Free Zones vs Mainland: Corporate Tax Return Requirements Compared
Corporate tax is no longer something UAE businesses can ignore. With major reforms rolled out in 2023 and more clarity coming into play for 2025, understanding how corporate tax in the UAE works and how it affects your business is now a must.
One of the biggest questions we hear from business owners is:
“Do tax rules apply differently to Mainland and Free Zone companies?”
The short answer? Yes — and the differences matter.
With separate rules, filing obligations, and tax rates in some cases, knowing which requirements apply to you can help you avoid mistakes, save money, and stay compliant.
That’s where ADEPTS comes in. We help UAE income tax filers, whether on the Mainland or in a Free Zone, make sense of all the changes.
From understanding exemptions to preparing tax returns correctly, our experts guide you step by step so you can focus on running your business instead of deciphering tax codes.
UAE Corporate Tax: What’s Changing in 2025
If you’re running a business in the UAE, 2025 brings a few important tax updates that are definitely worth knowing.
1. New 15% Tax for Large Multinational Enterprises (MNEs)
Here’s the headline: if your business is part of a big multinational group with over €750 million in global revenue, a new 15% minimum federal tax will be imposed in the following year.
This is the UAE’s way of aligning with global tax reforms under the OECD’s Pillar Two. If that sounds technical, don’t stress — the key point is:
Unless you’re a massive company, this doesn’t affect you. Most SMEs and local firms can breathe easy.
2. 9% Corporate Tax Continues for Most UAE Businesses
For the majority of UAE businesses, the basic corporate tax return UAE rule from 2023 still stands:
- You don’t pay any tax on your first AED 375,000 in profit.
- Anything above that gets taxed at 9%.
This applies to mainland businesses and Free Zone companies that don’t qualify for special exemptions.
So yes, you might owe tax, but it’s still one of the most business-friendly rates globally.
3. More Clarity for Partnerships and Family-Owned Businesses
Another change is that partnerships and family foundations are now getting more attention.
In the past, these setups were treated informally. But now, depending on your structure, you might need to do income tax return filing, just like a regular company.
Reviewing your setup is a good idea if you have a joint venture, are part of a family-run business, or use a trust or foundation. The rules are more detailed now.
4. Increased Reporting and Transparency
Lastly, and this applies to everyone, the UAE is asking for more transparency.
That means:
- Keep good financial records
- File returns even if you made no profit
- Free Zone companies claiming 0% tax? You’ll need to prove you qualify
- If you’re part of a large group, you may have extra reporting to do
It’s not about making life more complicated. It’s about the UAE aligning with international tax filing standards while still being a great place to do business.
Understanding Entity Classification
One of the first things you need to figure out when it comes to corporate tax returns in the UAE is how your business is classified.
Why? Because your classification decides how much tax you owe, whether you can benefit from any exemptions, and what kind of paperwork you’ll be expected to file each year.
There are three main types of business classifications under the new UAE tax system:
- Mainland Companies
- Free Zone Persons (FZP)
- Qualifying Free Zone Persons (QFZP)
Each of these comes with its own rules and tax return treatment. Let’s review what each one means and how it affects you.
1. Mainland Companies
If your business is set up with the Department of Economic Development (DED) — and not inside a Free Zone, you’re a mainland company.
This is the most common setup in the UAE.
Shops. Cafes. Agencies. Service providers. Most small and medium businesses fall into this group.
Here’s what that means for corporate tax:
- You pay 9% tax on annual profits above AED 375,000
- If your profit is under that amount, you don’t pay any income tax in the UAE — that buffer helps smaller businesses stay afloat
Still, even if you’re not paying tax yet, you must:
- Register with the Federal Tax Authority (FTA)
- File your corporate tax return every year
- Keep your accounts clean and updated
You could face penalties, even with low profits if you skip any of these steps.
As for business operations, there are no limits. Mainland companies can trade freely within the UAE, with Free Zones, and internationally. You’re free to do business with anyone, anywhere.
2. Free Zone Person (FZP)
If your company is based in one of the UAE’s Free Zones—like DMCC, JAFZA, RAKEZ, or any others- you’re known as a Free Zone Person, or FZP.
For a long time, people thought that simply being in a Free Zone automatically earned them the 0% tax rate in the UAE. But under the new rules, that’s no longer the case.
Yes, Free Zone companies are treated differently, but not all qualify for the 0% rate. Being located in a Free Zone is only step one. You need to meet extra requirements if you want to actually benefit from the lower UAE tax rate.
