Two of the most used special regimes available to internationally mobile businesses sit at opposite ends of the same trade route. The United Arab Emirates offers its free zones, and Spain offers the Canary Islands ZEC. Both promise a materially reduced rate in exchange for genuinely establishing activity in the territory, and businesses regularly ask which is better. The honest answer is that they are built for different purposes, and the choice is usually decided by where the customers are rather than by the rate.
The two regimes in outline
A UAE free zone entity that meets the conditions to be treated as a qualifying free zone person is taxed at zero per cent on its qualifying income, against a standard federal corporate rate of nine per cent, provided it maintains adequate substance in the zone, derives qualifying income as the relevant Cabinet decision defines it, respects the limits on non-qualifying revenue and complies with transfer pricing, together with the further conditions that the law and the ministerial decision made under it add. The Canary Islands ZEC taxes qualifying income at four per cent against the general Spanish rate of twenty-five per cent, conditional on minimum employment, on minimum investment, which the authorisation may dispense with provided that both the jobs to be created and the annual average workforce exceed the employment minimum, and on genuine activity on the islands, among the other requirements of the law, as we set out in our note on what the ZEC regime actually requires.
The rates themselves are statutory on both sides. Article 3 of Federal Decree-Law No. 47 of 2022 taxes a qualifying free zone person at zero per cent on qualifying income and at nine per cent on taxable income that is not qualifying income. On the Spanish side, Article 43 of Law 19/1994 sets the special ZEC rate at four per cent, and Article 29 of the corporate income tax law sets the general rate at twenty-five per cent. What the headline figures do not show is how much of the profit each reduced rate actually reaches, which is where the two regimes part company.
The decisive difference is the surrounding market
A ZEC entity is inside the European Union. It can invoice European customers as a European supplier, it sits within the customs union, and it has access to the European directives and treaty network. Indirect tax is the exception: the Canary Islands form part of the customs territory but are among the territories that Article 6 of the VAT Directive leaves outside its scope, and supplies made in the islands and imports into them are subject instead to the Canary general indirect tax under Article 3 of Law 20/1991. A UAE free zone entity is outside the Union entirely. For a business serving European clients, that difference outweighs any comparison of rates: being inside the market you sell into is worth more than a few points of tax.
The reverse is equally true. For a business serving the Gulf, South Asia, East Africa or the wider Indian Ocean trade, the Emirates sit at the centre of the map and the Canaries do not. The regime should follow the customers.
Nobody should choose between the Emirates and the Canaries on the headline rate. The question is which market you actually sell into, and the answer is usually not ambiguous.
How far each reduced rate reaches
In the Emirates, even for an entity that qualifies, the zero rate reaches only categories of income, not necessarily the whole of its profit. Cabinet Decision No. 100 of 2023 defines qualifying income and takes three kinds of income out of it, taxing them at nine per cent: income attributable to a domestic or foreign permanent establishment of the entity, income from immovable property located in a free zone in the cases the decision lists, and income from intellectual property other than the qualifying intellectual property it defines, together with income from qualifying intellectual property above the share that the ministerial calculation allows. The qualifying status itself is also at stake: under Article 18 of the corporate tax law, an entity that fails any of the conditions at any point in a tax period ceases to be a qualifying free zone person from the beginning of that period, subject to any different rule the Minister prescribes, and Article 5 of Ministerial Decision No. 229 of 2025 extends the loss to the four tax periods that follow.
On the Canary side, qualifying income is a shorthand. Article 42 of Law 19/1994 applies the special rate to the part of the tax base that corresponds to operations carried out materially and effectively in the geographic area of the zone, and Article 44 measures that part with a fraction. Its numerator is made up of the operations the article lists, among them goods made available to the buyer in the islands or dispatched from them and services performed with the entity’s means located there, less the operations that the article requires to be deducted; its denominator is all of the entity’s income and other positive items of the tax base. The rest of the base is taxed under the ordinary rules of the corporate income tax.
The same article then caps the reduced rate. It applies to the lower of that share of the base and a ceiling tied to employment, which is 1,800,000 euros of base for an entity that meets the minimum job requirement and rises by 500,000 euros for each job above the minimum, up to fifty jobs. All of that, and any employment above fifty, is subject to a further limit: the reduction in tax against the general rate in each period cannot exceed thirty per cent of the entity’s net turnover. For these purposes, job creation means the net number of jobs created in the geographic area of the zone since the entity’s registration, excluding, where applicable, the incorporation of a previous workforce.
