New UAE Corporate Tax Guidance 2025: Everything That Changed

The Evolving UAE Tax Landscape

The UAE's corporate tax regime, introduced by Federal Decree-Law No. 47 of 2022 and effective for financial years beginning on or after 1 June 2023, marked the end of the UAE's status as a zero-tax jurisdiction for corporate income. The 9% headline rate — with a 0% rate for Qualifying Free Zone Persons (QFZPs) on qualifying income — represented a calibrated approach designed to maintain the UAE's competitiveness while meeting international tax transparency standards.

Throughout 2025, the Federal Tax Authority (FTA) issued a series of decisions, ministerial decisions, and public clarifications that materially affected how the regime operates in practice. This article consolidates the key changes.

Qualifying Free Zone Person — The Narrowing Path

Cabinet Decision No. 100 of 2023 (As Clarified in 2025)

The original QFZP framework provided that a Free Zone Person could benefit from the 0% rate on "Qualifying Income" if it maintained adequate substance in the Free Zone and derived income from qualifying activities. The 2025 guidance clarified several critical points:

What Constitutes Qualifying Income

The FTA's 2025 guidance confirmed that qualifying income includes:

• Income from transactions with other Free Zone Persons
• Income from certain qualifying activities performed for non-Free Zone persons, provided the activity is listed in the Cabinet Decision
• Passive income (dividends, interest, royalties, capital gains) from owning shares in juridical persons

What Does Not Constitute Qualifying Income

The guidance explicitly excluded:

• Income from transactions with mainland UAE persons that does not relate to qualifying activities
• Income from immovable property situated in the UAE (unless the property is in a Free Zone and the transaction is with another Free Zone Person)
• Income from activities that are specifically excluded, including banking, insurance, and natural resource extraction

The De Minimis Rule

A QFZP may earn non-qualifying income of up to 5% of total revenue or AED 5 million (whichever is lower) without losing QFZP status. If this threshold is exceeded, the entity loses QFZP status for the entire tax period — not merely on the excess income. The 2025 guidance confirmed that this threshold is applied strictly and that inadvertent breaches will not be excused.

Substance Requirements

The 2025 guidance introduced more detailed substance requirements for QFZPs:

• Adequate employees: The entity must have a sufficient number of qualified employees to undertake its core income-generating activities. The FTA indicated that it will assess adequacy on a case-by-case basis.
• Adequate expenditure: Operating expenditure must be incurred in the Free Zone and must be proportionate to the activities undertaken
• Core income-generating activities (CIGA): The entity must conduct its CIGA in the Free Zone. The guidance provided examples of what constitutes CIGA for each qualifying activity
• Decision-making: Key strategic and management decisions must be made within the Free Zone

Domestic Minimum Top-Up Tax (DMTT)

Ministerial Decision No. 302 of 2024 (Effective 2025)

The UAE introduced a DMTT effective for fiscal years beginning on or after 1 January 2025, aligned with the OECD Pillar Two GloBE Rules. The DMTT applies to MNE groups with consolidated revenue of EUR 750 million or more in at least two of the four preceding fiscal years.

Key Features

• Rate: 15% minimum effective tax rate, consistent with the GloBE Model Rules
• Scope: Applies to Constituent Entities of in-scope MNE Groups located in the UAE
• Interaction with QFZP: The DMTT overrides the 0% QFZP rate for in-scope entities. A QFZP that is a Constituent Entity of an in-scope MNE Group will pay top-up tax to bring its effective rate to 15%
• Calculation: The top-up tax is calculated using the GloBE methodology — Adjusted Covered Taxes divided by GloBE Income — with adjustments for substance-based income exclusions (payroll and tangible asset carve-outs)

Practical Impact

For large MNEs, the DMTT effectively eliminates the benefit of the QFZP regime. A free zone entity with a 0% headline rate will pay 15% DMTT if it is part of an in-scope group. The UAE collects this tax domestically, preventing the parent jurisdiction from imposing a top-up tax under the IIR.

For smaller entities (below the EUR 750 million threshold), the QFZP regime remains fully effective. This creates a significant planning distinction between mid-market businesses and large MNEs.