3. Qualifying Free Zone Person (QFZP)
This is where the 0% corporate tax benefit comes in, but it’s not handed out to everyone. Your business has to meet several specific conditions set by the government to be considered a Qualifying Free Zone Person, or QFZP.
Here’s what that means in simple terms:
First, you need to be properly registered in a Free Zone and have a valid FTA eServices trade license issued by the Free Zone authority.
Next, your business must have a real presence in that Free Zone. That means you actually run operations there. You have a functioning office. You’ve got staff on site. You’re not just using the Free Zone as a mailing address while working out of your living room or a mainland office.
Authorities are checking for substance, not just paperwork.
Then comes the important part: what you do. To qualify for 0% tax, your income needs to come from specific “Qualifying Activities.”
These include things like:
- Operating as a holding company
- Manufacturing or warehousing
- Shipping and logistics in Free Zones
Another rule: you must not opt into the regular tax system. There’s an option in the law that lets Free Zone companies voluntarily be taxed like any other business. But if you make that election, you lose the 0% rate — even if your income would’ve qualified otherwise.
Also, if your business works with related companies, like other businesses owned by the same people or family, you’ll need to follow transfer pricing rules. Basically, you have to show that you’re charging fair market rates and not shifting profits around to avoid income tax. This means keeping proper documentation.
Lastly, you’ll need to have audited financial statements. Even smaller Free Zone companies that want to benefit from 0% corporate tax in the UAE need to maintain proper books and have them audited every year.
It’s part of proving that your income qualifies.
Corporate Tax Rates and Applicability: Mainland vs Free Zones
| Feature | Mainland Companies | Free Zone Companies |
|---|---|---|
| Standard Tax Rate | 9% on profits above AED 375,000 | 0% on qualifying income, 9% on non-qualifying income |
| Tax-Free Threshold | AED 375,000 on total taxable income | No threshold on non-qualifying income – taxed from first dirham if non-qualifying |
| Qualifying Income Criteria | Not applicable | Must meet substance requirements, income must be from qualifying activities, and not from excluded activities or domestic mainland sources |
| Non-Qualifying Income Threshold | Fully taxable above AED 375,000 | 9% applies if non-qualifying income exceeds 5% of total income or AED 5 million (whichever is lower) |
| DMTT (for MNEs) | 15% if global revenue > EUR 750 million | The same 15% rate applies under the same threshold |
| Exemptions | Small Business Relief may apply if revenue ≤ AED 3 million | Small Business Relief is not available to QFZPs |
| Scope of Tax | Applies to all UAE-sourced and foreign income (unless exempt) | Applies only to non-qualifying and mainland-sourced income for QFZPs |
V-A. Key Corporate Tax Thresholds & Ranges (2025)
| Trigger / Threshold | Impact | Applies To |
|---|---|---|
| AED 375,000 taxable income | First AED 375,000 is taxed at 0%; income above this is taxed at 9% | All taxable persons (except QFZPs) |
| AED 5 million OR 5% of total income (de minimis rule) | If non-qualifying income exceeds this, QFZP loses 0% CT benefit | Qualifying Free Zone Persons (QFZPs) |
| EUR 750 million consolidated global revenue | Triggers 15% DMTT under OECD Pillar Two rules | MNEs (Mainland & Free Zones) |
| 0% CT for Qualifying Income | Available only if substance, activity type, and qualifying income conditions are met | QFZPs only |
| Connected person transactions > AED 500,000 | Triggers mandatory Connected Person Disclosure Form | All entities with connected persons |
| Revenue or assets > AED 50 million | Triggers mandatory Audit Requirement | All entities |
| Total revenue > AED 200 million | Requires preparation of Master File & Local File for TP compliance | All large entities |
| Late Filing Penalty: AED 10,000 – AED 50,000 | Penalty for failure to submit CT return, TP forms, or supporting documents on time | All taxable persons |
Key Differences in Tax Filing Obligations
Mainland and Free Zone companies both have to file corporate tax returns. But how they do it, and what they need to include, can be quite different.
Let’s break it down.
1. Filing Forms Are Different
Mainland businesses file the standard UAE income tax return, which is the regular form used by most UAE companies.
Free Zone companies that qualify for the 0% corporate tax in the UAE use a different form, the QFZP template.
