UAE Corporate Tax Enters Second Year With New Compliance Requirements

Free zone companies face closer scrutiny on qualifying income. Transfer pricing documentation now mandatory.

The UAE's corporate tax regime, which took effect in June 2023, enters its second full compliance year in 2026 with several important changes. The Federal Tax Authority (FTA) has issued new guidance on transfer pricing documentation, qualifying free zone income, and substance requirements that affects both mainland and free zone companies.

What changed for 2026

The Federal Tax Authority released Ministerial Decision No. 97 of 2025 in November, clarifying several areas where the initial corporate tax law left room for interpretation:

Transfer pricing documentation: Companies with related-party transactions exceeding AED 40 million annually must now maintain contemporaneous transfer pricing documentation. The master file and local file requirements mirror OECD guidelines. Penalties for non-compliance start at AED 500,000.

Substance requirements: Free zone companies claiming the 0% rate on qualifying income must demonstrate "adequate substance." The FTA has clarified this means actual employees, actual office space, and actual decision-making in the free zone. Brass-plate arrangements won't qualify.

Qualifying income definition: Income from transactions with mainland UAE entities generally doesn't qualify for the 0% free zone rate unless specific conditions are met. The FTA has narrowed what counts as "qualifying activities" for purposes of the exemption.

The free zone reality check

The UAE's corporate tax was designed to preserve the free zone advantage while satisfying international pressure for minimum taxation. In practice, the distinction between qualifying and non-qualifying income is more complex than the marketing suggests.

Free zone companies earning income from UAE mainland customers, providing services to related parties at non-arm's-length prices, or lacking genuine operational substance will find themselves subject to the standard 9% rate on that income.

For holding companies, the participation exemption remains attractive: dividends and capital gains from qualifying subsidiaries are exempt regardless of free zone status. But the substance requirements mean passive holding structures need at least a minimal physical presence.

Practical compliance steps

Companies operating in the UAE should have filed their first corporate tax returns by late 2025 for tax periods starting in 2023 or early 2024. The 2026 filings require:

• Accurate segregation of qualifying vs. non-qualifying free zone income
• Transfer pricing documentation for related-party transactions above thresholds
• Evidence of substance (employment records, lease agreements, board minutes)
• Proper bookkeeping in AED with supporting documentation retained for 7 years

The FTA has indicated it will begin systematic audits in 2026, prioritizing free zone companies claiming the 0% rate and groups with significant intercompany transactions.

Still competitive, but different

At 9%, the UAE's corporate tax rate remains among the lowest in the world for companies with genuine operations. The free zone 0% rate is still available for businesses that actually conduct qualifying activities from within the zone.

What's changed is the documentation burden and the scrutiny. The days of setting up a UAE free zone company without real substance and assuming tax-free treatment are over. The structure still works for the right businesses. It just requires actual compliance now.

The FTA's corporate tax portal has updated guidance documents and registration requirements for 2026.