Corporate Tax & QFZP
11.1 UAE Corporate Tax (CT) — Overview
The UAE introduced a federal Corporate Tax under Federal Decree-Law No. 47 of 2022, effective for financial years commencing on or after 1 June 2023.
| Tax Rate | Applicability |
|---|---|
| 0% | Taxable income up to AED 375,000 (small business relief) |
| 9% | Taxable income above AED 375,000 (standard rate) |
| 0% (qualifying) | Qualifying Free Zone Person (QFZP) on qualifying income |
| 9% | QFZP on non-qualifying income |
11.2 Qualifying Free Zone Person (QFZP)
A DIFC entity can achieve 0% CT on qualifying income by satisfying all QFZP conditions simultaneously (PwC UAE CT Overview):
| QFZP Condition | Requirement |
|---|---|
| Registration | Juridical person incorporated or registered in a recognised UAE Free Zone (DIFC qualifies) |
| Adequate Substance | Core income-generating activities (CIGA) performed in the free zone; adequate UAE-based staff, assets, and operating expenditure |
| Qualifying Income | Income derived from qualifying activities (transactions with other FZPs; qualifying activities per Ministerial Decision No. 229 of 2025, which replaced MD 265 of 2023 effective retroactively from 1 June 2023) |
| No standard-regime election | Entity has not elected to be subject to 9% CT on all income |
| Transfer pricing compliance | Arm's-length pricing on all related-party transactions; documentation per OECD guidelines |
| De minimis rule | Non-qualifying revenue ≤ lower of 5% of total revenue or AED 5 million |
| Audited financial statements | IFRS-basis audited accounts required (per Ministerial Decision No. 84 of 2025) |
Consequence of non-compliance: Loss of QFZP status triggers 9% CT on all income for the current year and the following four years. After six years, the entity may retest.
Excluded activities (per MD 229 of 2025) — income from these activities is non-qualifying: - Direct transactions with natural persons (with limited exceptions) - Regulated banking, finance, leasing, insurance (reinsurance excepted) - Exploitation of IP not meeting qualifying IP criteria - Ownership / exploitation of immovable property (except commercial property between Free Zone entities)
11.3 VAT
UAE-wide 5% VAT applies in DIFC. DIFC entities with annual taxable supplies exceeding AED 375,000 must register for VAT with the Federal Tax Authority (FTA). Financial services are largely exempt (but not zero-rated); fee-based services are generally taxable.
11.4 Economic Substance Regulations (ESR)
The UAE's Economic Substance Regulations (Cabinet Resolution 57 of 2020, as amended) require DIFC entities conducting Relevant Activities to demonstrate economic substance in the UAE:
Relevant Activities subject to ESR: - Banking; Insurance; Investment Fund Management; Lease-Finance Business; Headquarters Business; Holding Companies; Intellectual Property Business; Distribution and Service Centre Business; Shipping
Requirements: Adequate employees in UAE; physical assets; management decisions taken in UAE; board meetings held locally; proportion of income generated from UAE activity
Reporting: Annual ESR Notification (within 6 months of financial year-end); Economic Substance Report if applicable (within 12 months of year-end)
Non-compliance penalty: AED 50,000 (notification); AED 400,000 for failed substance test
For DIFC, the DIFC Authority is the competent regulatory authority for ESR compliance.
11.5 Common Reporting Standard (CRS) and FATCA
DIFC entities with reportable accounts (financial accounts held by non-UAE tax residents) are subject to: - CRS (OECD Common Reporting Standard) — automatic exchange of financial account information between participating jurisdictions - FATCA (US Foreign Account Tax Compliance Act) — reporting of US person account holders to the US IRS via the UAE-US IGA
Both require registration with the UAE Ministry of Finance and annual reporting.
11.6 Pillar Two — Domestic Minimum Top-Up Tax (DMTT)
The UAE implemented the OECD Pillar Two Domestic Minimum Top-Up Tax (DMTT) effective for financial years commencing on or after 1 January 2025:
- Threshold: Applies to MNE groups with consolidated global revenues exceeding €750 million (approx. USD 869 million) in at least two of the prior four fiscal years
- Rate: Top-up to 15% effective tax rate (ETR) on UAE profits
- QFZP not exempt: Free Zone entities paying 0% CT that are part of in-scope MNE groups are not automatically exempt from the DMTT — their ETR is tested and a top-up may arise
- Safe Harbours: De minimis safe harbour (UAE revenue < €10 million; DMTT income/loss < €1 million); transitional CbCR safe harbour (available for fiscal years commencing on or before 1 January 2027); Simplified Computation Safe Harbour (permanent)
- Compliance: Registration with FTA; DMTT top-up tax return within 15 months of year-end (18 months for first transition year); IAS 12 disclosures required from FY2025
Smaller DIFC entities (not part of large MNE groups) are not affected by DMTT and continue to enjoy 0% CT on qualifying income as QFZPs.
Sources: UAE Ministry of Finance — Corporate Tax1; UAE Federal Tax Authority2; UAE Cabinet Decision on Qualifying Free Zone Person (QFZP)1; 10 Leaves — UAE Corporate Tax & DIFC3; Legability — UAE CT for DIFC Entities4