Is 0% Corporate Tax in DAFZ Real? The QFZP Rules and the Practical Pitfalls
DAFZ is often described as "0% corporate tax", but the benefit is limited to qualifying income. We explain the QFZP requirements and where the line with 9% taxation falls, from a practical perspective.
What "0% corporate tax" in DAFZ means
In DAFZ and other UAE free zones, a 0% corporate tax rate applies to companies that meet the Qualifying Free Zone Person (QFZP) requirements. The zone also has no currency or employment restrictions and permits 100% foreign ownership and free repatriation of profits. This open framework is one of the reasons DAFZ attracts more than 3,400 companies, including many from Japan.
The 0% rate applies only to qualifying income
This is where practical care is needed. The 0% rate applies only to qualifying income. Where sales to the mainland or income from excluded activities arise, that portion is, as a rule, taxed at 9%.
A company that operates on the assumption that "free zone means 0% across the board" can face unexpected tax exposure as soon as mainland transactions arise. Managing substance requirements and the classification of transactions is central to meeting the QFZP conditions.
- The 0% rate is limited to qualifying income.
- Mainland sales and excluded activities are, as a rule, taxed at 9%.
- Meeting the substance requirements is a precondition.
DAFZ is a UAE Designated Zone. Under Ministerial Decision No. 229 of 2025, the distribution of goods in or from a Designated Zone to customers who resell, process or alter them for resale can be a qualifying activity, even where the customer is on the mainland. Whether a given flow of goods qualifies depends on the facts, so it needs to be assessed case by case.
What to check in practice
Maintaining QFZP status requires ongoing management of how transactions are classified (free zone to free zone, or with the mainland) and meeting the substance requirements — adequate assets, employees and expenditure within the zone. At the business-planning stage, it is advisable to identify which of the expected transactions could involve the mainland.
Setting up the business itself is designed to take three steps — choose the licence, the legal form and the office — but QFZP eligibility for tax purposes requires an individual assessment based on the business. Keeping the transaction structure in mind from the setup stage helps avoid rework later. For the wider QFZP rules, including the de minimis test, see our complete guide to QFZP.
The 0% corporate tax rate in DAFZ applies only to qualifying income of a company that meets the QFZP requirements. Mainland sales and excluded activities are generally taxed at 9%, although DAFZ's status as a Designated Zone can allow certain distribution activities to qualify. Classifying transactions correctly and maintaining substance from the outset are what keep the benefit secure.
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