Are you thinking about starting your own business and wondering about the best place to set it up? A Free Zone company in the UAE might be one of the options that comes to mind. But is it the right choice for you?
In this article, we will provide you with the key differences between setting up a company in the Mainland versus a Free Zone, focusing on the advantages and disadvantages of each, to help you make a strategic decision that ensures the success of your business in the UAE market.
What is a “Free Zone company in the UAE”?
Before we clarify the differences between setting up a Mainland company versus a Free Zone company in the UAE, you must first understand what a Free Zone company in the UAE means and discover the pros and cons behind this type of company.
A Free Zone company in the UAE can be defined as a commercial entity established in a specific geographical area within the United Arab Emirates.
These zones provide a flexible investment environment for investors and entrepreneurs.
This flexibility includes allowing 100% foreign ownership of these companies and eliminating taxes or any import/export restrictions.
Some people confuse Free Zone establishments with Free Zone companies, but the main difference between these two types lies in the number of owners or shareholders, which directly affects the company’s structure and management.
Free Zone establishments are usually owned by a single person or one shareholder, making them suitable for small businesses, while Free Zone companies include two or more partners and are considered ideal for medium or large companies.
The UAE has around 50 Free Zones. Some of these are specialized in specific sectors like technology or logistics, while others have a multi-purpose license allowing for various activities.
Despite the advantages that Free Zone companies in the UAE offer, they also come with several disadvantages. The following are the pros and cons:
Advantages of Establishing a Free Zone Company in the UAE:
- 100% Foreign Ownership: Allows you to have complete ownership of your company without the need for a local partner.
- Tax and Customs Exemptions: There are no corporate taxes, and goods imported to or exported from the Free Zone
- Easy and Fast Registration: The company setup procedures are simple and efficient, making it easy to start operations quickly.
- Freedom to Repatriate Profits and Capital: You can transfer all your profits and capital back to your home country without restrictions.
- Employee Visas: It is possible to issue residency visas for employees and their families, which helps attract talent.
Disadvantages of Establishing a Free Zone Company in the UAE:
- Limited Local Market Access: Free Zone companies cannot conduct business directly outside the Free Zone’s boundaries.
To expand into trading or distributing in the local UAE market, a Free Zone company must use a local distributor or registered agent.
- Inability to Work in Certain Areas: Some activities that require providing services to a client outside the Free Zone (such as building repairs or maintenance) are prohibited.
- Ineligibility for Government Tenders: Free Zone companies are not allowed to participate directly in government tenders or contracts.
The UAE is known for having many zones suitable for company formation, including Jebel Ali Free Zone, Dubai Airport Free Zone, Dubai Healthcare City, Ras Al Khaimah Free Zone, and Masdar City.
Free Zones vary in their specializations, ranging from those that focus on specific sectors like Dubai Airport Free Zone, which concentrates on logistics and the aviation sector, to others that have a wider variety of specializations like Ras Al Khaimah Free Zone.
What are the Advantages of Establishing a Mainland Company in the UAE?
Mainland companies differ from Free Zone companies in the UAE in the scope of their commercial activities. Mainland companies can conduct their business activities anywhere within and outside the UAE, with the exception of Free Zones.
These companies are the best choice for entrepreneurs who want direct access to the local UAE market, the ability to participate in government tenders and projects, and the option to open multiple branches across the country.
These companies come in various legal forms, including: Limited Liability Companies, Sole Proprietorships, Civil Companies (for professionals such as doctors and engineers), and branches of foreign companies.
The advantages and disadvantages of establishing a Mainland company in the UAE are varied.
The following are the most important advantages and disadvantages you should take into your consideration before making the decision to set up your company on the Mainland.
Advantages of Establishing a Mainland Company in the UAE:
- Full Market Access: Companies operating on the Mainland can work anywhere within the UAE and provide their services directly to customers and consumers throughout the country.
- 100% Foreign Ownership: Thanks to new laws, foreign investors can now fully own their Mainland companies in most commercial activities, without the need for a local partner.
