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The UAE used to be marketed simply as a no-tax jurisdiction. Since the introduction of federal corporate tax in 2023, that marketing line is wrong. The current regime is a 9% federal corporate tax on most business profits, a tightly defined 0% regime for qualifying free zone activities, and from 2025 a 15% domestic minimum top-up tax for large multinationals. This article walks through what each layer is and how they interact.
The UAE corporate landscape
The UAE is a federation of seven emirates with a civil law system overlaid by common law in its two financial free zones. Federal taxes are administered by the Federal Tax Authority. Each emirate hosts onshore (mainland) entities and a range of free zones, some general-purpose (industry, trading, services) and some specialist (financial services, media, healthcare). Mainland entities deal in the local market and historically required local ownership for most activities; free zone entities sit inside designated geographic areas with their own licensing authorities.
The two financial free zones, the Abu Dhabi Global Market and the Dubai International Financial Centre, are distinctive. They have their own common-law-based legal systems and their own courts, independent of the federal civil law system, and their own financial services regulators.
Federal corporate tax
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, issued on 3 October 2022 and published in the Official Gazette on 10 October 2022, introduced federal corporate tax. The law applies to tax periods commencing on or after 1 June 2023.
The headline rate is 9% on taxable income above AED 375,000. Taxable income at or below AED 375,000 is taxed at 0%. The same rate applies to both UAE companies and to permanent establishments of foreign companies. There is no withholding tax on outbound dividends, interest or royalties paid to non-residents under the current legislation.
The corporate tax sits alongside the existing 5% VAT (Federal Decree-Law No. 8 of 2017) and emirate-level taxes on extractive and certain banking activities. Excluded from the corporate tax base are dividends from UAE residents and, under the participation exemption in Article 23 of the Corporate Tax Law, qualifying foreign dividends and capital gains where the participating interest is at least 5% (or the acquisition cost is at least AED 4 million), has been held (or is intended to be held) for at least 12 months, the participation is subject to corporate tax (or equivalent) of at least 9% in its jurisdiction, the ownership entitles the holder to at least 5% of profits and liquidation proceeds, and no more than 50% of the participation's assets are non-qualifying. Ministerial Decision No. 116 of 2023 and Ministerial Decision No. 302 of 2024 set out the operative detail.
The Qualifying Free Zone Person regime
The free zone regime is the most consequential feature of the UAE tax system. Article 18 of Federal Decree-Law No. 47 of 2022 sets out the cumulative conditions for Qualifying Free Zone Person status, which gives access to a 0% rate on qualifying income.
A Free Zone Person must be a juridical person registered in a UAE free zone. It must maintain adequate substance in the free zone, comply with arm's length and transfer pricing requirements, prepare audited financial statements, derive qualifying income from qualifying activities, and stay within the de minimis threshold for non-qualifying income. Failure on any condition causes loss of QFZP status from the start of that tax period.
The qualifying and excluded activities are set out in Ministerial Decision No. 229 of 2025, which replaced the earlier Ministerial Decision No. 265 of 2023 retroactively from 1 June 2023. Cabinet Decision No. 100 of 2023 governs the determination of qualifying income. Together, these instruments determine whether income earned by a free zone entity gets the 0% rate or the 9% rate.
Qualifying income broadly covers income from transactions with other Free Zone Persons where they are the beneficial recipient, income from listed qualifying activities (manufacturing, processing, fund management for regulated funds, reinsurance and certain financial services, logistics and distribution from designated zones, holding of shares and securities for investment, and certain headquarters and treasury activities), income from qualifying intellectual property under a nexus-style regime, and other income within the de minimis allowance.
The de minimis threshold
A QFZP can earn some non-qualifying revenue without losing status, but only up to the de minimis threshold: the lower of 5% of total revenue or AED 5 million per tax period. Non-qualifying revenue includes income from excluded activities, income from activities that are not qualifying activities when the counterparty is a non-Free Zone Person, and income from transactions with Free Zone Persons who are not the beneficial recipient of the goods or services.
Exceeding the threshold is fatal. A free zone company that breaches the de minimis test loses QFZP status from the start of that tax period, and the loss flows forward: the company is taxed at 9% on all its income for the period of failure and the four subsequent tax periods. That five-year lockout is the central deterrent in the regime, and it is the principal compliance risk that any sponsor using a free zone entity needs to manage.
