Claiming 0% Corporate Tax in UAE Free Zones: Key Conditions & Critical Compliance Points for Designated Zone Companies

The introduction of UAE Corporate Tax has created significant opportunities for Free Zone and Designated Zone companies to enjoy a 0% corporate tax rate on Qualifying Income. However, this benefit is not automatic. Companies must strictly comply with the conditions outlined under the Corporate Tax Law and the Free Zone Guide issued by the FTA, and seeking guidance from an experienced corporate tax consultant in Dubai  can help ensure full compliance and avoid penalties.

As a government approved audit firm in Dubai, Accruon Auditing LLC observes that many businesses operating in Designated Zones assume they are automatically eligible for 0%, but in practice the risk of non-compliance is high—especially if documentation and substance conditions are not met.

This article outlines the most important conditions, daily operational checks, and high-risk mistakes Designated Zone companies must avoid to retain the 0% CT status.

1. Understanding the 0% Corporate Tax Benefit for Free Zones

A Free Zone Person may be eligible for 0% corporate tax only if:

• They qualify as a Qualifying Free Zone Person (QFZP)
• They earn Qualifying Income
• They maintain adequate substance within the free zone
• They comply with transfer pricing & reporting obligations
• They do not elect to be taxed at 9%

For Designated Zones (DZ)—which are special free zones for customs/VAT—additional operational conditions apply, especially relating to movements of goods, bill of entry compliance, and distribution activities.

2. MOST IMPORTANT CONDITIONS TO CLAIM 0% CORPORATE TAX

Below are the key FTA-mandated conditions that must be satisfied continuously.

A. Maintain “Adequate Substance” in the Free Zone

A Qualifying Free Zone Person must demonstrate real presence in the Free Zone:

• Core Income-Generating Activities (CIGAs) must be carried inside the free zone
• Adequate full-time employees in the free zone
• Adequate office space (leased or owned)
• Operational expenses incurred in the free zone

Risk Point:

Virtual offices, outsourced staff, or operations happening outside the free zone are red flags.

FTA may disqualify 0% benefits.

B. Earn Only “Qualifying Income”

The income of a Free Zone entity is eligible for 0% only if it falls under Qualifying Income, such as:

• Transactions with other Free Zone Persons
• Distribution of goods within or from a Designated Zone
• Certain service income from foreign persons
• Certain service income from UAE mainland only if conditions are met

High-Risk Area for DZ Companies

Distribution of goods from a Designated Zone to Mainland must be invoiced to the Mainland company, and the mainland company must file the Bill of Entry.

If the Designated Zone company files the Bill of Entry, it becomes a business-to-mainland activity which is fully taxable at 9%.

C. Comply With the “De-Minimis Rule”

A QFZP must ensure that Non-Qualifying Income does NOT exceed 5% or AED 5 million, whichever is lower.

This includes:

• Income from UAE mainland customers (unless qualifying)
• Income from excluded activities
• Unspecified service income
• Interest or financing income
• Rental income from non-qualifying immovable property

Daily Risk:

Even one wrong invoice to a mainland customer may push the company over the 5% threshold, resulting in losing the 0% status for the entire financial year.

D. Follow Bill of Entry Rules for Designated Zones

For goods stored, distributed, or processed within a Designated Zone:

Correct Treatment (0% Eligible)

• Goods sold to UAE mainland MUST be cleared using a bill of entry in the name of the UAE mainland buyer.

DZ company should NOT file a “local import” bill of entry.

Wrong Treatment (Leads to 9% Tax)

• If the DZ company files the bill of entry in its own name for mainland delivery
• If goods are consumed/used within the mainland
• If the place of use is mainland

FTA considers this as mainland business, and the entire transaction becomes non-qualifying income.

E. Maintain Proper Transfer Pricing Compliance

Related-party transactions must comply with:

• Arm’s-length pricing
• Local file and master file (if applicable)
• Disclosure form in the corporate tax return
• Unbalanced pricing with parent/related companies is a common trigger for losing QFZP status.

F. Do Not Perform “Excluded Activities”

The following activities automatically disqualify a Free Zone company from 0% CT:

• Banking activities
• Insurance activities
• Finance & leasing activities
• Real estate activities with immovable property in mainland
• E-commerce activities with goods delivered to mainland (unless structured correctly)

If a DZ company performs any excluded activity, it loses the 0% benefit for the whole year.

3. DAY-TO-DAY OPERATIONAL CHECKLIST FOR DZ COMPANIES

✔ Check every invoice before issuing

Ensure the customer type (FZ, foreign, mainland) is correct and falls under Qualifying Income.

✔ Maintain a “Qualifying Income Tracker”

Daily entry of income sources to ensure de-minimis rule compliance.

✔ Verify logistics transactions

• Who filed the bill of entry?
• What is the movement of goods?
• Is the sale in line with FTA conditions?

✔ Substance documentation

• Employee salary slips
• Office rent agreements
• Attendance records
• Expense proofs within the free zone

✔ Monthly management review

A small mistake repeated monthly can destroy the company’s QFZP status.

4. Common Mistakes that Cause Loss of 0% Status

• Filing bills of entry in the DZ company’s name for mainland deliveries
• Having no real substance in the free zone
• Revenue from mainland customers exceeding de-minimis threshold
• Providing services that fall under “excluded activities”
• Incorrect transfer pricing documentation
• Back-dated adjustments or incorrect GL mapping
• Improper accounting of stock movement in Designated Zones

Once a company loses QFZP status for the year, all income becomes taxable at 9%.

5. How Auditors & Advisors Prevent Loss of 0% CT Eligibility

A specialized auditing company like Accruon Auditing LLC can help:

• Conduct CT compliance audits
• Implement qualifying income trackers
• Review bill-of-entry documentation
• Ensure correct DZ distribution documentation
• Set up proper transfer pricing files
• Conduct interim audits to prevent year-end surprises
• Maintain FTA-aligned documentation and substance proofs

A proactive audit approach reduces risk and helps companies maintain the 0% tax regime throughout the year.

Conclusion

Claiming and sustaining the 0% corporate tax rate for Free Zone and Designated Zone companies in the UAE requires continuous compliance, accurate documentation, and strict adherence to FTA guidelines.

Even small operational mistakes—wrong invoices, incorrect bill of entry, or lack of substance—can disqualify the company for the entire financial year.

Regular audits, compliance checks, and proper tracking systems help companies maintain eligibility and avoid heavy tax consequences.