For decades, the promise of Abu Dhabi’s free zones – from ADGM and Masdar City to KEZAD – was built on a foundation of 100% foreign ownership and a 0% tax environment.
The introduction of the UAE’s 9% Corporate Tax has changed this landscape.
For entrepreneurs and businesses in Abu Dhabi, this has created a wave of critical questions. The most common one we hear is: “Does my free zone company now have to pay the 9% tax?”
The answer is: Not necessarily, but 0% tax is no longer automatic. It is a benefit that must be earned by meeting a specific set of criteria.
This guide will explain the single most important concept you need to understand: The “Qualifying Free Zone Person” (QFZP).
The 9% vs. 0% Myth: It All Depends on Your ‘Qualifying’ Status
Here is the most important distinction: The UAE government allows certain free zone businesses to continue benefiting from a 0% tax rate. But to be eligible, your business must be recognized as a “Qualifying Free Zone Person” (QFZP).
If you meet all the QFZP conditions, you pay:
- 0% on your “Qualifying Income.”
- 9% on any income that is not “Qualifying Income.”
If you fail to meet the conditions, your entire net profit for the year could be subject to the standard 9% UAE Corporate Tax.
How to Become a Qualifying Free Zone Person (QFZP)
This is not an automatic status. You must proactively meet and maintain several key conditions.
- You Must Maintain “Adequate Substance” This is the most critical test. Your free zone company cannot be an empty shell. You must have real operations, sufficient employees, and adequate operational expenses in the UAE. The government needs to see that your company is genuinely managed and operating from within the free zone.
- You Must Generate “Qualifying Income” This is the heart of the matter. The 0% rate only applies to income that the government “qualifies.” We will cover this in detail below.
- You Must Not Exceed “Non-Qualifying” Revenue Limits Your revenue from non-qualifying activities (like selling to individuals on the mainland) must not exceed a specific threshold (e.g., 5% of total revenue or AED 5 million, whichever is lower).
- You Must Prepare Audited Financial Statements You must maintain all your books and have your financial statements audited according to international standards.
If you fail to meet even one of these conditions, you lose your QFZP status and the 0% tax benefit for that period.
The “Non-Qualifying” Trap: When Does the 9% Tax Apply?
This is where most businesses face risk. You will likely pay the 9% tax on:
- Income from “Excluded Activities”: A specific list of activities, including most banking, insurance, and real estate transactions, are excluded from the 0% rate.
- Income from Mainland UAE (Non-Qualifying): If your Abu Dhabi free zone company provides services to a customer on the UAE mainland (and it’s not a “Qualifying Activity”), that income is generally subject to 9% tax.
- Income from Individuals: Any sales made to an individual (natural person), regardless of their location, is typically not qualifying income.
This creates a hybrid system. It is very possible for a single company to pay 0% on its international income but 9% on its local mainland income.
Conclusion
The 0% Corporate Tax benefit for Abu Dhabi free zones is still a powerful advantage, but it is no longer a guarantee. It is a status that must be carefully planned, structured, and maintained.
The biggest mistake a business can make is assuming it is exempt. An incorrect assumption about your status or a failure to maintain adequate substance can lead to significant, unexpected tax liabilities.
Your business structure, activities, and client locations must all be professionally assessed. Creative Zone is your one-stop partner to manage your entire setup and ensure your tax strategy is compliant from day one.
If you’re ready to make your move in Abu Dhabi, contact our business setup experts today for a free consultation.