Mainland, in most cases. The free zone 0 percent rate reaches only Qualifying Income, and Ministerial Decision No. 229 of 2025 lists thirteen Qualifying Activities, none of which is software, SaaS or IT services. You pay 9 percent either way, so decide on market access, audit cost and procurement scoring instead.

Every instrument, date and figure below was checked against its primary source on 25 October 2026. UAE corporate tax is young legislation and several of the decisions cited were issued or amended within the last eighteen months, so check the dates before you rely on any of it.

Before choosing between the two, it is worth asking whether you need a UAE entity at all. I have answered that separately in do you need a local entity to sell software in the UAE. This piece assumes you have decided you do.

The free zone 0 percent rate probably does not apply to you

Almost every comparison of UAE free zones and the mainland is built on one claim: the free zone gives you 0 percent corporate tax and the mainland gives you 9 percent. For a software company that claim is usually wrong, and the reason is narrow and specific rather than a matter of interpretation.

Start with where the rates come from, because most summaries get this wrong too. Article 3 of Federal Decree-Law No. 47 of 2022 imposes corporate tax at 0 percent on taxable income up to an amount set by the Cabinet and 9 percent above it, and Cabinet Decision No. 116 of 2022 supplies the number, AED 375,000. That applies everywhere in the country. Article 3(2) of the same Decree-Law then sets a separate pair of rates for a Qualifying Free Zone Person: 0 percent on Qualifying Income, and 9 percent on taxable income that is not Qualifying Income. So the free zone benefit is not a lower rate on your profits. It is a 0 percent rate on one defined slice of them.

Qualifying Income is defined by Cabinet Decision No. 100 of 2023, issued 25 October 2023, which repealed Cabinet Decision No. 55 of 2023 and came into effect on 1 June 2023. Article 3(1) gives four routes to it: income from transactions with a Free Zone Person, income from a Non-Free Zone Person "but only in respect of Qualifying Activities that are not Excluded Activities", income from exploiting Qualifying Intellectual Property, and any other income provided the de minimis requirements are met.

Two of those are narrower than they look. The Free Zone Person route requires that counterparty to be the "Beneficial Recipient" of the services under Article 3(2), so selling to a free zone intermediary that on-supplies does not qualify. And the Non-Free Zone Person route sends you to a closed list.

Qualifying Activities are set out in Article 2(1) of Ministerial Decision No. 229 of 2025, issued 28 August 2025, which repealed Ministerial Decision No. 265 of 2023 and came into effect retroactively on 1 June 2023. There are thirteen, plus activities ancillary to them:

  1. Manufacturing of goods or materials
  2. Processing of goods or materials
  3. Trading of Qualifying Commodities
  4. Holding of shares and other securities for investment purposes
  5. Ownership, management and operation of Ships
  6. Reinsurance services
  7. Fund management services
  8. Wealth and investment management services
  9. Headquarter services to Related Parties
  10. Treasury and financing services to Related Parties or for its own account
  11. Financing and leasing of Aircrafts
  12. Distribution of goods or materials in or from a Designated Zone
  13. Logistics services

Software development is not there. SaaS licensing is not there. Implementation, integration, support and managed IT services are not there. If you sell software to a customer who is not itself a free zone entity, and most customers are not, that revenue is non-qualifying.

The practical consequence catches people out. A free zone company selling a subscription to a bank in Riyadh, a manufacturer in Germany or a hospital in Abu Dhabi is earning non-qualifying income in all three cases. A foreign customer does not help. The test is whether the counterparty is a Free Zone Person and whether the activity is on the list, not where the customer sits.

Two caveats keep this honest. Non-qualifying does not automatically mean taxed, because Article 3(1)(d) of Cabinet Decision No. 100 of 2023 lets any other income qualify where the de minimis requirements are met, and Article 3 of Ministerial Decision No. 229 of 2025 sets those: satisfied where non-qualifying revenue "does not exceed 5% (five percent) of the total Revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000 (five million dirhams), whichever is lower". Note "does not exceed", so exactly 5 percent still passes. For a company whose entire product line is non-qualifying, that is not a plan. It is a rounding tolerance.