- Operational Flexibility: There are no restrictions on business dealings between Mainland companies. They can freely interact with clients and government entities, in addition to opening multiple branches.
- Tax Benefits: These companies benefit from the favorable tax system in the UAE, as there is no corporate or personal income tax.
- No Minimum Capital Requirement: In many cases, there is no minimum level of capital required to start a company, making it easier for startups to begin operations.
Disadvantages of Establishing a Mainland Company in the UAE:
- Higher Costs: The costs of establishing and operating a Mainland company in the UAE are higher compared to Free Zone companies.
- Longer Procedures: The process of setting up a Mainland company takes more time, as it involves obtaining approvals from several government bodies.
- Full Liability: In the case of a sole proprietorship, the owner bears full liability for the company’s financial obligations.
From the above, we can say that Mainland companies offer an excellent opportunity for investors aiming to expand and grow in the local UAE market, especially in commercial activities that require direct interaction with customers.
9 Key Differences Between a Mainland Company and a Free Zone Company in the UAE
To make a crucial decision like establishing your company on the Mainland or in a Free Zone, you must first be sure of your business’s nature and goals.
Here is a detailed comparison between setting up a Mainland company and a Free Zone company in the UAE:
- Scope of Work
- Mainland Companies: Enjoy great flexibility, as they are allowed to operate in any place in the UAE, including within Free Zones.
They can also participate in government tenders and provide services to clients anywhere in the country.
- Free Zone Companies: Their operations are focused on activities outside the UAE, and they are restricted to their specific Free Zone.
To expand and work in the local market, they must do so through a registered local agent.
Additionally, they are prohibited from activities that require leaving the Free Zone (such as maintenance or delivery).
- Ownership
- Mainland Companies: Thanks to new laws, foreign investors now can own up to 100% of the company assets in most commercial and industrial activities, with the exception of some strategic activities.
- Free Zone Companies: Allow for 100% foreign ownership in all available activities.
- Taxes
- Mainland Companies: Are subject to a 5% VAT and a 9% corporate tax on profits exceeding AED 375,000.
- Free Zone Companies: Benefit from comprehensive tax exemptions (100%) on corporate taxes, personal income, and customs duties.
- Employment Requirements
- Mainland Companies: 2% of the company’s total employees must be Emirati nationals.
- Free Zone Companies: Are not subject to any Emiratisation requirements.
- Office Requirements
- Mainland Companies: Must secure a physical office space no less than 100 square feet.
- Free Zone Companies: Have no mandatory requirement for a large office space and offer flexible options like virtual offices.
However, if a physical office is rented, it must be located within the Free Zone.
- Setup Process
- Mainland Companies: Setting up companies in mainland are mainly regulated by the Department of Economy and Tourism (DET) in each Emirate, and the procedures take a longer time.
- Free Zone Companies: Are managed by their own Free Zone authority, which makes the setup process faster and more flexible.
- Required Capital
- Mainland Companies: There is usually no specific minimum capital requirement; the amount is determined based on the legal structure.
- Free Zone Companies: The minimum capital required to establish a company varies from one Free Zone to another.
- Visas
- Mainland Companies: There are no limits on the number of visas, provided the number is proportional to the company’s size and activity.
- Free Zone Companies: There is a specific limit on the number of visas per company, which can be increased by renting a larger office space.
Ultimately, the decision of the most suitable location for your company depends entirely on your business objectives.
By knowing the fundamental differences between the two, you can make an informed decision that guarantees the success of your project in the UAE market.
ATMACSS | Management Consultancy in the UAE
Does the process of setting up your company in the UAE seem complex and challenging? You are not alone in this!
ATMACSS Management Consultancy is here to be your strategic partner.
We understand the magnitude of the difficulties you may face when choosing between the Mainland and Free Zones.
That’s why we are here to support you, helping you understand the key differences, determine the most suitable option for your business, and complete all the necessary legal procedures to ensure your company is successfully established. Contact us now.
