The UAE corporate tax regime — 12 months in

Twelve-month recap

The UAE corporate tax regime entered force for fiscal years beginning on or after 1 June 2023. The first full filing window closed in late 2024 and early 2025; the second is closing as we write. The rate is 9% on taxable income above AED 375,000 (~USD 102,000) for most taxpayers, with a 0% bracket below that threshold. Free Zone Persons meeting the qualifying conditions can apply a 0% rate to their qualifying income; income outside the qualifying perimeter falls into the 9% mainland regime. Multinational groups within scope of Pillar Two have, since 1 January 2025, been subject to the UAE Domestic Minimum Top-up Tax (DMTT) at 15%.

In the policy literature, the regime was framed as the closing chapter of the “tax-free UAE” story. In practice, the first twelve months of administration have been more interesting. The Federal Tax Authority (FTA) has been pragmatic where it could be, strict where the legislation gave it no choice, and surprisingly transparent in its public guidance. The result is a regime that is operationally manageable, but no longer one where the structuring decisions can be made on autopilot.

This is what we have learned from twelve months of advising clients through their first filings.

Free Zone Person status — what is working, what is not

The Qualifying Free Zone Person (QFZP) regime is the centerpiece of the UAE's structuring offer and the area where field experience diverges most from the policy commentary.

Five conditions must be met to qualify:

• Adequate substance in the UAE (commensurate with the income).
• Income derived from qualifying activities or qualifying income types (Cabinet Decision 100/2023, as amended by Cabinet Decision 265/2023).
• No election to be subject to mainland tax.
• Compliance with arm's-length transfer pricing.
• Compliance with audited financial statements requirements.

The pinch point in the first filing cycle has consistently been the second condition — the qualifying-activity / qualifying-income analysis — and within it, three patterns are recurring.

Pattern 1: IP licensing

“Ownership, exploitation, management and licensing of intellectual property” is not a qualifying activity for QFZP purposes. Royalty income earned by a Free Zone entity is almost always non-qualifying and falls into the 9% mainland regime — even where the IP holder has substance in the Free Zone. We have seen multiple groups assume the regime accommodated IP holding structures; it does not. Groups that have an IP-holding tier in a Free Zone are now actively migrating it either onshore (to a mainland UAE entity, which then captures the 9% rate but with a cleaner Pillar Two profile) or out of the UAE entirely.

Pattern 2: Distribution and trading

The distribution-and-trading category is more workable but requires that the goods be physically present in the Free Zone, or transit through a designated zone. A Free Zone entity that drop-ships to mainland UAE customers without the goods crossing the Free Zone border is in non-qualifying territory. Most logistics-heavy groups have restructured to ensure physical presence in a designated zone before the second filing.

Pattern 3: Holding company income

“Holding of shares and other securities” is a qualifying activity, and dividends received from corporate subsidiaries flow through cleanly. The complication is the de minimis threshold: non-qualifying income cannot exceed AED 5 million or 5% of total revenue, whichever is lower. Holding companies that earn even a modest amount of interest on cash deposits or other ancillary income can blow the de minimis test on the lower-bound, AED-denominated cap. The fix is operational: route ancillary income through a mainland subsidiary or restructure the cash management arrangement.

The substance test in practice

Cabinet Decision 55/2023 sets out the substance test for QFZPs. The legislation is principle-based; the FTA's guidance, published in three updates over 2024, has been usefully concrete. The core requirements:

• Core income-generating activities (CIGAs) are conducted in the UAE Free Zone.
• Adequate qualified employees are based in the UAE Free Zone.
• Adequate operating expenditure is incurred in the UAE Free Zone.
• Adequate physical assets (typically office space) are located in the UAE Free Zone.

“Adequate” is the operative word, and the FTA has been careful not to set a numerical floor in published guidance. In our advisory experience, the unwritten rule that has emerged from early audits is roughly: a single full-time UAE-resident employee with the qualifications and authority to perform the CIGAs is the minimum for an entity earning under USD 5m of qualifying income; entities earning materially more are expected to scale headcount and office space accordingly. The FTA pays particular attention to the alignment between income and headcount; an entity earning USD 50m of qualifying income with one part-time employee is not a defensible position.

Outsourcing to a related party in the same Free Zone is permitted and counts toward substance, provided the outsourcing entity itself meets the substance requirements and the arrangement is at arm's length.

