Introduction

The main mistake that the market continues to repeat in 2026 sounds very simple: if a company is registered in a free zone, then it almost automatically retains 0% corporate tax. From a legal point of view, this is incorrect. The Ministry of Finance directly indicates that legal persons established in a free zone fall within the scope of corporate tax as taxable persons, and the preferential 0% rate applies not to the registration in the free zone itself, but only to a company that meets the status of a Qualifying Free Zone Person and earns Qualifying Income. In other words, a free zone in itself does not provide tax immunity; it only creates the possibility of entering the preferential regime if specific conditions are met.

This is exactly where the main practical risk arises. Most owners, holding structures, trading companies, and service platforms continue to think according to the old logic: the license exists, the office exists, the free zone exists — therefore the tax structure is safe. But since the replacement of the old regime for qualifying activities and excluded activities by Ministerial Decision No. 229 of 2025, this logic has become even more dangerous. The Ministry of Finance officially announced that Ministerial Decision No. 229 of 2025 replaced Ministerial Decision No. 265 of 2023, clarifying the framework of qualifying activities and excluded activities for the purposes of corporate tax in free zones. This is not a cosmetic update. It is a clarification of the boundary between income that may remain subject to 0% and income that is either taxed at 9% or completely destroys the status of a Qualifying Free Zone Person for a longer period.

Therefore, in 2026 the question no longer sounds like this: “do we have a company in a free zone?” The correct question sounds different: “do we comply, at every moment of the tax period, with all the conditions of Article 18, have we exceeded the de minimis rule, are we carrying on excluded activities, have we broken the status because of the incorrect income structure, transactions with natural persons, real estate, financing, intragroup flows, or the absence of audited financial statements?” It is precisely on these details that the 0% is lost.

1. A Free Zone is not equal to 0%: where the right to the relief begins at all

The basic rule is set out in Federal Decree-Law No. 47 of 2022. Corporate tax for ordinary taxable income is established according to the general model: 0% on the portion of income within the threshold determined by a Cabinet decision, and 9% on income above that threshold. But for a Qualifying Free Zone Person, a separate logic applies: 0% on Qualifying Income and 9% on taxable income that is not Qualifying Income. From this structure alone, it is clear that a free zone does not grant a universal zero regime on all of a company’s income. The law directly divides the income of such a company into two baskets: qualifying and non-qualifying. This is a fundamental point that the market very often overlooks.

Article 18 of Federal Decree-Law No. 47 of 2022 establishes that a Qualifying Free Zone Person is a Free Zone Person that simultaneously satisfies all conditions: maintains adequate substance in the State, earns Qualifying Income, has not elected to move to the general tax regime under Article 19, complies with the requirements of Articles 34 and 55 of the law, and fulfills such other conditions as may be prescribed by the Minister. If any of these conditions is breached at any time during the tax period, the person ceases to be a Qualifying Free Zone Person from the beginning of the relevant tax period. Already at the level of the law, it is clear that 0% is not a default relief, but a status-based regime with a постоянный test of compliance.

It is important to emphasize one more point here. Article 19 of the same law directly allows a Qualifying Free Zone Person to make an election and move to the ordinary corporate tax regime under the general rates. That is, even where the company formally has the possibility of using the relief, it may consciously exit it. In practice, this may be strategically justified, for example, if the income structure has already become mixed, if the company wants to simplify its tax model, or if the preferential regime begins to create more compliance risk than benefit. But legally this confirms the main point: the 0% regime is a special status, not an automatic feature of any free zone company.

2. What exactly changed in 2025–2026 and why this increased the risk of losing 0%

The key regulatory shift occurred after the issuance of Ministerial Decision No. 229 of 2025. The Ministry of Finance officially announced that the new decision replaced Ministerial Decision No. 265 of 2023 and clarified the framework of qualifying activities and excluded activities for the purposes of corporate tax in free zones. In parallel, Ministerial Decision No. 230 of 2025 was issued on recognized price reporting agencies for the purposes of the regime for qualifying commodities, and in the list of the Ministry of Finance’s financial legislation, Ministerial Decision No. 336 of 2025 was also published on the determination of the competent authority for the purposes of Ministerial Decision No. 229 of 2025. This shows that the state did not simply rewrite one subordinate act, but fine-tuned the entire framework of its application.

The practical meaning of these changes is that the market received clearer, but at the same time stricter, regulation. When rules are drafted abstractly, business often lives on interpretations, advisory positions, and optimistic assumptions. When the list of qualifying activities, excluded activities, the de minimis rule, and additional conditions is fixed more precisely, the room for self-comfort narrows. In 2026, the risk is no longer that the business “did not know the general idea,” but that it did not read the details and continues to operate according to the old logic.

