Free Zone Entities Earning Below AED 3 Million: “Should You Choose Qualifying Free Zone Relief or Small Business Relief?” A Tax Advisor’s Take

The introduction of Corporate Tax in the UAE has brought two attractive benefits for smaller or Free Zone-based entities: Qualifying Free Zone Person (QFZP) Relief and Small Business Relief (SBR).

Both offer opportunities for tax savings, but choosing the right one requires careful evaluation. For a Free Zone entity earning less than AED 3 million, the question isn’t simply “which gives 0% tax?” but rather “which relief aligns best with my business model, growth plans, and long-term strategy?”

Let’s break it down.

1. Understanding Each Relief

a. Small Business Relief (SBR)

The Small Business Relief provision was introduced under Article 21 of the Corporate Tax Law (Federal Decree-Law No. 47 of 2022) to support micro and small enterprises.It allows eligible resident businesses to be treated as having zero taxable income, provided their revenue does not exceed AED 3 million for the relevant and all preceding tax periods.

To qualify:

• Your revenue (as per accounting standards) must be ≤ AED 3 million for the period.

• You must not be a Qualifying Free Zone Person (QFZP) or part of a Multinational Enterprise Group (with consolidated group revenue ≥ AED 3.15 billion).

• You must make an election in your corporate tax return to apply the relief.

Key benefits include:

✅ No corporate tax payable for that year.

✅ Simplified compliance and reduced documentation.

✅ Ideal for startups, consultancies, and small firms in early growth stages.

However, there are trade-offs, under SBR, you cannot:

• Carry forward tax losses to future years.

• Carry forward net interest expense deductions.

• Claim certain foreign tax credits.

So, SBR is best suited for entities prioritizing simplicity and cash flow over long-term tax optimization.

b. Qualifying Free Zone Person (QFZP) Relief

Free Zone entities enjoy a unique regime under the UAE’s tax law. A Qualifying Free Zone Person can benefit from a 0% corporate tax rate on qualifying income, and a 9% rate on non-qualifying income.

To qualify, a Free Zone company must:

• Maintain adequate substance within the Free Zone (employees, assets, operations).

• Derive Qualifying Income as defined in Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023.

• Comply with transfer pricing rules and have audited financial statements.

• Not have elected to be taxed under the normal mainland regime.

Qualifying income generally includes:

• Income from transactions with other Free Zone Persons (subject to conditions).

• Certain passive income (e.g., interest, royalties, dividends).

• Specific activities like reinsurance, fund management, or manufacturing.

If the entity earns non-qualifying income, it remains eligible as long as that income does not exceed the de minimis threshold (AED 5 million or 5% of total revenue, whichever is lower).

This relief is ideal for Free Zone companies engaged in intra-free-zone trade or international operations who want to stay compliant and preserve a long-term 0% rate on eligible income.

2. Which Is Better for Free Zone Entities Under AED 3 Million?

Here’s where the decision becomes strategic.

Case 1: You are a startup or small Free Zone business with limited activity

If your revenue is below AED 3 million and your transactions include sales to the mainland or non-free-zone clients, you likely do not meet the qualifying income definition.

In this case, Small Business Relief is your friend.

It offers instant simplicity, no need to assess qualifying income or meet substance thresholds. You’ll simply declare zero taxable income and continue to grow.

Example:

A digital marketing agency in a Free Zone earns AED 1.5 million annually, primarily from mainland clients. Since its income is not “qualifying” under Free Zone rules, QFZP isn’t viable.

→ The company elects for SBR and pays 0% tax, with minimal administrative work.

Case 2: You have qualifying income and long-term Free Zone operations

If your business model fits within the qualifying income activities, you have substance in place, and your clients are mostly within Free Zones or outside the UAE, then QFZP status can be far more beneficial.

It not only allows you to maintain a 0% corporate tax rate beyond the AED 3 million threshold but also enables you to carry forward losses, maintain interest deductions, and remain positioned for future scalability.

Example:

A Free Zone trading company earns AED 2.6 million, primarily from transactions with other Free Zone entities. It meets the substance and compliance criteria.

→ The company maintains QFZP status and continues to enjoy a 0% rate on qualifying income, even if its revenue exceeds AED 3 million in the future.

Case 3: You expect to grow beyond AED 3 million soon

If your business is growing rapidly, opting for SBR may only offer short-term relief. Once your revenue exceeds the AED 3 million limit, you’ll automatically fall out of SBR eligibility, potentially causing a sudden tax exposure the following year.

In such cases, QFZP or the regular 9% regime (depending on your income mix) may be a more sustainable choice.

Example:

A Free Zone tech solutions provider earns AED 2.9 million this year and expects to cross AED 4 million next year. Rather than using SBR temporarily, it plans ahead, aligns with QFZP requirements, and ensures smooth continuity under 0% on qualifying income.

3. Decision Matrix: Quick Comparison

Criteria	Small Business Relief (SBR)	Qualifying Free Zone Person (QFZP)
Eligibility	UAE-resident businesses (mainland or FZ) with ≤ AED 3M revenue	Free Zone entities meeting substance and income criteria
Tax Rate	0% on all income (for the year)	0% on qualifying income, 9% on non-qualifying income
Revenue Cap	AED 3 million	No limit (as long as qualifying)
Compliance	Very simple, fewer filings	Requires audited FS, transfer pricing, substance proof
Carry Forward of Losses	❌ Not allowed	✅ Allowed
Suitable For	Early-stage or small businesses	Established Free Zone entities with qualifying operations

4. Our Advisory View

For Free Zone entities below AED 3 million, the Small Business Relief offers a straightforward and practical option, particularly if your income does not fall under “qualifying” categories.

However, if your operations are long-term, strategically positioned in Free Zones, and you already meet substance requirements, QFZP status provides a more sustainable and growth-friendly structure. It keeps you future-ready while maintaining compliance and flexibility as your revenue scales.

In short:

• Choose SBR for simplicity, cash flow, and low administrative load.

• Choose QFZP for long-term tax efficiency and scalability.

5. How Arzonell Can Help

At Arzonell, we work closely with Free Zone businesses to assess the most beneficial route under the Corporate Tax framework.

Our tax team helps you:

• Evaluate your income sources and revenue thresholds.

• Determine whether your activities qualify for QFZP.

• Assess eligibility for Small Business Relief and guide the election process.

• Maintain compliance with FTA requirements, including filings and documentation.

Whether you’re choosing between SBR and QFZP or planning ahead for your next growth phase, Arzonell ensures your tax position is optimized and your elections are aligned with both your compliance obligations and your business goals.

Reach out to us: info@arzonell.com | +971 52 191 5973