Pillar Two and the UAE DMTT (15%)

The UAE introduced its Domestic Minimum Top-up Tax for fiscal years starting on or after 1 January 2025. The DMTT applies to multinational groups with consolidated revenue of at least €750m, brings the effective tax rate of any UAE Constituent Entity up to 15%, and is designed to be a Qualified Domestic Minimum Top-up Tax under the OECD framework — meaning it is creditable against any IIR or UTPR top-up that would otherwise have been imposed by another jurisdiction.

The implication for in-scope groups is straightforward: the effective rate on UAE income for Pillar Two purposes is 15% regardless of whether the entity is a QFZP at 0% or a mainland entity at 9%. The QFZP regime continues to deliver its benefit relative to the 9% mainland regime, but the net-of-DMTT position is identical for both.

For groups below the €750m threshold, the QFZP regime is unaffected by the DMTT and continues to deliver a genuinely 0% rate on qualifying income. This is the population for which the UAE remains structurally most attractive.

Treaty network and withholding interaction

One of the more interesting administrative developments in the first twelve months has been the FTA's approach to treaty residence certificates. The UAE has more than 140 in-force double tax treaties — the largest network in the GCC. The FTA now issues residence certificates only to entities that meet the substance test and have filed a corporate tax return; the old letterbox-style certification has effectively ended.

For groups using UAE entities as treaty access points — into India, Saudi Arabia, Egypt, Indonesia, China and an expanding list of other Asian and African counterparts — the practical effect is to align the treaty-eligibility threshold with the QFZP substance threshold. An entity that qualifies as a QFZP can typically obtain a residence certificate; an entity that does not, increasingly cannot. Beneficial-ownership scrutiny from counterparty jurisdictions (notably India, where the Indian-UAE treaty's Article 4 has been litigated repeatedly) remains a live issue, but the FTA's discipline has materially improved the UAE's position in those arguments.

The audit picture in early 2026

The FTA opened its first wave of corporate tax audits in Q3 2025, focusing initially on entities with high revenue and high non-qualifying-income exposure. Three observations from the audits we have seen close out in Q1 2026:

1. The transfer pricing file is being examined first.UAE TP documentation requirements are aligned with the OECD Master File / Local File model. Entities with thin or late-filed TP documentation are receiving information requests focused on the methodological choice and comparable selection.
2. Substance is tested via headcount and physical presence, not via formal documentation. The FTA has visited Free Zone offices unannounced. Entities with a registered address but no day-to-day occupation have lost QFZP status retrospectively.
3. De minimis breaches are being treated strictly.Once the de minimis threshold is breached, QFZP status is lost for the entire fiscal year and for the four subsequent years. There is no rounding, no remediation. A handful of groups have lost status this way and are now restructuring to avoid recurrence.

What clients are actually doing differently

Twelve months in, the patterns we see across our UAE-active client base:

• Splitting holding and operating functions.A clean Free Zone holding entity for the share portfolio, a separate Free Zone operating entity for the qualifying activity, and a mainland entity for everything that does not fit the QFZP perimeter.
• Re-papering intercompany agreements. The first filing cycle exposed a generation of intercompany agreements written before the regime existed. Most groups are using the second cycle to refresh the agreements and align the legal form with the TP narrative.
• Investing in substance early.The FTA's unannounced visits have changed the calculus. The cost of a real Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM) office and a UAE-resident managing director is now treated as a permanent line in the structuring budget, not as an optional add-on.
• Routing IP elsewhere.The largest single structural change. IP-licensing tiers have moved out of the Free Zones and into either the mainland UAE regime (9% rate, cleaner Pillar Two profile) or out of the UAE entirely (typically to the Netherlands, Switzerland or Singapore depending on the group's footprint).

The bottom line

The UAE corporate tax regime is real, the administration is competent, and the first audit wave has demonstrated that paper substance is no longer enough. For groups below the Pillar Two threshold, the QFZP remains genuinely attractive and structurally clean. For groups within Pillar Two, the DMTT removes the rate arbitrage but leaves the operational benefits — treaty network, regulatory environment, talent market — intact. The defining shift is from “UAE as a zero-tax destination” to “UAE as a serious, well-administered jurisdiction with a low rate and clear rules”. The latter is, for serious operators, a more durable proposition than the former ever was.