The UAE has entered a critical phase of its corporate tax journey. While the Federal Decree-Law No. 47 of 2022 laid the foundation, a series of updates in 2025 are reshaping how companies operate, especially those in free zones and multinational groups. Understanding these changes is essential to ensure compliance, optimize tax strategies, and avoid penalties.
What Has Changed in 2025?
The latest reforms aim to bring the UAE tax law in line with international standards, especially the OECD Pillar Two framework. Key updates include:
- Clarified definitions for Qualifying Free Zone Persons
- Introduction of the Domestic Minimum Top-Up Tax (DMTT)
- Revised rules for mixed-income companies
- Updates on the treatment of holding companies
- Expanded Small Business Relief thresholds
These changes are effective from January 1, 2025, and impact registration, filing, and structuring decisions for UAE-based businesses.
Qualifying vs Non-Qualifying Income
Not all income earned by free zone companies is tax-free. The law now distinguishes:
- Qualifying Income: Includes transactions with foreign entities or other free zone businesses.
- Non-Qualifying Income: Includes income from dealings with mainland UAE (unless properly structured under the “de minimis” rule).
This distinction affects whether a free zone company retains its 0% tax benefit or becomes fully subject to the 9% corporate tax.
Impact on Free Zone & Holding Companies
The reform clarifies treatment for passive income and holding companies:
- A pure holding company (i.e., no operational activity) may still be considered a Qualifying Free Zone Person, provided it meets substance and reporting requirements.
- However, entities with mixed income (both qualifying and non-qualifying) must carefully monitor thresholds or risk losing their 0% tax status.
This places more emphasis on activity classification and documentation.
Small Business Relief Adjustments
The updated reforms continue to offer Small Business Relief under certain conditions:
- Businesses with revenue under AED 3 million can benefit.
- This exemption is not available to Qualifying Free Zone Persons or members of multinational groups subject to DMTT.
This relief reduces compliance burdens but must be actively claimed and verified during audits.
What About Global Groups?
Businesses that are part of Multinational Enterprise Groups with global turnover exceeding EUR 750 million will be affected by the new 15% Domestic Minimum Top-Up Tax. The rule ensures these businesses pay a minimum tax rate, even if enjoying incentives in the UAE.
This aligns the UAE with international efforts under the OECD’s BEPS 2.0 (Pillar Two) framework.
When Do These Apply?
All reforms are effective from January 1, 2025. Businesses need to:
- Review free zone contracts and structures
- Reassess qualifying vs non-qualifying activities
- Prepare documentation in line with updated FTA rules
- Track eligibility for relief or exemptions carefully
You can view further guidance via the UAE Ministry of Finance
How KLOUDAC Can Support You
KLOUDAC offers tailored corporate tax advisory services to help your business navigate free zone qualification, assess DMTT applicability across group entities, implement best practices for documentation and reporting, and optimize your overall tax strategy in response to the latest UAE reforms.