This form asks extra questions to confirm eligibility. It checks for qualifying income, business activity, and other conditions.
2. Reporting Related Party Transactions
If your company works with other businesses in the same group, you need to report it. This is called related party disclosure, part of transfer pricing compliance.
This rule applies to both Free Zone and mainland companies.
But Free Zone setups often encounter it earlier, especially when multiple related entities share services or capital.
3. Mainland Income Must Be Reported Carefully
Mainland companies report all UAE income under one tax structure.
Free Zone companies must split their income and apply special rules.
If a Qualifying Free Zone Person earns income from the UAE mainland, it must evaluate whether the income is from excluded activities or non-qualifying transactions.
In many cases, such income disqualifies the entity from the 0% rate, and the entire income may be subject to 9% Corporate Tax, not just the mainland portion.
4. Withholding Tax on Cross-Border Payments
Withholding tax in the UAE applies only to UAE-sourced income paid to non-resident persons. Under the current corporate tax regime, the withholding tax rate is set at 0%, making the UAE a highly attractive jurisdiction for cross-border payments. This includes payments such as royalties, interest, and service fees.
While the law establishes the framework, no actual withholding tax is currently collected, unless specified otherwise by future regulations. Both mainland and Free Zone businesses should monitor developments, especially if they frequently engage in transactions with foreign entities. Free Zone entities, in particular, may encounter these issues more due to their international operational models or foreign ownership structures.
Special Considerations for Multinational Enterprises (MNEs)
If your company is part of a large international group, you’ll need to follow a different set of UAE tax rules.
The UAE now applies a 15% corporate tax for multinational groups with over €750 million in global revenue. This is known as the Domestic Minimum Top-Up Tax (DMTT).
It applies to all qualifying entities, regardless of whether they’re on the mainland or in a Free Zone—there is no location-based exemption.
This aligns the UAE with global standards like OECD’s Pillar Two and addresses concerns under BEPS 2.0.
Even if your Free Zone company earns 0% tax locally, your group’s consolidated profits may still trigger additional tax exposure.
Review your transfer pricing, income allocations, and reporting obligations, especially if your UAE operation is part of a broader structure.
Common Mistakes and Compliance Gaps
Many UAE companies are still adjusting to the new corporate tax framework. Here are the most frequent errors:
Getting QFZP Status Wrong
Some Free Zone companies claim the UAE 0% corporate tax rate without meeting all the conditions. If the FTA (Federal Tax Authority) reviews your case and finds you ineligible, you may retroactively face a 9% tax.
Not Reporting Related-Party Transactions
Companies often forget to report deals with group companies — a transfer pricing red flag that may result in fines.
Skipping the Audit
Audits are mandatory for QFZPs. Skipping this step means risking your 0% tax return in the UAE claim, even if your income qualifies.
Filing Late or Making the Wrong Claims
Missing deadlines or making incorrect declarations — like wrong entity classification or FTA eServices errors — can result in fines, even if you owe no tax.
No Proof of Economic Substance
Some companies claim QFZP benefits but don’t maintain proof of operations, staff, or real presence. UAE tax compliance relies heavily on this documentation.
Key Advantages of Each Structure
The decision between mainland and Free Zone setups concerns tax rates. It affects how easily your business grows, stays compliant, and handles filings.
Mainland Companies: Why Many Still Prefer This Route
- Full market access
No restrictions — you can serve clients across the UAE, including Free Zone and global markets. - Simpler compliance
One system, one rulebook — no need to separate qualifying vs non-qualifying income. - Audit readiness
Mainland businesses are often better prepared for transfer pricing scrutiny due to local audit expectations. - Business momentum
In 2024, new mainland license registrations grew by over 25%. ADGM was a major driver for global expansion.
Free Zone Companies (QFZPs): Why Many Still Choose This Model
- 0% tax on qualifying income
If substance and activity rules are met, you can benefit from 0% corporate tax under QFZP status. - Lower setup costs
Especially suitable for lean models like consulting, digital, or holding companies. - Tailored for trade
Free Zones offer smoother customs handling, which is crucial for logistics and international commerce. - Industry support
Each Free Zone is optimized for specific industries: tech, media, health, finance, etc. - Massive growth
Free Zones are booming:- JAFZA: 10,000+ firms
- RAKEZ: 14,000+
- Sharjah & Ajman: Over 25,000 combined
- JAFZA: 10,000+ firms
Conclusion
Choosing between the mainland and the Free Zone isn’t just about the tax rate in UAE.
