Excluded Activities in the Free Zone — what actually disqualifies you from the 0% rate?
My Free Zone company's activity qualifies — but are there things that could quietly cost me the 0% rate without me realizing?
Even if your core activity falls under the 'Qualifying Activities' we covered in an earlier article, there's a parallel list called 'Excluded Activities,' set out in the same Ministerial Decision No. 265 of 2023. If your income comes from one of these, it's taxed at the standard 9% rate — even if the entity itself is registered as a Free Zone Person.
One of the clearest examples: transactions with natural persons. If your company provides a service or product directly to individuals — not companies or entities — beyond a few specific exceptions like certain wealth management services or aircraft financing and leasing, that income is treated as excluded. Banking and insurance activities are also excluded entirely, apart from reinsurance, which is treated differently.
Finance and leasing activities are excluded as well, unless provided to related parties or tied to the aircraft financing and leasing that appears under Qualifying Activities. A practical example: a car or equipment rental company in a free zone serving individual customers or unrelated businesses has excluded income from that activity, which doesn't benefit from the 0% rate.
Owning or exploiting immovable property is also excluded, with one specific carve-out: commercial (not residential) property transacted with another Free Zone Person. So if your company leases residential property, or even commercial property to someone who isn't a Free Zone Person, that income is treated as excluded. Owning or exploiting intellectual property — such as patent or trademark licensing — also falls under excluded activities.
One more important point: any activity 'ancillary' to an excluded activity gets the same treatment — the core activity doesn't have to be on the excluded list itself; even a secondary activity supporting an excluded one can end up classified the same way. In practice, this often catches companies that start with a qualifying activity like manufacturing or distribution, then expand or add a side service — like leasing out part of their building, or extending a loan to a customer — without realizing it can open up an excluded-activity issue.
At RASEEKH, we run periodic reviews of our Free Zone clients' income sources, and work through with each client whether any new activity they're considering would be classified as qualifying or excluded, so they can build their expansion on a clear footing from the start.