Until recently, the vast majority of companies in the UAE paid no tax on profits at all. That changed in 2023, when corporate tax was introduced at 9% on profits above AED 375,000 (about $102,000). The possibility of paying no profit tax survived, though: a 0% rate applies to companies in free zones. It is not available to everyone, but only to companies carrying on certain activities – trading in commodities, for example, or intra-group treasury functions, and a number of others discussed below.

A company may choose not to apply the relief, but that decision has consequences: opting out of the 0% rate locks the choice in for the current year and the four that follow. This matters right now, because companies are filing their 2025 corporate tax returns by the end of September, and that return puts free zone companies to a choice: claim the relief, or pay tax at 9%. The choice is all the more important because a company that claims zero but fails even one of the conditions loses the status for the same period – the current year and four more. The price of an error, or of opting out, is therefore not one year of 9% tax but five.

Registration in a free zone is not enough on its own. On top of that, a company has to satisfy six conditions for the relief.

First, the type of income the company earns. Income is “qualifying” – that is, eligible for the relief – if it comes from the intra-group treasury functions and commodity trading already mentioned, with the latter only where the commodities have a quoted price on a recognised commodities exchange or from a recognised price reporting agency. There are thirteen such activities in all, and those most often seen in practice also include holding shares and securities, headquarter services for group companies, manufacturing and processing of goods, logistics and distribution of goods from a Designated Zone, fund and wealth management, and several others. Intellectual property is a special case: income from owning IP is treated as qualifying only if it derives from patents and copyright-protected software, and then only in the proportion given by a special formula that takes account of the company’s own development costs.

Second, the threshold for “wrong” revenue, known as the de minimis test. Non-qualifying revenue must not exceed the lower of two figures: AED 5 million (about $1.4 million) or 5% of total revenue. Exceeding it by a single dirham costs the relief entirely.

Third, carrying on the business in the free zone itself. This condition is often underestimated, but it matters: the company needs to have operating expenditure and assets appropriate to its activity, and its employees must take the key decisions on its core business inside the free zone. Only holding companies can manage without hiring staff who are regularly present at the company’s main office in the free zone – in practice they are allowed to hold board meetings as and when needed, without keeping employees permanently in a free zone office. Some functions may be outsourced within the zone, but only if the company retains genuine control over the service provider. There are no precise criteria for what counts as control, or for headcount, assets and operating expenditure – the rules require “adequate” levels of each, which makes attempts to economise and cut corners risky.

Fourth, the audit. It has to be carried out every year regardless of revenue, and the audit report filed together with the tax return.

Fifth, compliance with transfer pricing rules – the arm’s length principle. Transactions with related and connected parties must be priced at market levels, disclosed in the tax return where the thresholds are exceeded, and supported on request by documentation justifying those prices.

And sixth, actually claiming the zero rate in the tax return rather than electing for 9%.

Now let us work out what complying with the conditions for the 0% rate can cost. Take a small trading company in a free zone: one or two employees, a modest office, revenue of a few million dollars, and an ongoing intra-group arrangement for buying goods for export.

Qualifying revenue – this has to be tracked and documented, non-core transactions have to be monitored, and borderline cases carry risk. Hard to price, but at a minimum it demands attention, and it may well prompt a decision to hive part of the business off into a separate mainland company, or into a free zone company that does not claim the zero rate. Let us put this burden at up to $10,000 a year.

The audit – for an ordinary 9% taxpayer it is mandatory only where revenue exceeds AED 50 million (roughly $13.6 million). For a company claiming the zero rate it is always mandatory, so for a small company it is a pure additional cost arising precisely because of the relief. Audit fees vary widely with the company, the circumstances and the auditor, but let us put it at roughly $5,000 a year.

Carrying on the business in the free zone itself – the most company-specific cost, and the hardest to estimate. Much depends on the nature of the activity, and hence on the number of employees and the office space required, and on the choice of zone: the “expensive” ADGM and DIFC, or the less well-known free zones. Employees are needed in any case, but hiring them locally (possibly with a relocation package) and renting an office in the right location can become a significant budget line. Let us put this at upwards of $20,000 a year for a small company – but if a dedicated office and one or two qualified employees are required, the bill quickly reaches $60,000 to $80,000.

And finally, compliance with transfer pricing (TP) rules. Strictly speaking, these rules apply regardless of the relief, and the thresholds for preparing TP documentation are the same for free zone and mainland companies. For qualifying companies – those claiming 0% – the price of an error is higher, however: not merely an adjustment on one or several transactions, but the loss of the preferential status altogether where pricing departs from arm’s length and is not corrected voluntarily. For our calculation, let us assume that the status called for a pricing analysis on one transaction (say, a purchase of goods from a manufacturer) and on payments to a director, and that this additional work costs $6,000 a year.

