📌Tax implications for businesses in free zones vs. mainland
Compare corporate tax, VAT, and customs duties for Free Zone and Mainland businesses. Learn which setup offers the best financial and regulatory advantages.
🏢 Overview
The UAE implemented a federal corporate tax system effective from 1 June 2023 (or 1 January 2024 for some fiscal years). The tax framework includes different rates based on income and entity type.
📊 Tax Rate Summary
Business Type
Corporate Tax Rate
VAT
Customs Duties
Mainland Company
0% up to AED 375,0009% above AED 375,000
5%
5% on imports and transfers from Free Zones
Free Zone (QFZP)
0% on qualifying income9% on non-qualifying mainland income
5%
Exempt within Free Zone5% if imported into mainland
🧾 Corporate Tax Details
Mainland Businesses
Standard Tax Rate: 9% on profits above AED 375,000.
0% Tax: Applies to profits up to AED 375,000.
Large Multinationals: A 15% Domestic Minimum Top-up Tax (DMTT) applies to companies with consolidated global revenues of €750M+.
Free Zone Businesses
Qualifying Free Zone Persons (QFZPs): Eligible for 0% tax on qualifying income (i.e., trade within the Free Zone or internationally).
Non-qualifying Income: Subject to 9% tax if derived from trading with the mainland (non-qualifying activity).
ℹ️ Qualifying income must meet conditions set by the UAE Corporate Tax Law and be substantiated with audited accounts.
💸 VAT and Customs
Value Added Tax (VAT)
Rate: 5% VAT applies across the UAE for most goods and services.
Free Zone vs. Mainland: VAT compliance processes are largely similar, but VAT applicability may differ for "Designated Zones."
Customs Duties
Free Zone: Exempt from customs duties within the zone and on international exports.
Mainland: 5% customs duty applies to imports and to goods transferred from Free Zones.
🎯 Key Considerations
Sector-Based Tax Treatment
Free Zone businesses involved in mainland transactions must account for VAT and potentially pay 9% corporate tax on those revenues.
Mainland businesses benefit from UAE’s double tax treaties, reducing foreign tax liability on international income.
Strategic Planning Tips
Free Zone firms should:
Carefully define and document qualifying vs. non-qualifying income.
Use VAT-compliant invoicing when dealing with the mainland.
Mainland firms should:
Maintain strong accounting practices for VAT filing and corporate tax compliance.
Consider sector-specific exemptions or incentives available.
✅ Conclusion
Both Free Zone and Mainland entities enjoy a tax-friendly environment compared to global standards. However, the key is knowing which setup aligns with your business model:
Choose Free Zone for: international trade, limited local activity, full foreign ownership.
Choose Mainland for: unlimited local access, government contracts, larger workforce.
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