Substance in a free zone
Substance under the QFZP regime is qualitative, not quantitative. There are no published minimum headcount, expenditure or square-footage thresholds. The Federal Tax Authority assesses whether the company's core income-generating activities are conducted in the free zone, whether the company maintains adequate assets and qualified full-time employees relative to the income claimed, and whether the operating expenditure is proportionate to the scale and nature of the business.
Ministerial Decision No. 84 of 2025 requires audited financial statements for all QFZPs, regardless of revenue, removing the earlier turnover-based threshold. The FTA's Corporate Tax Guide on Free Zone Persons (CTGFZP1) sets out the interpretive position, including examples illustrating the substance test and the meaning of beneficial recipient and qualifying activity.
Outsourcing of core income-generating activities to a related party or third party in the free zone or in another UAE free zone is permitted, but the outsourced activity counts only if the QFZP can supervise it adequately, and the outsourcing arrangement does not allow the substance to be effectively performed outside the UAE.
ADGM and DIFC
The Abu Dhabi Global Market and the Dubai International Financial Centre are financial free zones with their own legal systems. ADGM directly adopts English common law and equity; the DIFC has its own statute-based common law system. Both have independent courts staffed by senior international judges, and both run dedicated financial regulators: the Financial Services Regulatory Authority in ADGM and the Dubai Financial Services Authority in the DIFC.
Entities licensed in ADGM or the DIFC can be Free Zone Persons for federal corporate tax purposes if they meet the standard QFZP conditions. They are favoured for licensed financial services activities (asset management, advisory, brokerage, banking), for family offices and private investment companies, and for fund vehicles where investors expect a recognisable common-law regulator and dispute resolution forum.
The 15% Domestic Minimum Top-up Tax
Cabinet Decision No. 142 of 2024, issued on 31 December 2024, introduced the UAE Domestic Minimum Top-up Tax with effect from financial years beginning on or after 1 January 2025. The DMTT is the UAE's implementation of the OECD's Pillar Two GloBE rules.
The DMTT applies to constituent entities of multinational enterprise groups with consolidated annual revenue of at least EUR 750 million in at least two of the four preceding financial years. The mechanism is straightforward: where the effective tax rate on UAE profits is below 15%, including where the entity benefits from the 0% QFZP regime or other UAE incentives, an additional top-up tax is imposed to bring the rate to 15%. The DMTT does not replace the 9% corporate tax; it adds to it.
The practical impact is that the QFZP 0% rate now only delivers a real 0% outcome for groups below the EUR 750 million threshold. Above the threshold, the 0% is recharacterised as a 15% effective rate (with the difference paid as DMTT). The UAE has not implemented an Income Inclusion Rule, on the basis that the corporate tax system does not include a CFC regime, but it has retained the option of doing so in future.
The DMTT return is due within 15 months of the end of the fiscal year, extended to 18 months for the first year. Registration with the Federal Tax Authority is required.
What UAE structures are used for
The most common applications are operating businesses serving the UAE market (mainland or free zone), regional headquarters and distribution centres for groups serving the Middle East, holding companies that need treaty access (the UAE has an extensive network of double tax agreements), fund management businesses in ADGM or the DIFC, family offices and private investment companies, and individual residence with a tax-free personal income tax position (the UAE does not tax individuals on personal income).
Substance is the binding constraint. A free zone entity that books offshore-style profits without local people and decisions will not pass FTA scrutiny under either the QFZP test or the broader corporate tax substance review.
When the UAE is the right tool
The UAE is the right tool when the business has genuine substance there, when treaty access matters (the UAE treaty network is wider than any other Gulf jurisdiction's), and when the qualifying activities under the QFZP regime align with what the company actually does. It is the right tool for individuals seeking a no-personal-tax residence with banking, lifestyle and travel infrastructure that the older zero-tax centres do not match. It is not the right tool for a pure paper holding company looking for a low-substance offshore wrapper; that use case is now closed by both the QFZP substance test and (above the threshold) the DMTT.
If you are weighing a UAE structure for either personal relocation or corporate operations, the right next step is a structuring conversation that maps the activity against the QFZP qualifying list before any free zone licence is taken out.
This material is produced by Cadena International. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such.
