize the benefits of the tax perks provided by the free zone authorities. The common taxes and fees that apply to a free zone person or company are:
- Corporate Tax
- Value-Added Tax (VAT)
- Customs Duties
- Municipal Fees
Federal Corporate Tax (FCT) for Free Zone Companies
The Federal Corporate Tax (FCT) is a national tax imposed on the income or profits of companies operating within Dubai. Just like other business entities, free zone companies also abide by the law to pay taxes with certain exemptions. This was introduced by the Federal Tax Authority in June 2023 for profits exceeding AED 375,000.
However, free zone companies with qualified income are exempt from this tax as per Federal Decree-Law No. 47 of 2023 of the UAE Commercial Companies Law. Non-qualifying income, on the other hand, must pay a 9% corporate tax on profits exceeding AED 375,000.
Before we get into how to calculate this, you need to understand what qualifies as a qualifying and non-qualifying free zone person or income.
Qualifying Free Zone Person (QFZP) or Income
A Qualifying Free Zone Person (QFZP) is a business or individual that fulfills the qualifying conditions defined under Federal Decree-Law No. 47 of 2022 and Cabinet Decision No. 100 of 2023, generating qualifying income and benefiting from tax exemptions. To qualify, the business or individual must have a physical presence in the free zone and economic substance. Non-compliance could result in losing these tax advantages and QFZP status.
Typically, to be classified as a QFZP, a company must meet certain conditions such as:
- Physical Presence in a Free Zone
- Operating in qualifying activities
- Maintaining a certain level of economic Expenditure
- Ensuring compliance with the UAE’s Transfer Pricing rules, if applicable.
Non-Qualifying Free Zones Person
Non-qualifying Free Zone Person refers to a business or individual that does not meet the criteria outlined by the Federal Decree-Law No. 47 of 2022 and Cabinet Decision No. 100 of 2023. For instance, they will be generating Income from non-qualifying activities or activities outside the free zone. Other than that they may not be present within a free zone.
Non-qualifying income is subject to a 9% corporate tax on profits exceeding 375,000 AED, even if the business is located within a free zone.
What is the Corporate Tax Rate for a Company in a Dubai Free Zone?
The corporate tax for a company in a Dubai free zone is 0% on qualifying income for 50 years and 9% on non-qualifying income for profits exceeding the 375,000 AED threshold, as per Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. The below table clearly mentions corporate tax for both categories qualifying Free Zone Person and Non-qualifying Free Zone Person.
| Entity Type | Corporate Tax Rate |
| Qualifying Free Zone Person | 0% |
| Non-qualifying Free Zone Person | 9% |
Value-Added Tax (VAT)
Value-added tax (VAT) is a consumption tax applied to the import and export of products at each step of production and distribution as per Federal Decree-Law No. (8) of 2017 on Value Added Tax, approved by the Minister of Finance and the Federal Tax Authority. Value Added Tax is paid by the end consumers. It is applied to all taxable imports and exports in Dubai, with exceptions for certain activities such as government entities, public welfare associations, and others.
Value Added Tax (VAT) is divided into two subcategories: zero-rated VAT and exempted VAT. Based on this classification, you can identify how much VAT tax a free zone company will pay. However, most companies in the free zone are subject to a 5% VAT.
Zero-rated VAT
Zero-rated VAT is a type of value-added tax on goods and services taxed at 0%. It allows businesses to reclaim VAT paid on their purchases and expenses.
Example: Exported goods and international services
Exempted VAT
Exempted VAT means no VAT is charged. Here businesses cannot reclaim VAT on related expenses.
Example: Certain financial services and residential property
To help you understand the difference our expert has summarized the difference between Zero-rated VAT and Exempted VAT in the table below.
| Criteria | Zero-rated VAT | Exempted VAT |
| VAT Rate | 0% | 0% |
| Reclaiming VAT on Inputs | Yes, businesses can reclaim VAT on purchases | No, businesses cannot reclaim VAT on expenses |
| Examples | Exported goods, international services | Residential real estate, certain financial services |
| Impact on Business | Beneficial for businesses involved in exports or international trade | Businesses cannot recover VAT on related purchases or costs |
What is the Value Added Tax (VAT) for a Free Zone Company in Dubai?
The Value Added Tax for a company in a Dubai free zone is 5% on all taxable income which is the income exceeding 375,000 AED according to Federal Decree-Law No. (8) of 2017 from the Federal Tax Authority.
However, certain activities and specific government entities are exempt from VAT under this law. These include activities like welfare work that do not aim to make a profit and government bodies such as federal and local ministries.
Customs Duties
Customs duties are taxes or tariffs imposed by a government on goods when they are imported into or exported from a country. Businesses have to pay a 5% customs duty; however, it may increase for certain products like tobacco and luxury items, and decrease for foodstuffs and medicine, as per Federal Law No. 2 of 2017 on Customs Law of the UAE and Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses.
Free zone companies are exempt from customs duties with a Duty-Free Import Authorization (DFIA) from the Federal Tax Authority (FTA). However, if the companies trade with mainland entities, they are subject to about 5% customs duty, as mentioned above.
Municipal Fees
Municipal fees are charges imposed by local government authorities for public services and infrastructure maintenance on an annual or monthly basis. In most Dubai free zones, it is 5%, but this varies based on property type, business activity, and jurisdiction. These fees help fund local services such as:
- Waste Management
- Public Infrastructure
- Health and Safety
- Building and Land Use
Municipal fees are typically collected from residents, businesses, and property owners within a specific free zone. In free zones, these fees are lower than in mainland areas. Some free zones exempt these fees to attract investors, while others, like Dubai Silicon Oasis (DSO) municipality fee of 5% on the annual value of the rent from the property as per their official website.
