Starting a business in the United Arab Emirates (UAE) is an attractive proposition for entrepreneurs worldwide. The UAE boasts a favorable business climate, strategic geographic location, and a robust infrastructure, making it an ideal hub for startups and large corporations alike. However, when establishing a company in the UAE, one crucial decision is the choice between a Free Zone or a Mainland company. This article will guide you through the nuances of each option to help you make an informed decision.

Basic Differences

1. Company Registration

A Mainland company is a business entity registered with the Ministry of Economy and operates under the jurisdiction of the Department of Economic Development (DED) in the respective emirate. This framework allows added flexibility in trading and wider legal recognition.

In contrast, Free Zone companies operate in specific designated areas established by the UAE government to promote international trade and investment. Each of the 50+ Free Zones is managed by its own Free Zone Authority, leading to different regulations and requirements based on the specialization of each zone.

2. Ownership Structures

One of the most appealing aspects of setting up a company in the UAE is the possibility of 100% foreign ownership. Both Mainland and Free Zone companies allow this ownership structure, making it easier for investors from abroad to retain complete control over their business ventures.

However, it is essential to note that some Mainland activities may require a local partner, meaning an Emirati national must hold a certain percentage of shares in the company. The UAE Government has amended the federal Commercial Companies Law, allowing foreign investors to own up to 100% of certain businesses, removing the previous limitation of 49%. This change, enacted by Federal Decree-Law No. 26 of 2020, eliminates the requirement for a major Emirati shareholder, enabling non-Emiratis to establish onshore (Mainland) companies.

For instance, in Dubai, over 1,000 commercial and industrial activities qualify for full foreign ownership, although some strategic sectors remain restricted. Other emirates are following suit by continually extending the economic activities available for 100% foreign ownership.

In conclusion, while the reforms significantly enhance opportunities for foreign investment in the UAE, not all types of activities on the Mainland are available for 100% foreign ownership. Therefore, it is essential to verify the specific requirements for each business activity.

3. Operational Scope

The operational reach differs between the two types of company setups. Mainland companies can conduct business activities both within the UAE and internationally without limitations, providing broader market access. In comparison, Free Zone companies are limited to conducting business within Free Zones and internationally. This can restrict the ability of Free Zone businesses to trade directly in the UAE Mainland market unless through a local distributor.

To sum up, in the case of Free Zone companies, you should analyze Free Zone regulations, your business model, distribution strategy, and potential partnerships carefully. This includes understanding the limitations imposed by operating within a Free Zone, evaluating the necessity of a local distributor for accessing the Mainland market, and assessing how these factors may impact your overall business growth and operational strategy. Ultimately, when choosing between Free Zone and Mainland, it is crucial to understand the geographic focus of your business activities.

Benefits of Free Zone Companies

1. Significant Tax Benefits and Economic Incentives 
 

Free Zone companies have traditionally enjoyed significant tax benefits, which have become even more relevant in the light of the new corporate tax regulations introduced in June 2023. For instance:
 a corporate tax of 9% applies to businesses with taxable income exceeding AED 375,000, but Free Zone companies have the opportunity to obtain Qualifying Free Zone Person status and benefit from the 0% corporate tax rate (subject to meeting the criteria established by law). We will analyze tax rules for Qualifying Free Zone Persons in more detail in future publications.

Additionally, Free Zone licensees can import goods or equipment into the Free Zone from abroad without incurring customs duties, which can significantly lower their operational costs. Customs duties are only charged when goods leave the Free Zone and are brought into the UAE Mainland. 

2. Simplified Setup Process

Free Zones are known for their efficient and streamlined business setup processes, often offering package deals that include licensing, visas, and office space. This can lead to quicker and less bureaucratic business incorporation. Many Free Zones provide comprehensive administrative support, reducing the complexity and time needed to establish and maintain a business.

3. Flexible Office Solutions

Free Zones offer a range of office solutions, from flexi-desks to full-scale offices with different options of space that will satisfy business needs. This flexibility can be cost-effective, especially for startups or companies looking to minimize overheads, while large corporations may benefit from having ample space in well-equipped office environments.
 
4. Sector-Specific Advantages and Networking Opportunities
 
Free Zones often have regulations and frameworks tailored to the needs of specific industries, making them more attractive for businesses within those sectors.
 
A large number of Free Zones are designed around specific industries (e.g., technology, media, finance, logistics, etc.), providing companies with access to specialized facilities, industry networks, and like-minded businesses. Free Zones often foster a strong sense of community among businesses operating within them, offering networking events, industry-specific seminars, and collaboration opportunities that can lead to growth and innovation.

5. Ease of Company Closure

If a business needs to cease operations, the process of closing a company in a Free Zone is generally more straightforward and less costly compared to the Mainland. This flexibility can be a key factor for startups or businesses testing new markets.

Benefits of Mainland Companies

While Free Zones present numerous advantages, Mainland companies also offer compelling benefits worth considering:

1. Broader Market Access and Local Clients

Due to the ability to conduct business within the UAE market directly, Mainland companies can easily tap into the larger UAE market, offering their products or services to a broader customer base, including local consumers— an essential factor for retailers and service providers.

Many local companies and individuals prefer or are required to work with Mainland companies due to legal or regulatory reasons. Mainland businesses can directly engage with these clients without the need for intermediaries.

2. No Restriction on Office Location

Mainland businesses have the flexibility to set up their office or shop anywhere in the UAE. This allows businesses to strategically locate themselves closer to their customer base, enhancing accessibility and convenience.

A physical presence in key areas, such as downtown districts, malls, or high-traffic zones, can attract walk-in customers and enhance the company’s visibility.

3. Broader Range of Activities and Flexibility

Mainland businesses are able to engage in a broader range of business activities, offering more flexibility to adapt to market demands and customer needs. This contrasts with Free Zones, where activities may be narrowed to specific sectors. However, with over 50 Free Zones in the UAE, you are sure to find one that perfectly suits your specific business needs and industry focus.

4. No Limit on Number of Visas

Mainland companies can obtain an unlimited number of visas (subject to office space), which can be crucial for businesses planning to scale up their operations and workforce. This ensures that companies can adequately staff their operations to meet customer demand.

5. Ease of Collaboration and Partnerships

Mainland companies find it easier to form strategic partnerships with other local businesses, which can enhance their service offerings and improve customer satisfaction. Such collaborations can lead to comprehensive solutions that meet the diverse needs of customers.

Other Factors to Consider

When making your decision between a Free Zone and a Mainland setup, consider the following aspects:


• Type of business activity: Some business sectors may have restrictions or specific requirements that can influence your decision.
• Geographical scope: When choosing between a Free Zone and Mainland, it is crucial to understand the geographic focus of your business activities.
• Future growth plans: If you anticipate a rapid expansion that includes entering the local market, a Mainland setup might be the way to go.
• Funding and investment: Evaluate your financial projections, funding options, and how they align with the operational limitations posed by either structure.

Conclusion

The decision between establishing a Mainland or Free Zone company in the UAE is not one to be taken lightly. Each option presents unique advantages and potential drawbacks that can significantly impact your business operations and growth trajectory. 
 
To successfully navigate the intricacies of the business landscape in the UAE, it is crucial to conduct thorough research and consult with professionals who can provide personalized guidance tailored to your business goals. At DiLex Group, we are committed to being your trusted partner every step of the way, ensuring you make the best choice suited to your entrepreneurial ambitions.