The United Arab Emirates (UAE) divides its economy into two main jurisdictions: the mainland and free zones. These jurisdictions differ significantly in terms of tax benefits, access to market, legal structures, and other factors. In this blog, we look at the key differences between the UAE mainland and free zones, helping you choose the best option for your business setup in the UAE.
UAE Mainland vs Free Zone: Company Formation
Selecting the right jurisdiction is crucial when setting up your business in the UAE. The first step involves deciding between the UAE mainland and free zones before narrowing down to a specific region.
- Mainland Company
A mainland company is set up in the UAE mainland and registered with the Department of Economic Development of the relevant emirate. Mainland companies can trade freely both within and outside the UAE.
- Free Zone Company
A free zone company is established in one of the UAE’s free zones and registered with both the Department of Economic Development of the relevant emirate and the authorities regulating the specific free zone. While free zone companies have limited access to the mainland market, they enjoy benefits such as 100% repatriation profits and minimal import and export restrictions.
UAE Mainland vs Free Zones: Key Differences
Government policies and regulations for business vary between economic jurisdictions. The key differences between the UAE mainland and free zones are:
- Business Ownership and Control
The key difference between a mainland and free zone company used to be in relation to the extent of foreign ownership allowed.
Mainland
Previously, foreign ownership in mainland companies was limited to 49%, with majority ownership held by UAE citizens. However, the UAE government recently amended the federal Commercial Companies Law to allow up to 100% foreign ownership in specific businesses, except for those in 7 sectors of strategic importance, such as defense and currency printing.
Free Zone
In free zones, all businesses enjoy 100% foreign ownership.
- Business Activity and Licenses
UAE mainland and free zone companies differ in their areas of business operations and the types of licenses offered.
Mainland
Mainland companies can conduct business operations across the UAE. They can avail six major types of licenses:
- Industrial
- Commercial
- Professional
- Tourism
- Agricultural
- Occupational
Free Zone
The companies in free zones can operate their business within the jurisdiction of the free zones. However, there is a wider range of business licenses in specific domains that are offered, namely:
- Commercial
- Media
- Warehouse
- Consultancy/service
- E-Commerce
- Innovation
- Industrial
- Manufacturing
- Educational
- Freelancer
- Taxation Policies
The corporate tax regime varies for business in the mainland and free zones in the UAE.
Mainland
The mainland businesses are subject to a two-tiered corporate tax structure.
- Taxable income up to $102,096: 0% corporate tax
- Taxable income exceeding $102,096: 9% corporate tax
Note: 1 AED = 0.27 USD as on 19 October 2024
Free Zone
The businesses in free zones enjoy a 0% preferential corporate tax rate on their ‘Qualifying Income’ (income earned from qualifying activities such as manufacturing, processing, trading, fund management services, etc.). To be a ‘Qualifying Free Zone Person’, a free zone company must:
- Maintain adequate substance in the UAE free zone
- Derive qualifying income
- Not have elected to the standard corporate tax rates
- Comply with transfer pricing rules
Understanding the new corporate tax regime in the UAE can help you better.
- Legal Structures
Choosing a legal structure that complements your business activity is crucial when forming a company in the UAE. The available structures vary between mainland and free zone jurisdictions.
Mainland
The UAE mainland provides a wide range of legal structures to choose from, such as:
- General partnership
- Limited partnership
- Limited liability company (LLC)
- Public/private joint stock company
- Civil company
- Branch of a local/foreign/free zone/GCC company
- Sole establishment
- Holding companies
Free Zones
The free zones offer a relatively limited range of legal structures to choose from, such as:
- Free zone limited liability company
- Free zone company
- Free zone establishment
The differences in legal structures arise from the minimum capital requirement, liability sharing, number of shareholders, the emirate, and whether the shareholder is a natural person or a legal person.
UAE Mainland vs Free Zone: Benefits
Both the UAE mainland and free zones offer numerous benefits to businesses. In this section we list out the main ones.
Advantages of Setting Up in the Mainland
- Access to local market
- Flexibility in business activities
- Potential for a larger client base
- No requirement for a local agent/sponsor for businesses under the amended Commercial Companies Law
- Up to 100% foreign ownership, excluding activities of strategic importance
You can understand more about company formation in the UAE Mainland here.
Advantages of Setting Up in a Free Zone
- Free capital transfer
- Low custom tariff (0–5%) for almost all goods
- 100% foreign ownership
- 100% repatriation of profits
- Specialization in particular business domains
- Simplified business setup procedures
UAE Mainland vs Free Zone: Costs
The major costs associated with the UAE business setup process include:
- License application fee (including renewal)
- Rent
- Utilities
- Employment visas
- Compliance costs
- Employee compensation
These costs vary significantly between emirates, their mainland areas, and free zones. On average, the costs of setting up and operating a business are lower in the free zones compared to the mainland. However, specific cost comparisons should be made based on your business needs and chosen location.
Choosing between UAE Mainland and Free Zone
In the UAE business setup process, you have to choose between the mainland and free zones. This choice largely depends on your specific business needs and goals. The key factors to consider include:
- Business Objectives and Goals
Align your choice of ‘mainland vs free zone’ with your business objectives. If your business involves significant local interaction, the mainland may be ideal. However, if your business focuses on a niche sector or requires minimal local interaction, a free zone might be more suitable.
- Long-Term Growth and Expansion Plans
Your long-term expansion plans play a crucial role in choosing between mainland and the free zones. If your objective is to develop a wide client base in the Middle East, the UAE mainland would be advantageous due to increased connectivity and access to regional and global markets.
For example, you can learn the difference in company formation between the mainland and free zones in Dubai.
Conclusion
The UAE mainland offers broader market access and 100% foreign ownership for most businesses, but often at higher setup and compliance costs. Free zones provide benefits such as minimal export/import restrictions, 0% preferential corporate tax rate on qualifying income and lower business setup costs, but with limited access to the UAE market.
Your choice between mainland and free zones should be based on your business activity, target client base, long-term goals, and expansion plans. Consulting experts like Commenda can help you make an informed decision and aid in business setup in the UAE.
Key Highlights
- The UAE has two main economic jurisdictions: mainland and free zones. Mainland companies operate freely throughout the UAE and internationally, while free zones have limited market access.
- The key differences between the mainland and free zones center on ownership, taxation, and legal structures.
- The decision between mainland and free zones depends on factors like business objectives, target market, and long-term growth plans. Mainland offers broader market access but often with higher costs, while free zones provide tax benefits and easier setup with limited local market access.
Viren Mathias
.png)
.png)
.png)