The second caveat is the intellectual property route, and it is the interesting one.

The one route that reaches software income, and the six words that close it

Article 1 of Cabinet Decision No. 100 of 2023 defines Qualifying Intellectual Property as "Patents, Copyrighted Software and any right functionally equivalent to a Patent that is both legally protected and subject to a similar approval and registration process to a Patent", excluding marketing related assets such as trademarks. It then defines Copyrighted Software separately as "Any copyright subsisting in software granted under the law regulating copyrights in the State or granted under the relevant law of a foreign jurisdiction."

Notice what the punctuation does. There is no comma before "and any right", so the patent-equivalent registration test attaches to the third limb only. Copyrighted software qualifies on its own standalone definition and does not have to clear anything patent-like. Your Polish copyright counts, and secondary commentary that implies otherwise is misreading the sentence.

So there is a door, and income from exploiting your software can be Qualifying Income entirely outside the activity list. Article 4 of Ministerial Decision No. 229 of 2025 then decides how much of it. The formula is the OECD modified nexus fraction: qualifying expenditures plus an uplift, divided by overall expenditures, multiplied by overall income. The uplift is 30 percent of qualifying expenditure, and Article 4(3) applies it "only to the extent that Qualifying Expenditures, after being up-lifted is less than or equal to Overall Expenditures".

The outcome is settled by two definitions in Article 4(2). Qualifying Expenditures are research and development spend "conducted either by the Qualifying Free Zone Person or outsourced to any Person in the State or any Person outside the State that is not a Related Party". Overall Expenditures are research and development spend "conducted either by the Qualifying Free Zone Person or outsourced to any Person", and the clause closes "including acquisition costs of the Qualifying Intellectual Property".

Read them next to each other. The numerator excludes research outsourced to a related party abroad. The denominator says "any Person" and excludes nothing. For a Polish or European software company the product is built by engineers employed by the Polish parent, and to the UAE free zone subsidiary that parent is a Related Party outside the State, so its spend lands in the denominator and is kept out of the numerator. Buying or licensing the finished software instead does not help, because acquisition cost is expressly an Overall Expenditure. If all the research sits with the parent, qualifying expenditure is zero, and the uplift cannot rescue it, because 30 percent of zero is zero.

The same six words close the other door too, and this is the part worth understanding properly.

A Qualifying Free Zone Person has to maintain substance. Article 8(1) of Cabinet Decision No. 100 of 2023 requires it to undertake its core income-generating activities in a free zone with adequate assets, "an adequate number of qualified full-time employees" and an adequate amount of operating expenditure. Article 8(2) permits those core activities to be outsourced, but only "to another Person in a Free Zone or a Designated Zone". Article 8(3) then carves out intellectual property: core income-generating activities for Qualifying Intellectual Property "can be outsourced to any other Person in the State and to any other Person who is not a Related Party outside the State".

So the substance rule is genuinely more generous for IP work than for anything else, and a free zone company that contracts an unrelated Polish development house to build its software, with adequate supervision, is doing exactly what the regulation permits. A company whose developers work for its own parent is not. Article 35(1)(c) of Federal Decree-Law No. 47 of 2022 makes two juridical persons Related Parties where one "directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person", and Article 35(2) adds control, including the catch-all ability "to determine, or exercise significant influence over, the conduct of the Business and affairs of another Person", which carries no percentage at all. A parent company is caught twice over.

That is the finding worth taking away, and it is in none of the setup-agency content on this keyword. The line the UAE free zone regime draws is relatedness, not geography. Keeping your developers in Krakow is fine. Keeping them on the parent company's payroll is what closes the nexus formula and the substance carve-out at the same time, on the same six words. The only real cure, moving the research into the UAE entity itself, is a much bigger decision than the one you are trying to make.

Two of the thirteen activities deserve a second look if you are thinking about a group rather than a product. Headquarter services to Related Parties and treasury and financing services to Related Parties both qualify. If what you actually want in the UAE is a regional management layer that charges your other group entities, the free zone regime fits that, and fits it well. It does not fit a company whose UAE revenue is customer revenue.