To sum up. For a small company, monitoring compliance with the 0% rate conditions, the audit, maintaining an office and TP analysis produce an approximate cost level in the range of $35,000 to $45,000. Whether it manages to stay within that and save a little, or whether the figures turn out to be several times higher, depends on the situation.

Working from that figure, let us now calculate how much profit a company needs to earn to recover the cost of the zero rate. The saving is easy to compute: 9% of profit less the exempt AED 375,000 (roughly $102,000).

On that simple formula, costs of $35,000 to $45,000 a year are recovered at a profit of roughly $490,000 to $600,000; costs of $60,000 at a profit of around $770,000; costs of $100,000 at a profit of around $1.2 million; and costs of $150,000 at a profit of around $1.8 million.

An example makes it clearer. A company with a profit of $1 million saves around $81,000 of tax a year. If maintaining the status costs it $40,000, the relief is comfortably worthwhile. If it costs $100,000, the company is paying more for its right to 0% than it saves. The relief then makes sense only where the company plans to increase turnover substantially in future and giving up the 0% rate for five years would be counterproductive.

Hence a practical benchmark: the zero rate works reliably from somewhere around $1.5 to $2 million of annual profit. In the $500,000 to $1 million range, the answer depends on how burdensome the presence in the zone turns out to be. Below $500,000, the economics are usually against the relief.

For small companies there is an alternative, and a simpler one. Small Business Relief allows a company with revenue of up to AED 3 million (about $817,000) to pay no corporate tax at all – with no office, no staff, no mandatory audit and no TP documentation.

The regime was originally due to run until the end of 2026, but it has recently been extended to tax periods ending no later than 31 December 2029. For a free zone company with modest turnover, this is the answer to the question in the headline: it does not need zero within the qualifying regime – it already has zero, and more cheaply.

Losses are a separate story. The zero rate has an unwelcome feature that few think about in advance: a loss attributable to the Qualifying Income of a company on the zero rate is simply forfeited. It cannot be carried forward, it cannot be set against the company’s own taxable income if the company moves to the 9% rate in future, and it cannot be transferred to another group company. The UAE tax authority says so expressly in its guidance on free zone persons. For an ordinary 9% taxpayer the position is the opposite: a loss is carried forward without a time limit and reduces the profits of later years, albeit by no more than 75% of the profit of each year. So a company that has ended the year with a substantial loss should model this option too: do not claim the zero rate for that year, keep the loss for future profitable years, and save the cost of substantiating the status into the bargain. The price of that decision is the same five years of waiting. But if, on the calculations in the previous section, the relief is already balancing on the break-even point, giving it up in a loss-making year may be the most sensible move of all.

Large international groups are another special category. Where consolidated revenue is EUR 750 million or more, a minimum tax of 15% has applied since 2025, and whatever is not paid in corporate tax is collected by that minimum tax instead – the Pillar Two rules introduced by the global tax reform. There is no point in maintaining an office in a free zone and meeting the compliance requirements for relief that the minimum tax takes away.

And if a significant part of the business does not fit the relief – income from non-qualifying or excluded activities – it makes more sense to look at a mainland company from the outset, or to avoid incurring the cost of meeting the 0% requirements even while operating in a free zone.

The decision on the zero rate is not a tick in a tax return but a management choice with a five-year horizon. Before making it, it is worth going through a short checklist.

First, calculate the saving in money rather than in percentages, and set beside it a realistic budget for maintaining the status: office, people, audit and other associated costs.

Second, test 2025 revenue against the de minimis threshold on the actual figures rather than the plan: what matters is the actual share of non-qualifying transactions, not the share assumed at the start of the year.

Third, assess whether the company would be able to defend its preferential status in the event of a tax audit. This is not a theoretical risk: in our experience the UAE Federal Tax Authority looks considerably more closely at companies that have claimed the zero rate in a free zone than at other taxpayers, and requests to substantiate the status are already arriving. The FTA asks for lease agreements and utility bills, payroll and visa data, board minutes, a breakdown of revenue and agreements with related parties. And for one of the qualifying activities – distribution of goods in Designated Zones – an agreed-upon procedures report from auditors confirming that the conditions for the relief are met will be required from the 2026 reporting period onwards (Irina Fadeeva writes about this in this article).

So where does that leave us? The zero rate in the UAE is a tax relief with a price attached. It stops paying for itself at the point where the cost of a presence in a free zone and of complying with the rules exceeds 9% of profit. And at that point the ordinary regime, or other mechanisms – Small Business Relief itself, or the ability to recognise losses and carry them forward – can deliver a comparable result at a much lower cost. There is no universal answer here: it comes out of the size of the group, the real scale of the presence in the UAE, the amount of profit and the plans for the next few years. So the arithmetic still has to be done on your own structure and your own figures. We do these calculations regularly, and we see that companies which look alike from the outside often get different answers to the question in the headline.