UAE Corporate Tax: Considerations for Holding Structures in Free Zones

Created By : Yeeshu Sehgal | UAE Tax Lead

A Free Zone holding company can pay no corporate tax at all. It can also lose that treatment for five years because of one overlooked detail. The difference comes down to two questions. Does the company qualify as a Qualifying Free Zone Person, and is the income it earns qualifying income? Both are asked afresh every year.

Background

Groups use Free Zone holding companies for practical reasons: to own the operating subsidiaries, keep ownership in one place or run treasury. The tax outcome, though, is not attached to the licence. It follows from what the company does, what it owns and where its income comes from. Registration comes first in every case, since no exemption or 0% claim survives without a Tax Registration Number.

The rules themselves changed in 2025. Ministerial Decision No. 229 of 2025 replaced the 2023 decision on qualifying and excluded activities, and it applies retrospectively to 1 June 2023. Returns already filed for FY2023 and FY2024 were prepared under a text that no longer exists, so those positions deserve a second look.

Ask whether the income is exempt before asking about the Free Zone

Some income never reaches the Free Zone question at all. Dividends from a UAE company are exempt outright. Dividends and capital gains on a foreign shareholding are exempt under the Participation Exemption, which broadly asks for a 5% stake, or AED 4 million invested; a holding period of twelve months, or the intention to hold for that long; and a foreign company taxed at 9% or more.

Where those tests fail, the Free Zone regime takes over. A Free Zone company holding a 2% stake in a listed company cannot use the Participation Exemption. The dividend is still not taxed, because holding shares as an investment is a qualifying activity. The two sets of rules work together, and the order in which they are applied matters.

What a holding company earns, and how it is taxed

• Dividends and capital gains. Holding shares as an investment qualifies, but the shares must be held for an uninterrupted twelve months. A stake bought and sold within the same year fails the test. Where twelve months have not yet passed, the intention to hold must be demonstrable.
• Other securities. The rule is not confined to equity. Investment instruments, including derivatives and convertibles held as investments, sit in the same category.
• Interest on group loans. The 2025 decision extended qualifying treatment to treasury and financing services provided to related companies or for the company’s own account. Interest on intra-group loans and returns on the company’s own cash now qualify. Lending to outsiders as a business does not.
• Headquarter and management fees. These qualify where the services go only to related companies, are charged at a market price, and the work is genuinely done in the Free Zone. The scope is wide: senior management, administration, procurement, business planning, risk management and group coordination.
• Property and shareholders. Income from immovable property is excluded, unless it is commercial property in a Free Zone let to another Free Zone company. So is anything invoiced to an individual. A single apartment on the balance sheet, or a fee billed to a shareholder personally, creates non-qualifying revenue.

The conditions, and what happens if one slips

Non-qualifying revenue must stay within 5% of total revenue or AED 5 million, whichever is lower. Audited financial statements are mandatory. Transactions with related parties must be priced as they would be with a stranger.

Miss any one of these at any point in a year, and the company stops being a Qualifying Free Zone Person from the start of that year and for the four years that follow. One lapse, five years at 9%.

Substance: less than most fear, more than some assume

The requirement is that the activities which actually generate the income happen in the Free Zone, supported by assets, employees and expenditure appropriate to the scale of what is being done.

The FTA’s guide on Free Zone Persons answers the question most boards ask. Company V has a small Free Zone office and no employees. Its directors take the investment decisions and a broker executes them. That is enough, because deciding is the income-generating activity, and the decisions are taken and minuted in the Zone. The example should be read narrowly. It works because a passive holding company has nothing to do except decide. Once the same company lends money, charges management fees or owns property, each of those activities needs substance of its own, and a single board meeting will not carry all of them.

Transfer pricing is part of the test, not an add-on

Arm’s length pricing is one of the conditions of the 0% rate. An interest-free shareholder loan, or a management fee set by habit, is not merely a paperwork problem. It can cost the status.

Related party transactions are disclosed with the return, with itemised reporting once a category passes AED 4 million and total related party dealings pass AED 40 million. Larger groups also prepare a Master File and a Local File. Below the thresholds the standard still applies. For headquarter and treasury charges in particular, a mark-up chosen for convenience will not hold. The cost base, the way costs are allocated and the mark-up itself all need support.

Practical takeaways

Treat the 0% rate as something to be evidenced, not assumed. Track holding periods. Watch the de minimis limit through the year rather than in the audit. Support every intra-group charge. Keep the accounts audited and the minutes accurate about where decisions were taken. Where the company lends, owns property or carries on more than one activity, review the position before the return is filed and before any distribution leaves. And because the 2025 decision reaches back to June 2023, the older returns are worth reopening.

How can we help?

AKM Global carries out structured assessments of Free Zone status covering eligibility and compliance reviews, impact assessments, restructuring options, transfer pricing benchmarking and documentation, permanent establishment risk, and post-registration advisory. Where a return has already been filed, we advise on whether an amended return is warranted.