What electing free zone status costs you

Because the 0 percent rate is unlikely to reach your revenue, the free zone election is not a free option. It carries three costs a mainland company does not pay.

Audited financial statements from the first year. Article 2(1) of Ministerial Decision No. 84 of 2025, issued 25 March 2025 and applying to tax periods commencing on or after 1 January 2025, requires audited financial statements from two categories. The first is "a Taxable Person that is not a Tax Group and that derives Revenue exceeding AED 50,000,000". The second is a bare four-word limb with no threshold, no carve-out and no cross-reference: "A Qualifying Free Zone Person." A mainland company on AED 2m of revenue has no corporate tax audit obligation. A free zone company on AED 200,000 that has elected Qualifying Free Zone Person status does.

Small Business Relief, forfeited. Ministerial Decision No. 73 of 2023 lets a resident person with revenue up to AED 3,000,000 elect to be treated as having no taxable income, and Ministerial Decision No. 131 of 2026 amended it so the threshold "shall continue to apply to subsequent Tax Periods that end on or before 31 December 2029". That decision was issued on 29 July 2026 and announced by the Ministry of Finance on 7 August. Article 3 of the 2023 decision, headed "Additional Conditions for Small Business Relief", names two kinds of person who cannot elect: a constituent company of a multinational enterprises group, and a Qualifying Free Zone Person.

Read that against the first section. A first UAE entity turning over AED 2m of software revenue pays nothing on the mainland under Small Business Relief, and 9 percent above AED 375,000 in a free zone, because its income is non-qualifying and it gave up the relief by electing. On those numbers the free zone is the more expensive option, and it is the option people choose precisely because it sounds like the tax-efficient one.

A five year penalty for getting it wrong. Article 5(2) of Ministerial Decision No. 229 of 2025 provides that a Qualifying Free Zone Person which at any time during a tax period fails any of the conditions "shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent (4) four Tax Periods". Electing out does the same thing. One bad year costs five, and the Federal Tax Authority's worked example is blunt about it: the four subsequent years are lost "even if the conditions to be a QFZP during any of these four subsequent years are met".

There is also a substance requirement that quietly rules out the arrangement most people have in mind. Core income-generating activities must happen in the free zone, and outside the intellectual property carve-out they can only be outsourced to someone else in a free zone. A one desk licence with the work done by the parent company abroad does not satisfy it.

A note on the guide everybody quotes. The Federal Tax Authority's Free Zone Persons corporate tax guide is still the May 2024 first edition, its own first page is marked INTERNAL, it tells you at section 2.6 that it is "not a legally binding document", and it cites Ministerial Decision No. 265 of 2023 fifty-eight times, an instrument Article 6 of Ministerial Decision No. 229 of 2025 repealed with retroactive effect to 1 June 2023. The rules in it are mostly still good law. Its citations are not. Check anything load-bearing against Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025 directly.

Who you can invoice, and what Dubai opened in 2025

The real historic difference between the two was never tax. It was reach. A free zone company was confined to its zone and to export, and selling onshore meant a separate mainland entity or branch. In Dubai, that changed in 2025.

Executive Council Resolution No. (11) of 2025, Regulating the Conduct of Free Zone Establishments' Activities within the Emirate of Dubai, was issued on 3 March 2025 and, under Article 15, came into force when it was published, in Official Gazette No. 707 of 21 March 2025. Article 4 gives a free zone establishment three routes:

  • A licence to establish a branch of the establishment within the emirate.
  • A licence to establish a branch "operating out of the Free Zone".
  • A permit to conduct specific activities within the emirate.

Article 4(b) makes both licences "valid for a period of one (1) year, renewable for the same period". The permit sits in Article 7 and runs "for a period not exceeding six (6) months", so six months is a ceiling and not a term.

The difference between the two licences is where you have to be. CMS reads the first as requiring onshore physical presence and the second as not, and the resolution bears that out, because Article 6(a) has the Department of Economy and Tourism issue a licence to establish a branch "in the Free Zone for the purposes of conducting its Activities within the Emirate". Articles 5(b) and 6(b) both provide the branch has no separate legal personality.