Substance, in both cases, is the real condition
Both regimes are conditional on genuine presence, and both are administered by authorities that verify rather than assume. The ZEC requires a stated minimum investment, save where the waiver described above applies, and a minimum number of jobs created on the islands within a defined period, and the ZEC Consortium examines the business plan before authorizing. The UAE requires adequate substance in the free zone, meaning that the core income-generating activities are actually conducted there with sufficient people, assets and operating expenditure. Those activities can be outsourced to another person in a free zone or designated zone, provided the entity adequately supervises them, and the latitude is wider for qualifying intellectual property.
What neither regime tolerates is a business whose real activity remains elsewhere while an entity in the territory collects the income. We set out the European version of that test in our note on which business models work in the ZEC, and the reasoning transfers directly to the Emirates.
What qualifies, and what does not
The two regimes define qualifying activity differently, and the detail matters. The UAE qualifying activities centre on manufacturing and processing, trading of qualifying commodities, holding shares and securities, ship operation, reinsurance, fund and wealth management, headquarters and treasury services to related parties, aircraft leasing, distribution from a designated zone and logistics services. The complete list, with the definition of each activity, is in Ministerial Decision No. 229 of 2025. Notably, the same decision treats as excluded activities, among others, any transaction with natural persons, save transactions in relation to the ownership, management and operation of ships, fund management, wealth and investment management, and the financing and leasing of aircraft, and the ownership or exploitation of immovable property other than commercial property located in a free zone where the transaction is with a free zone person. Revenue from excluded activities counts, with limited exceptions that the Cabinet decision sets out, as non-qualifying revenue, and an entity whose non-qualifying revenue exceeds five per cent of its total revenue or five million dirhams, whichever is lower, fails the de minimis condition, which excludes a range of businesses that assume they fit.
The ZEC works from a list of permitted activities and from the requirement that the activity be genuinely carried on in the islands. A wide range of services, technology, logistics, audiovisual production and certain trading operations all fit, as our sector notes on the regime describe.
The comparison cuts the other way on group services. Headquarter services and treasury services to related parties are qualifying activities in the Emirates, whereas the annex to the Spanish law excludes coordination and intragroup service centres from its head office and management consultancy categories. Trading carries its own condition in the Canaries. Goods bought for resale that never pass through the islands count in the numerator where the commercial operations are carried out in the zone and close a commercial cycle with economic results there, and the law treats them as carried out in the zone when they are organised, directed, contracted and invoiced from it and at least ninety per cent of the related expenses, excluding the cost of the goods and the costs of their transport and traffic, correspond to the entity’s personnel and material means in the Canaries. Entities trading in this way file a quarterly information return on those operations.
How long each regime runs
In the Emirates, Article 18 of the corporate tax law applies the zero rate for the remainder of the tax incentive period granted by the legislation of the free zone in which the entity is registered. That period may be extended in accordance with any conditions that a Cabinet decision determines, but no single period may exceed fifty years.
The ZEC is tied to European State aid rules. Article 29 of Law 19/1994 allows the incentives to be enjoyed during the six years immediately following the end of the validity of the General Block Exemption Regulation, Regulation (EU) No 651/2014, or of the rule that replaces it, with a possible extension if the State aid rules applicable to the Canaries so provide, after communication from the European Commission. The authorisation to register is limited to that Regulation’s end date, which Article 59 of its current consolidated text sets at 31 December 2026, or to that of the rule that replaces it, and the maintenance of the zone is in any case subject to the periodic reviews of the European Commission.
Using both
Groups with genuinely global operations sometimes use both, with a Gulf-facing business in a UAE free zone and a Europe-facing business in the ZEC, and a European holding above the structure. Where that is the case, the pricing between the entities has to be at arm’s length and documented, since two low-taxed entities in the same group is precisely the pattern that attracts examination. Our note on transfer pricing between a Dutch BV and a ZEC entity sets out the discipline, and the same applies to the Emirates side. For the third European option, see our comparison of ZEC and Madeira.
The Spanish side adds a rule of its own. Under Article 44(7) of Law 19/1994, operations carried out, directly or indirectly, with persons or entities resident in non-cooperative jurisdictions, or paid through them, are not treated as carried out in the zone. The Emirates do not appear on the list that Spain applies today, Order HFP/115/2023, last amended in June 2026. The list is revised from time to time, so its content has to be read for the period concerned.
Montclare runs a dedicated Special Economic Zones desk, structuring the corporate, tax and holding architecture for groups and families entering Europe through the Netherlands. Our services are set out on our services page.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.