It’s about your industry, revenue model, international exposure, and compliance readiness.
- Mainland companies enjoy full market access and simpler tax filing.
- Free Zone companies can access the 0% rate — but only if they meet QFZP conditions and back it up with solid records.
Regardless of location, tax return UAE compliance is non-negotiable. That means correct classification, timely filing, FTA eServices registration, and proper documentation.
At ADEPTS, we help businesses across the UAE mainland and Free Zone — file smarter, audit better, and plan ahead.
Need help? Let’s talk.
FAQs:
Free Zone companies, especially those claiming QFZP status, are expected to maintain audited financials. While there isn’t a strict profit threshold, audits are typically triggered when claiming 0% tax benefits.
Yes, the FTA may review and audit companies that claim QFZP status to ensure they meet all conditions. These audits help confirm economic substance, qualifying activities, and correct income categorization.
If QFZP status is lost during the year, the company may be taxed as a Mainland entity for the entire financial year. This can result in a 9% tax on all profits.
Even if a company is dormant or not actively trading, it must still register for corporate tax and file a return unless it is officially liquidated or exempted. Penalties apply if ignored.
Generally, Free Zone branches of foreign companies are not automatically eligible for 0% tax. To qualify for any exemption, they must meet QFZP conditions, including income type and substance.
Excluded activities are businesses that cannot benefit from the 0% rate. Non-qualifying income includes earnings from sources outside approved QFZP activities, like direct mainland sales.
Holding and advisory services may qualify if they meet certain conditions. Marketing services are generally excluded. Each activity must be reviewed against the FTA’s qualifying activity list.
Yes, industries like finance, real estate, and insurance often fall under excluded categories. Each business must review the QFZP rules to confirm whether its sector is eligible for 0% tax.
Shared revenue involving mainland entities is considered non-qualifying income for QFZPs. That portion will likely be taxed at 9%, even if the rest of the income is tax-free.
Yes, if the company has real presence in the Free Zone, earns qualifying income from foreign clients, and meets all compliance requirements, it may enjoy the 0% corporate tax rate.
DIFC and ADGM are treated the same as other Free Zones under corporate tax law. However, businesses still need to meet QFZP conditions to access the 0% tax benefit.
Generally, QFZPs are exempt from corporate tax on qualifying income, so tax credits aren’t needed. But foreign withholding tax relief may apply if income is taxed abroad.
QFZP status is reviewed annually during tax return filing. If a business no longer meets the conditions, it risks losing the 0% rate and being taxed like a Mainland company.
There’s no separate reapplication process, but eligibility is checked every year when you file your return. You must consistently meet all QFZP criteria to retain your tax-free status.
Yes, the FTA may use AI to flag inconsistencies in filings, related-party transactions, or eligibility claims. It helps them identify risks and audit businesses more accurately and efficiently.
Resources
- Authority, Federal Tax. ‘Federal Tax Authority – United Arab Emirates’. Federal Tax Authority United Arab Emirates, https://tax.gov.ae//en/.
- —. ‘Federal Tax Authority Launches “Family Foundations as an Unincorp’. Federal Tax Authority – Media Centre, https://tax.gov.ae//en/media.centre/news/federal.tax.authority.launches.family.foundations.as.an.unincorporated.partnership.application.via.emaratax.digital.platform.aspx.
- Corporate Tax. https://u.ae/en/information-and-services/finance-and-investment/taxation/corporate-tax.
- Economic Substance Regulations. https://mof.gov.ae/economic-substance-regulations/.
- ‘Free Zones’. Ministry of Economy UAE, https://www.moec.gov.ae.
- ‘Global Anti-Base Erosion Model Rules (Pillar Two)’. OECD, https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html.
- Ministry of Finance Announces Amendments to Corporate Tax Law. https://www.wam.ae/en/article/b6lsvgy-ministry-finance-announces-amendments-corporate.
- ‘UAE Domestic Minimum Top-up Tax’. Ministry of Finance – United Arab Emirates, https://mof.gov.ae/uae-domestic-minimum-top-up-tax/.
- Verify Business Licences. https://u.ae/en/information-and-services/business/important-digital-services/inquire-about-licences-names-and-activities.
- Young, Ernst &. Department of Economic Development | Abu Dhabi DED | Department of Economic Development. https://www.added.gov.ae/en/.
- https://eservices.tax.gov.ae/.
