The Free Zone Building Where Half the Rent Is Taxed

Two buildings stand in the same free zone. One is an office block let to companies registered in the zone. The other is a serviced apartment block. Under Article 6 of Cabinet Decision No. 100 of 2023 the first can produce income at 0% and the second cannot produce it at all, whatever the owner does. Property is the category where the free zone rules stop following the zone boundary and start following the use of the building and the identity of the tenant.

The rule, and the two ways it bites

Article 6(1) of Cabinet Decision No. 100 of 2023 makes income derived from immovable property located in a Free Zone Taxable Income, at the standard rate, in two situations: transactions with a Non-Free Zone Person in respect of Commercial Property, and transactions with any Person in respect of immovable property that is not Commercial Property.

Read the second limb carefully. It carries no counterparty condition. If the property is not Commercial Property, it does not matter who the tenant is, whether they sit inside the zone, or how well the rest of the structure is arranged. The income is taxable.

What Commercial Property actually means

The definition in Article 1 of Cabinet Decision No. 100 of 2023 is narrower than the ordinary commercial meaning, and the exclusion is stated by name. Commercial Property is immovable property, or part of it, used exclusively for a Business or Business Activity and not used as a place of residence or accommodation including hotels, motels, bed and breakfast establishments, serviced apartments and the like.

This matters more in the UAE than it would elsewhere. Serviced apartments and hotel apartments are a substantial part of the property stock inside several Dubai free zones, and they are often held in the same free zone entity as an operating business. The word exclusively also does work: a building used partly for a business and partly as accommodation is not wholly Commercial Property.

Mixed-use buildings are split, not classified

Where a building has both kinds of use, the FTA guide does not ask which use dominates. It requires the income to be allocated between the components, with 0% and 9% applied to the respective parts.

Its worked example takes a ten-floor property in a free zone: eight floors of residential apartments and two floors of retail units occupied by Free Zone Persons, producing AED 10,000,000 of annual rent. Direct allocation is the preferred method. Where direct allocation is not possible, an indirect basis such as floor space may be used, which here gives AED 2,000,000 of Qualifying Income from the retail component at 0%, and AED 8,000,000 taxed at 9%.

The guide applies the same logic inside a single hotel building, and its line is worth knowing before an allocation is prepared: retail outlets and restaurants are generally commercial units, while rooms, conference rooms and banquet halls are not. A hotel is therefore not uniformly non-qualifying, but the parts that generate most of the revenue usually are.

The de minimis trap, which runs the wrong way

A reader who has followed the de minimis rules will expect taxable property income to eat into the 5% allowance. It does not. Article 4(3)(a) of Cabinet Decision No. 100 of 2023 excludes this revenue from the de minimis calculation entirely, from non-qualifying Revenue and from total Revenue alike.

Where the beneficial recipient condition actually comes from

Article 6 says nothing about beneficial recipients, so it is worth following the route by which the condition attaches. Article 3(1) excludes from Qualifying Income anything derived from the ownership or exploitation of immovable property in accordance with Article 6. A letting of Commercial Property to a Free Zone Person is not one of the two cases Article 6 lists, so it survives that exclusion.

Surviving it is not the same as qualifying. The income still has to fall within one of the categories in Article 3(1), and the one that fits is paragraph (a), income derived from transactions with a Free Zone Person. Article 3(2) then attaches the condition: for the purposes of that paragraph, income is considered as derived from transactions with a Free Zone Person where that Free Zone Person is the beneficial recipient of the relevant services or goods.

One link in that chain is easy to lose. Paragraph (a) applies except to income from Excluded Activities, and the ownership or exploitation of immovable property is an Excluded Activity under Article 2(2)(e) of Ministerial Decision No. 229 of 2025. The carve-out from that Excluded Activity is precisely Commercial Property in a Free Zone transacted with a Free Zone Person, which is what leaves the letting inside paragraph (a) in the first place.

What to check

1. Classify each property, and each part of each property, against the Commercial Property definition, including whether any part is used as residence or accommodation.
2. For every commercial letting, confirm the tenant is a Free Zone Person and that it is the beneficial recipient of what it is paying for.
3. Where a building is mixed-use, allocate directly if you can, and document why an indirect basis was necessary if you cannot.
4. Recalculate de minimis with property revenue removed from both sides of the fraction, because the allowance is smaller than headline turnover suggests.
5. Check whether property outside the zone is held in the same entity, because that income is not Qualifying Income either.

Cabinet Decision No. 100 of 2023 was issued on 25 October 2023 and takes effect from 1 June 2023. Ministerial Decision No. 229 of 2025 also takes effect from 1 June 2023. Confirm the position for your own facts and your own tax periods before relying on it.