The fees are in the resolution itself, which is worth knowing because they are almost always quoted from law firm briefings instead. Article 12 sets AED 10,000 per year for issuing or renewing the licence for a branch operating out of the free zone, and AED 5,000 for issuing or renewing the temporary permit. Article 12 covers only those two routes. There is no fee stated anywhere in the resolution for an ordinary mainland branch, where Article 5(a)(6) simply sends you to the normal Department of Economy and Tourism schedule, so do not read AED 10,000 and AED 5,000 as the price of onshore access generally.

Each route needs the prior approval of the free zone licensing authority, and the approval of the government entities supervising the activity "where required". Article 2 excludes financial establishments licensed in the Dubai International Financial Centre, and only those. Article 3(b) requires the establishment to "maintain separate financial records for the Activities conducted outside of the Free Zone and within the Emirate, distinct from those kept for Activities conducted within the Free Zone".

None of this was usable on the day it was published. Article 9 gave the Department of Economy and Tourism six months to issue the activity list, and the scheme went live on 8 October 2025 as the Free Zone Mainland Operating Permit, launched by the Dubai Business Registration and Licensing Corporation, part of the Department of Economy and Tourism, with the Dubai Free Zones Council. The scope is the part that matters to anyone reading this: "In its initial phase, the framework covers non-regulated activities including technology, consultancy, design, professional services, and trading, with plans to extend to regulated sectors." Technology is in phase one. The launch puts the permit at "valid for six months at a cost of AED5,000 renewable for the same fee every six months", restricts it to free zone companies holding a Dubai Unified Licence, and runs applications through the Invest in Dubai platform. No date is given for regulated sectors, so do not plan around one.

One further detail saves real money. Article 8 lets the establishment "engage its existing workforce registered on the Free Zone portal, and may continue to benefit from all Free Zone employment privileges". You do not staff the mainland operation twice.

Two qualifications. This is Dubai local legislation, so a Dubai free zone company that wants to work in Abu Dhabi or Sharjah still goes to those authorities. And income attributable to a mainland branch is a Domestic Permanent Establishment taxed at 9 percent under Article 5(1) of Cabinet Decision No. 100 of 2023, so the permit buys access, not exemption.

Here the Federal Tax Authority's guide carries a point most summaries miss, and it cuts both ways. Having a Domestic Permanent Establishment does not by itself cost you Qualifying Free Zone Person status. Its income is ring-fenced at 9 percent, and its revenue is left out of the de minimis calculation altogether. But where the free zone parent transfers goods or services to its own mainland branch, the arm's length value of that transfer is non-qualifying revenue which does count toward de minimis. The guide's own example has outputs transferred at AED 100,000 and on-sold at AED 140,000, producing "non-Qualifying Revenue of AED 100,000" with the branch's AED 40,000 margin excluded. So the mainland branch does not break your free zone status. Supplying it can.

The other thing that changed is that the choice is no longer permanent, in principle. Federal Decree-Law No. 20 of 2025, issued 1 October 2025 and in force from 15 October 2025, inserted a new Article 15 bis into the Commercial Companies Law creating a statutory transfer of registration, so a company can move between UAE authorities, including free zone to mainland and back, keeping the same legal entity. Before this, moving usually meant liquidating one company and incorporating another, with new contracts, a new bank account and a new tax registration. That was the genuine reason to agonise over the first decision.

Be careful how much weight you put on it today. As at late October 2026 the Ministry of Economy and Tourism's own legislation index carries no instrument setting out the transfer procedure. For an ordinary free zone the obstacle is not one missing federal decision, because Article 15 bis conditions the transfer on both authorities' registration systems permitting it, the absence of a blocking notation, and the approval of both authorities, with the detailed controls left to each competent authority. The express Cabinet mandate in that article is for transfers involving the financial free zones. So the route exists in law and is not yet a procedure you can put a date against.

The procurement detail nobody mentions

Here is the fact that should actually move the decision for anyone selling to large UAE buyers, and it has nothing to do with tax.