Transfer Pricing — Enhanced Requirements

Ministerial Decision No. 97 of 2023 (Implemented in 2025)

The UAE's transfer pricing rules, based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, were implemented with force from 2025 for reporting purposes:

Documentation Requirements

• Master File: Required for MNE groups with consolidated revenue exceeding AED 3.15 billion (approximately EUR 750 million)
• Local File: Required for entities with revenue exceeding AED 200 million or related party transactions exceeding AED 40 million
• Country-by-Country Report (CbCR): Required for MNE groups with consolidated revenue exceeding AED 3.15 billion, filed by the UAE entity if the ultimate parent is in a non-exchanging jurisdiction

Arm's Length Standard

All related party transactions must comply with the arm's length principle. The FTA has indicated that it will apply the five standard OECD methods:

• Comparable Uncontrolled Price (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (CPM)
• Transactional Net Margin Method (TNMM)
• Transactional Profit Split Method (TPSM)

Specific Guidance on Intra-Group Services

The 2025 guidance addressed common intra-group service arrangements:

• Management fees must be supported by evidence of actual services rendered
• Cost allocation arrangements must demonstrate a genuine benefit to the recipient entity
• Mark-ups on intra-group services must be benchmarked against comparable arrangements
• Shareholder activity costs are not deductible by the subsidiary

Small Business Relief — Clarifications

The FTA confirmed that Small Business Relief (available for businesses with revenue not exceeding AED 3 million) remains a simplified alternative to full corporate tax compliance. Key clarifications:

• The AED 3 million threshold is assessed annually
• Entities claiming Small Business Relief are treated as having no taxable income for the period
• Small Business Relief cannot be claimed by QFZPs, Free Zone Persons, or members of MNE Groups subject to Pillar Two
• Entities must still register for corporate tax and file a return, even when claiming Small Business Relief

Withholding Tax

The UAE has not yet implemented withholding tax on domestic payments. The corporate tax law provides for a 0% withholding tax rate, which may be increased by Cabinet Decision in the future. The 2025 guidance confirmed that no withholding tax changes are planned for the immediate term, but advisors should monitor for potential changes aligned with Pillar Two's Undertaxed Profits Rule (UTPR).

Practical Implications for International Structuring

For Mid-Market Businesses (Below EUR 750 Million)

The UAE remains an attractive jurisdiction for genuine commercial operations. The QFZP regime provides a 0% rate on qualifying income, provided substance requirements are met. The key planning points:

• Ensure genuine substance in the Free Zone (employees, expenditure, decision-making)
• Monitor the de minimis threshold carefully
• Maintain robust transfer pricing documentation for all related party transactions
• Do not assume that the 0% rate applies automatically — it requires active compliance

For Large MNEs (Above EUR 750 Million)

The DMTT effectively imposes a 15% minimum rate, eliminating the QFZP benefit. However, the UAE remains competitive:

• The 15% rate is at the global minimum — no higher
• The substance-based income exclusion reduces the effective top-up tax for entities with genuine local payroll and assets
• The UAE's treaty network, infrastructure, and business environment justify a genuine commercial presence independent of the tax rate

For Family Offices and Investment Vehicles

The QFZP regime remains effective for family offices and investment holding companies that are not part of in-scope MNE Groups. Key considerations:

• Investment income (dividends, capital gains) from qualifying shareholdings is qualifying income
• The entity must maintain adequate substance in the Free Zone
• CRS and FATCA reporting obligations apply to all financial accounts

Key Takeaways

• The 2025 FTA guidance narrowed the QFZP qualifying criteria, particularly around substance and the de minimis threshold
• The DMTT (effective 2025) imposes a 15% minimum rate on Constituent Entities of in-scope MNE Groups, overriding the QFZP 0% rate
• Transfer pricing documentation requirements are now mandatory for entities above specified thresholds
• The QFZP regime remains effective for mid-market businesses and family offices with genuine Free Zone substance
• The de minimis threshold (5% / AED 5 million) is applied strictly — exceeding it results in loss of QFZP status for the entire period
• International structuring using the UAE must now be based on genuine commercial rationale and substance, not tax rate alone
• Advisors should monitor for potential withholding tax implementation and UTPR developments