Exempt vs. zero-rated: Know the difference

An Exempt Person is completely excluded from the scope of Corporate Tax. These entities are not taxed because their purpose is rooted in public service, welfare, or statutory function. Examples include:

- Government or Government-Controlled Entities

- Pension and social security funds

- Qualifying public benefit entities

- Certain investment funds

- Wholly owned subsidiaries of the above, provided they perform specific related activities

To qualify, they must meet strict conditions — such as exclusivity of purpose, Cabinet listing (e.g., for public benefit entities), and not distributing income for private gain. Their exemption is absolute: they don’t compute taxable income, they don’t file regular tax returns like other businesses, and they do not fall under the Corporate Tax regime unless they violate their qualifying status.

By contrast, a Qualifying Free Zone Person (QFZP) is very much within the scope of Corporate Tax — but allowed to pay 0% on qualifying income if it meets detailed criteria.

To maintain QFZP status, a Free Zone company must:

- Be a juridical person registered in a UAE Free Zone

- Derive Qualifying Income (such as from transactions with other Free Zone Persons or Qualifying Activities)

- Avoid Excluded Activities (like banking or real estate with individuals)

- Meet the de minimis threshold (non-qualifying revenue must not exceed AED 5 million or 5% of total revenue)

- Maintain adequate substance, audited financials, and comply with Transfer Pricing rules

Importantly, if any of these conditions are breached, the QFZP loses its 0% rate and pays 9% on all taxable income — and remains disqualified for the following five tax periods.

So while both Exempt Persons and QFZPs may appear tax-free on the surface, only one is legally excluded from the tax regime, while the other is conditionally allowed a 0% rate through rigorous compliance.

Misunderstanding the two can result in costly errors — especially for Free Zone businesses that assume “zero tax” is automatic.

“Exemption is a legal privilege rooted in purpose. Zero-rated status is a reward earned through precision.”

As the UAE Corporate Tax environment matures, businesses must look beyond labels and assess their actual classification. Because when it comes to tax — clarity isn’t optional. It’s compliance.

- By Alia Noor, Tax Agent, CGMA, FCMA, MBA

 Associate Partner Taxation and Compliance Advisory – Ahmad Alagbari Chartered Accountants