The National In-Country Value programme scores suppliers on how much of their spend stays in the UAE, and federal agencies and government linked buyers apply it when awarding work. How that scoring works across the Gulf is a subject of its own, and I have written it up separately in how Gulf enterprise procurement actually works. What matters here is a single line that treats free zone companies differently depending on what they sell.

The Ministry of Industry and Advanced Technology publishes the National In-Country Value (ICV) Certification Guidelines for Suppliers, currently the September 2025 edition. At section 5.3 on manufacturing cost, and again at section 5.4 on third party spend, it says:

"Goods Manufacturers" based in Free Zone will be considered as "Within UAE"

"Service Providers" based in Free Zone will be considered as "Outside UAE"

Read that from your customer's side. When a UAE contractor or operator calculates its own ICV score, money it spends with a free zone service provider, which is what a software vendor is, counts as spend outside the UAE. The identical contract with a mainland supplier counts as spend inside it. Your free zone licence dilutes your customer's score, and your customer is scored on it in exactly the tenders you want to win. A free zone goods manufacturer does not have this problem, which tells you the rule is deliberate rather than an oversight. Software companies are on the wrong side of it.

What that costs is published, at least in Abu Dhabi. Article 8(3) of the Abu Dhabi Local Content Guidelines in Government Procurement, version 1.0 of October 2021, provides that "The local content criterion weight shall be 40% of the financial criterion in the evaluation of the tender", and the article carries its own worked example: on a tender whose financial weight is 70 percent, local content takes 28 percent and the financial score keeps 42. So roughly a quarter of the whole evaluation can turn on a number your invoice moves in the wrong direction.

If you bid yourself, Article 7(4) rewards careful reading, because the trigger is narrower than people assume: "If the Supplier fails to submit the Certificate, it shall not be excluded from the tender, yet the Local Content will score zero." It is non-submission, not non-possession, and Article 7(3) allows a grace period until the financial evaluation starts where the tender documents say so. A bidder who holds a certificate and does not file it scores nothing on a quarter of the evaluation, for a filing error.

Three details about your own certification are worth knowing before you plan around it.

The asymmetry runs one way only. Section 5.8 of the same guidelines says "Revenue from Free Zone companies will be considered as "from UAE Customers"", so a free zone customer's money counts as UAE revenue to you, while your invoice counts as foreign spend to them.

The certificate is valid "for a period of 14 months from the date of issuance of the Audited Financial Statements", and recertifying on the same statements does not restart the clock, because "the validity of 14 months from the initial issuance will still apply". Those statements must be prepared under IFRS and audited by an auditor licensed in the UAE, and must be no older than two years from the certification year, with a company under ten months old allowed up to nine months of management accounts instead.

And that last rule tightened in a way that catches European groups specifically. The September 2025 edition adds that from 1 January 2025, certificates for financial years ending after 31 December 2024 "will require the use of stand-alone audited financial statements specific to the entity being certified", and that "Bifurcated management accounts that are based on consolidated financial statements will no longer be accepted as part of the ICV certification process." If your UAE subsidiary has only ever been reported inside the group consolidation, it needs its own audit before it can be certified at all. Note where that lands: a free zone entity is paying for that audit anyway under Ministerial Decision No. 84 of 2025, while a mainland entity only pays for it when it wants a score.

Free zone does not mean VAT free

A smaller point, but it comes up in almost every first conversation. Some UAE free zones are Designated Zones, and a Designated Zone is treated as being outside the State. The thing to understand is what that treatment is built around, which is the movement of goods.

Article 51 of the VAT Executive Regulations, Cabinet Decision No. 52 of 2017, as amended on this article by Cabinet Decision No. 88 of 2021, runs to ten clauses and five of them are about goods. Services get one clause, Article 51(6), and it says the opposite of what people hope:

"The place of supply of any Services is considered to be inside the State if the place of supply is in the Designated Zone."

The Federal Tax Authority's Designated Zones VAT guide puts the same thing in plain words at section 2.1. Zones which are Designated Zones are treated as outside UAE territory "for specific supplies of goods", while "In contrast, supplies of services made within Designated Zones are treated in the same way as supplies of services in the rest of the UAE."