3. Where the real boundary runs: qualifying activities and excluded activities

Ministerial Decision No. 229 of 2025 lists qualifying activities. These include the manufacture of goods or materials, the processing of goods or materials, the trading of qualifying commodities, the holding of shares and other securities for investment purposes, the ownership, management, and operation of ships, reinsurance services, fund management services, wealth and investment management services, headquarter services for Related Parties, treasury and financing services for Related Parties or for its own account, the financing and leasing of aircraft, the distribution of goods or materials in or from a Designated Zone, logistics services, as well as ancillary activities that are necessary to or directly related to such qualifying activities. This is a long list, but it does not mean that any activity within a free zone automatically becomes qualifying. It must correspond exactly to a normatively established category.

The same Ministerial Decision No. 229 of 2025 lists excluded activities. These include any transactions with natural persons, except for transactions related to certain specifically identified qualifying activities; banking activities; insurance activities, except for specifically carved-out qualifying activities; finance and leasing activities, except for specially preserved exceptions; the ownership or exploitation of real estate, except for commercial real estate located in a free zone, if the transaction concerning such commercial real estate is conducted with a Free Zone Person; as well as ancillary activities to excluded activities. It is here that most future tax problems are hidden. Business often thinks in categories of license and product, while the law thinks in categories of type of activity and counterparty. One and the same business in commercial substance may, in one part of its income, remain within the qualifying perimeter, and in another part fall into the excluded perimeter.

The most dangerous practical effect of these rules is that they require operational mapping of income, not simply reading the licensed description of the activity. It is not enough to say: “we are a logistics company” or “we are a holding.” It is necessary to determine from exactly which type of transaction, with exactly which counterparty, and in exactly which structure the income arises. For example, a company may consider itself a treasury center, but if certain transactions in substance are qualified as finance and leasing activity outside the narrowly preserved qualifying categories, it has a problem. Similarly, a company may consider itself a group service platform, but if a significant portion of its operations goes into transactions with natural persons, that flow may fall within excluded activities.

4. Why transactions with natural persons have become one of the most underestimated triggers for losing the relief

Ministerial Decision No. 229 of 2025 directly classifies as excluded activities any transactions with natural persons, except for a limited set of transactions related to certain qualifying activities. For the market, this is critical. Very many free zone companies were historically built as business-to-business structures on paper, but gradually began serving founders, management, individual clients, investors, or end users on the retail side. While corporate tax had not yet been launched, this was often viewed as a secondary commercial detail. In 2026, this can already become a tax trigger.

The main danger here lies in the scale of unnoticed drift. A company may begin as a pure business-to-business model, then add personal advisory flows, paid services for natural persons, separate individual financing arrangements, premium membership for founders, personal wealth support, or other products. Commercially, this may look like reasonable diversification. But from a tax point of view, this is capable of turning part of the revenue into non-qualifying revenue, and if the threshold of the de minimis rule is exceeded, destroying the status of Qualifying Free Zone Person entirely. This is exactly why many notice the risk too late: they monitor the size of turnover, but not its nature.

5. The de minimis rule: how the rule works that most often destroys the status in a non-obvious way

One of the most important elements of the new regime is the de minimis test. Ministerial Decision No. 229 of 2025 provides that the requirements of the de minimis rule are deemed satisfied if the non-qualifying revenue earned by a Qualifying Free Zone Person in a tax period does not exceed 5% of the total revenue of that company for the relevant period or AED 5,000,000 — whichever is lower. This is one of the most dangerous provisions in the entire free zone regime. It looks like a technical threshold, but in practice it is precisely through this rule that status most often breaks.

Why is this so dangerous? First, the market intuitively underestimates the “whichever is lower” rule. Many hear about 5% and mentally treat it as the main test. But the decision directly establishes a double limiter: percentage and absolute. For companies with large turnover, it is the absolute limit of AED 5,000,000 that may prove more severe. Second, non-qualifying revenue includes not only income from excluded activities, but also income from activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person, as well as income from transactions with a Free Zone Person if that Free Zone Person is not the Beneficial Recipient of the relevant services or goods. That means the problem may arise not only from obviously prohibited activity, but also from the incorrect structure of the counterparty or the beneficial recipient.

Even more importantly, certain categories are specifically excluded from the calculation of non-qualifying revenue and total revenue: revenue from certain real estate transactions in a free zone, revenue attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment, as well as revenue from the ownership or exploitation of intellectual property, except income related to qualifying intellectual property. This means that the de minimis rule is not a simple accounting test of “take the whole turnover and look at 5%.” It is a legally structured calculation in which one must first correctly qualify the types of revenue and only then check the limit. An error at the level of qualification almost automatically leads to an error at the level of status.

6. Loss of status is not only a problem of the current year

The harshest norm of the new regime is set out in Ministerial Decision No. 229 of 2025 in the article on other conditions. The decision directly states: if a Qualifying Free Zone Person at any time during the tax period does not satisfy the conditions of Article 18 of the law, the conditions of the decision itself, or any other conditions prescribed by the Minister, such person ceases to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent four Tax Periods. This is one of the heaviest regulatory effects in the entire regime. The issue is not a local assessed amount on a separate transaction, but the loss of status for a lengthy period.

This is what turns seemingly minor compliance mistakes into a strategic risk. A company may assume that a disputed income flow is simply a “small non-qualifying stream,” which in the worst case would be taxed at 9%. But if that stream leads to the failure of the de minimis rule or shows that the company did not comply with other conditions of the regime, the consequences are much broader: the status is lost retrospectively from the beginning of the year and is then not automatically restored in the following period. For structures with major group flows, licensing stacks, commodity structures, and holding investment models, this may mean a multi-year revision of the entire tax architecture.

7. Audited financial statements: a formality without which 0% does not work

The market often treats audited reporting as a post-factum compliance requirement. In the free zone regime, this is a mistake. Ministerial Decision No. 229 of 2025 directly includes the preparation of audited financial statements among the additional conditions that a Qualifying Free Zone Person must satisfy. Moreover, this condition is linked to Ministerial Decision No. 84 of 2025, which in turn establishes that audited financial statements must be prepared and maintained by, among others, a Qualifying Free Zone Person. This is not a side obligation; it is part of the very structure of the right to the relief.

In practice, this means two things. First, one cannot treat an audit as something that can be “finished later if requested.” Second, it is not enough simply to have some form of financial statements; what is required is exactly the level and format that corresponds to the normative requirement. If a company has not built the audit into a normal annual cycle, it faces not only a procedural risk but also a status risk: the absence of audited financial statements may become one of the grounds for concluding that the status of Qualifying Free Zone Person was not satisfied. And then the rule on loss of status from the beginning of the period and for the subsequent four periods is triggered.

8. Adequate substance: why a simple office and a license are no longer enough as a logic

Although Ministerial Decision No. 229 of 2025 does not re-open the category of adequate substance, the requirement itself is directly fixed in Article 18 of Federal Decree-Law No. 47 of 2022. To be a Qualifying Free Zone Person, a Free Zone Person must maintain adequate substance in the State. And this must be read together with the overall logic of the law and Cabinet Decision No. 100 of 2023, where there is separate reference to maintaining adequate substance and outsourcing in a free zone. In other words, the issue is not the formal existence of registration, but the real economic substance of the activity.

For business, this means an unpleasant but important truth: the model “license + secretary + address + occasional documents” is increasingly unable to withstand modern corporate tax analysis. If a company claims headquarter services, treasury and financing services, fund management, wealth and investment management, or commodity trading, but cannot show sufficient functions, personnel, control of risks, and real operational content in the free zone, the risk is not limited to a dispute over a specific amount of income. The question may be wider: was the company entitled at all to remain a Qualifying Free Zone Person?

9. Treasury, financing and leasing: why these kinds of business are especially dangerous

The most treacherous part of the regime is the sphere of financing. On the one hand, Ministerial Decision No. 229 of 2025 recognizes as a qualifying activity treasury and financing services to Related Parties or for its own account, as well as the financing and leasing of aircraft. On the other hand, the same decision treats finance and leasing activities as excluded activities, except for specially preserved qualifying categories. In other words, the legislator did not say “financing is allowed” or “financing is prohibited.” It built a more complex boundary, where the decisive element becomes the nature of the financing, the subject structure of the transaction, and its precise qualification.

That is exactly why many treasury centers and intragroup financing vehicles are in a real danger zone. Commercially, they are often seen as a normal part of the corporate architecture. But from a tax standpoint, any error in who exactly receives the services, who is the counterparty, whether the flow really is Related Party financing, whether it falls outside the qualifying perimeter, and how the arm’s length principle is documented may change the qualification of the income. And since Article 18 of the law also requires compliance with Article 34 on transfer pricing, the question of financing almost always has to be analyzed both as a question of qualifying activity and as a question of the arm’s length principle.