So for a software vendor, Designated Zone status is worth nothing. Your services are supplied inside the UAE and then taxed under the general rules, which means 5 percent to a UAE or GCC customer, though the guide notes that exported services, made to a person resident and located outside the GCC Implementing States, may be zero rated. There is no registration advantage either. The AED 375,000 mandatory registration threshold sits in Article 7(1) of the Executive Regulations rather than the Decree-Law, and Article 51(10) deems any person "established, registered or which has a Place of Residence in a Designated Zone" to have a place of residence in the State, so a UAE-resident free zone entity registers on exactly the same terms as a mainland one. Choosing a Designated Zone because it sounds like a tax advantage is choosing on a feature you will never use.

One currency note. That guide is Issue 1 of July 2018 and its internal cross-references have drifted, because Cabinet Decision No. 88 of 2021 inserted a new clause 7 into Article 51 and renumbered everything after it. The Authority's current word on the subject is public clarification TAXP010 of October 2026, which sets out when a zone counts as a Designated Zone but does not restate the services rule, so Article 51(6) is what carries that point.

What this means in practice

Stop treating this as a tax decision and you will make it quickly.

If you are a European software company opening a first UAE entity in order to sell, go mainland.

You are at 9 percent above AED 375,000 either way. Full foreign ownership is available, and it is worth being precise about why, because almost everybody cites the wrong instrument. Since 1 June 2021 a foreign investor has been able to own all of a mainland company, not because any article grants it, but because the Commercial Companies Law, now Federal Decree-Law No. 32 of 2021, no longer carries the old 51 percent Emirati shareholding requirement. What remains is Article 10, which leaves ownership restrictions to the activities with strategic impact listed in Cabinet Resolution No. 55 of 2021 and preserves each emirate's power to set a national shareholding percentage. That list runs to seven activities: security and defence, banks and insurance and finance, currency printing, telecommunications, Hajj and Umrah services, Holy Quran recitation centres, and services related to fisheries. Software is nowhere near it. Dubai Economy, announcing the change on 3 June 2021, put full ownership at "more than 1,000 commercial and industrial activities" and confirmed that "Branches of foreign companies do not require an Emirati agent."

Two things follow from that phrasing. The position is permissive by default rather than guaranteed by statute, which is worth knowing before you build a structure on it. And Federal Decree-Law No. 26 of 2020, which nearly every guide cites for this, was the reform that removed the requirement and was itself spent when Article 364 of the 2021 law abrogated the 2015 law it had amended.

So on the mainland you keep Small Business Relief while you are under AED 3m, you have no corporate tax audit obligation until AED 50m, you can invoice anyone, and your invoice counts as in country spend when your customer's ICV score is calculated. The free zone's remaining advantages for your situation are speed of setup and a tidier visa process. Both are real. Neither is worth those four.

Choose a free zone deliberately in three cases. First, if what you are building is a regional headquarters or treasury function charging your own group, because those are on the Qualifying Activities list and the 0 percent rate is genuinely available. Second, if you want the Dubai International Financial Centre or Abu Dhabi Global Market specifically, for the common law framework and the courts rather than the tax, in which case the decision was never about free zone status at all. Third, if you are not selling into the UAE and the entity is a base for Saudi Arabia and the wider Gulf, where the ICV argument does not apply.

And if you already have a free zone company, do not panic and do not liquidate. In Dubai, price the Article 12 permit or branch licence and keep the entity, and check whether your activity is inside phase one of the Free Zone Mainland Operating Permit, because technology is. Elsewhere, watch Article 15 bis rather than starting again, while remembering it is not yet a procedure with a timetable. Then run the arithmetic that actually matters: whether electing Qualifying Free Zone Person status is costing you Small Business Relief and an annual audit in exchange for a 0 percent rate your revenue never touches. For a lot of small software entities sitting in UAE free zones, it is.

If you want that worked through against your own revenue mix and customer list, get in touch.

Sources

UAE corporate tax, VAT and licensing rules change frequently, and several of the decisions cited here were issued or amended within the last eighteen months. Every figure and instrument above was verified against its primary source on 25 October 2026. Verify current requirements before making a decision. This is commercial guidance, not legal or tax advice.