10. Real estate: one of the most frequent hidden triggers for losing 0%

The real estate regime in a free zone is structured in an especially delicate way. Ministerial Decision No. 229 of 2025 treats as excluded activities the ownership or exploitation of immovable property, except for commercial property located in a free zone, if the transaction concerning such commercial property is conducted with a Free Zone Person. At the same time, Cabinet Decision No. 100 of 2023 directly states that income derived from immovable property located in a free zone from transactions with a Non-Free Zone Person in respect of commercial property, as well as from transactions with any Person in respect of property that is not commercial property, is considered taxable income and is taxed in accordance with the general part of the regime.

The practical conclusion here is harsh. Many structures in free zones treat real estate as a secondary asset: the office is rented out, part of the premises is used, part is placed on a related structure, and part may generate ancillary revenue. But the normative regime looks at this differently. It very clearly distinguishes commercial property, the status of the counterparty, and the nature of the transaction. Therefore, a structure that overall looks like a normal free zone business may quietly build into itself taxable immovable property income or even an excluded activity. The market often notices this too late, because commercially such income appears “incidental,” while for tax purposes it may become status-significant.

11. Qualifying commodities: where the new regime simultaneously expanded possibilities and raised the evidentiary standard

The new regime preserved and clarified the qualifying treatment for commodity business. Ministerial Decision No. 229 of 2025 treats the trading of Qualifying Commodities as a qualifying activity, but at the same time defines this as physical trading of Qualifying Commodities, associated financial derivatives trading used to hedge against risks involved in such activities, and associated structured commodity financing activity. At the same time, an important restriction is introduced: this activity is not considered qualifying if it is carried on by a Qualifying Free Zone Person whose revenue from distribution, warehousing, logistics, or inventory management functions amounts to 51% or more of revenue for the relevant tax period. In parallel, Ministerial Decision No. 230 of 2025 defines the list of recognized price reporting agencies for the purposes of this regime.

For commodity traders, this is a very important signal. The state did not exclude commodity business from the preferential regime, but made it far more disciplined. It is no longer enough simply to call the activity commodity trading. One must show that the matter truly concerns qualifying commodities, with proper quoted price logic, proper reporting agency reference, and the correct economic nature of the business. Moreover, if in fact the company looks more like a distribution, warehousing, or logistics platform than a commodity trading house, the regime may qualify it differently. This is a subtle but extremely significant line.

12. Holding of shares and investment structures: why even here one cannot relax

Among the qualifying activities, Ministerial Decision No. 229 of 2025 specifically preserves the holding of shares and other securities for investment purposes. At first glance, this looks like comfortable news for holding structures. But this is exactly where the market often makes a dangerous logical leap: if the holding of shares is a qualifying activity, then any investment vehicle in a free zone is safe. This is incorrect. The status of a qualifying activity for one type of income does not cancel the other conditions of Article 18 of the law, the de minimis test, audited financial statements, adequate substance, and compliance with Articles 34 and 55. Moreover, as soon as the holding starts engaging in recharges, services, financing, property exploitation, or mixed flows, the structure of the analysis becomes much more complex.

In practical terms, this means that a “clean holding” and a “group that calls itself a holding but does five more things inside” are tax-wise different entities. And if the second model continues to live under the old myth “we are still in a free zone,” it is almost certainly underestimating the risk.

13. Related Parties and transfer pricing: the relief can be lost not only because of the type of income, but also because of how it is structured

Article 18 of Federal Decree-Law No. 47 of 2022 directly requires that a Qualifying Free Zone Person comply with Article 34 and Article 55. Article 34 establishes the arm’s length principle for transactions and arrangements between Related Parties, and Article 55 allows the Authority to require transfer pricing disclosure and transfer pricing documentation in the prescribed cases. This means that the free zone regime does not live separately from the general transfer pricing regime.

In practice, this is one of the most underestimated areas of risk. A company may formally receive income from qualifying activities, but at the same time structure intra-group pricing, allocations, headquarter charges, treasury returns, or financing spreads in such a way that questions arise under the arm’s length standard. And Article 18 directly links compliance with transfer pricing obligations to the status of Qualifying Free Zone Person. Therefore, the problem may be double: not only a tax adjustment in amount, but also a dispute over compliance with the status itself. For groups with active shared services, treasury hubs, and cross-border related-party flows, this is particularly sensitive.

14. Beneficial Recipient: why even transactions with another Free Zone Person may fall out of the qualifying perimeter

Cabinet Decision No. 100 of 2023 directly states that income from transactions with a Free Zone Person is considered qualifying only where such Free Zone Person is the Beneficial Recipient of the relevant services or goods. This concept is defined as a person that has the right to use and benefit from the service or goods and does not bear a contractual or legal obligation to provide such service or goods to another person. At the same time, in the de minimis test, non-qualifying revenue includes transactions with a Free Zone Person where such counterparty is not the Beneficial Recipient.

This is an incredibly important rule for group structures, distribution platforms, procurement hubs, and service chains. Many companies assume that a “Free Zone to Free Zone” transaction is safe in itself. But the regime looks deeper: who is the real recipient? Does the counterparty use the service or goods for itself, or merely pass it on further? Does it have its own economic function, or is it only an intermediate conduit? It is exactly through this test that a significant portion of seemingly safe intra-free-zone revenue may move into the non-qualifying bucket.

15. Domestic Permanent Establishment and Foreign Permanent Establishment: how a free zone structure quietly exits its own perimeter

Cabinet Decision No. 100 of 2023 separately establishes that qualifying income applies only on the condition that the relevant income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment. Moreover, income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment is considered taxable income and taxed under the relevant logic. For the purpose of determining a Domestic Permanent Establishment, the decision expressly requires the application of Article 14 of the law with adapted terminology for a Qualifying Free Zone Person.

This matters because many free zone structures in fact operate on the mainland, through personnel, dependent agents, real presence outside the free zone, project sites, regional sales centers, or operating hubs. If such activity creates a Domestic Permanent Establishment, part of the income ceases to live inside the “clean free zone perimeter.” This does not always immediately destroy the status, but it almost always changes the tax picture and requires a separate computation of taxable income. Where business continues to look only at the license, it risks failing to notice that economically it has long gone beyond the limits of a pure free zone model.

16. Why most notice the risk too late

The main reason is simple: the market long lived in the logic of jurisdiction rather than the logic of income. Entrepreneurs, and even some advisers, became accustomed to asking: where is the company registered? what license does it have? which free zone? is there 0% there? But the new regime requires another question: what exactly is the income composed of, who is the counterparty, who is the Beneficial Recipient, is there an excluded activity, how is the de minimis rule calculated, are there audited financial statements, is adequate substance maintained, are the transfer pricing rules complied with? When the business continues to look only at the first questions, it notices the risk only after the income structure has changed, the year is almost over, and the audit trail has either not been collected or was never designed for such analysis at all.

The second reason is a false sense of security from the words “Free Zone.” Psychologically, they work more strongly than the text of the law itself. Therefore, even very competent owners sometimes perceive corporate tax risk as a matter for mainland companies, while considering their own structure protected by default. In 2026, this is no longer simply an outdated view, but a real managerial mistake.

17. What business needs to check already now

The first layer of review is an entity-level status review. One must answer again the question whether the company truly complies with the conditions of Article 18 of Federal Decree-Law No. 47 of 2022: adequate substance, qualifying income, no election under Article 19, compliance with Articles 34 and 55, and compliance with ministerial conditions. This is not a one-off memo review, but a periodic status test.

The second layer is income mapping. It is necessary to break down revenue by types of activity, counterparties, geography, beneficial recipient, property component, financing component, and related-party component. Without such mapping it is impossible to correctly test either qualifying activities, excluded activities, or the de minimis rule.

The third layer is de minimis modeling. One must model in advance what volume of non-qualifying revenue already exists, what may appear, which income streams are excluded from the calculation, and at what point the structure exceeds 5% or AED 5,000,000, whichever is lower. Without this, business often makes commercial decisions without seeing the tax price of those decisions.

The fourth layer is audit and documentation readiness. Audited financial statements, transfer pricing support, intra-group documentation, property classification, evidence of substance, commodity pricing support, and internal governance should be prepared as though a dispute could begin tomorrow rather than “sometime later.” Because if a dispute begins, it will almost always concern not only the amount of the tax, but also the right to the status.

Conclusion

In 2026, companies in a Free Zone lose 0% corporate tax not because the state suddenly abolished the relief. They lose it because they continue to think according to the old formula: Free Zone = zero. The normative framework says otherwise. Federal Decree-Law No. 47 of 2022, Cabinet Decision No. 100 of 2023, Ministerial Decision No. 229 of 2025, Ministerial Decision No. 84 of 2025, and for commodity flows Ministerial Decision No. 230 of 2025 together form a system where the right to 0% depends on status, the quality of income, the structure of operations, the de minimis rule, audit discipline, and the overall tax architecture.

The main practical conclusion is very harsh: a Free Zone today is no longer a “place where taxes are low,” but a regime in which one must constantly prove one’s right to the relief. And those who will win are not those who simply preserved the license, but those who built a correct income model, a provable operating logic, a proper evidentiary base, and real control over the boundary between qualifying and non-qualifying revenue.