Mainland vs Free Zone Company in UAE

Mainland Company vs Free Zone Company

Choosing between a Mainland and a Free Zone company is one of the most significant decisions any business owner makes when entering the UAE market. Both the jurisdictions provide distinct benefits but the right choice relies on your business activity and target market along with ownership choices and long term growth plans. A Mainland business provides you the freedom to sell directly across the UAE and internationally without limitation while a Free Zone company provides 100% foreign ownership and is usually preferred by businesses aiming at import/export or international operations.

Getting to know the differences in ownership structure and office space needs along with visa eligibility and government approvals is important before choosing either option. This guide discusses the major distinctions so you can setup your business in the UAE easily.

The Difference Between Mainland And Freezone Companies In The UAE

Every day, we come across one common inquiry by many entrepreneurs who are interested to invest in the UAE Market as part of their global expansion: “What is the difference between mainland and free zone companies?”

This article will give you the most basic but major differences between LLC & Freezone establishments in the UAE.

Let us explain what a Mainland Company and a Free Zone Establishment are here.

Mainland Company:

A mainland company is an onshore company licensed by the Department of Economy and Tourism (DET) of the related emirate which is allowed to do business in the local market as well as outside UAE without any restriction.

Free Zone Company

A free zone establishment is incorporated within a designated jurisdiction of the emirate where the company is allowed to do business inside the same free zone or outside UAE. For commercial licenses and trading of physical goods, the company cannot do local business directly because the government has posed a limitation for trading in the local market through a distributor and by paying a 5% duty on the local market invoices. 

Comparison At a Glance

1. Scope of Business

Mainland Company can freely do business in the local market, any free zone or outside UAE. It applies to all commercial or professional licenses. 

Free Zone Company can do business within the same free zone or outside UAE. It is usually for entrepreneurs who wish to set up a base in UAE (tax optimization) for their international imports/re-exports. The restriction of local business through a distributor is mainly to differentiate the business in the local market by onshore company and free zone licenses used for imports and exports. The distributor has a Mainland license can act as your agent and charge a certain fee which is lesser than the 5% duty applicable on free zone invoices if they trade directly into the local market. In case the company chooses to use a distributor, the goods should be shipped in through the distributor itself.

Otherwise, a 5% duty is applicable for any goods coming out of the free zone. Restriction usually applies to commercial licenses bringing physical goods outside of a particular free zone into the local market. Professional licenses can still have the liberty of providing the services without much hassle to the local market. Marketing through Printed Media and Door to Door sales becomes limited with a free zone license.

2. Ownership Structure

According to the UAE’s Foreign Direct Investment reforms, 100% foreign ownership is now available for majority of commercial and professional activities on the mainland thus eliminating the previous need for a UAE National shareholder or Local Service Agent in the majority of cases. A small amount of strategic sectors that includes certain security and other nationally sensitive activities may need additional local shareholding or government approval. Free zone companies consistently provides 100% foreign ownership across all licensed activities with no UAE National partner needed at any step.

As compared with Mainland, the Free Zone license is 100% owned by the ex-pat partner. There is no need for UAE National partner/service agent in the license

3. Office Space

For every mainland license, there is a minimum requirement of 200 sq ft to be leased out on annual basis. Only then the Department of Economy and Tourism (DET) will issue the license. Ejari Certificate issued from the land department makes the annual tenancy contract, legal and presentable in DET for the issuance of the license.

Unlike Mainland, free zone licenses can be incorporated with or without a physical office. Free zone Authorities allow the licensees to use the common business centre desks for a minimum of 5 hrs/per week. It gives security to the new market entrants to save on the initial costs of registration. This facility of “plug in and go” business desks is also referred to as Flexi Desks/Smart offices.

4. Visas Facility

There is no limitation of visas on the mainland license, An E-quota (electronic quota) is issued to every company in the mainland by the Ministry of Labor which shows their visa eligibility and it can be increased if the company require more staff. Eligibility for visas depends on the office space. The more office space you have, the higher number of visas you may get. Outdoor sales staff/PRO services and driver/messenger visas do not fall under this condition.

Usually, every Free Zone license offers 2 visas on the smart office package. However, different free zones in UAE allow 3 – 6 visas on the smart office package. If any entrepreneur requires more visas then a physical office/warehouse has to be leased out to avail of more visas.

5. Approvals from Government Authorities

A mainland license does require standard government approvals per license. E.g. DET, DM(Dubai Municipality), Ministry of Labor (MOL), Department for Naturalization and Residency affairs of Ministry of interiors or Immigration (MOI). Some external government authorities approvals are required for particular business activities i.e. KHDA (Knowledge and Human Development Authority) for all Education related licenses, DHA (Dubai Health Authority) for all medical-related licenses, FOOD Department of Municipality for all food-related licenses, Civil defence, Real Estate Regulation Authority etc.

The main purpose of having a free zone establishment is for imports and re-exports and Free Zone authorities usually do not need approvals from external authorities for license issuance unless and until there are special activities which require external authorities' approval.

6. Corporate Tax Considerations

Both mainland and free zone businesses are governed by the UAE Corporate Tax regime. Standard mainland companies are taxed at 9% on taxable income of more than AED 375000 while income lower than this threshold is taxed at 0%. Free zone businesses can in majority of cases continue to benefit from a 0% Corporate Tax rate on eligible income in one condition that they are to be treated as a Qualifying Free Zone Person and maintain enough substance within the zone. Non eligible income earned by a free zone company that includes majority of the income from mainland sourced business is taxed at the standard 9% rate. Companies should analyze their expected income mix before strategizing that a free zone structure will be more tax efficient than mainland.

For all new entrepreneurs, it is always necessary to seek advice from their Business Consultants in order to choose the best trade/professional license and that license to be set up in the right jurisdiction. The right advice from experienced minds always serves the business needs in the long term.

Common Misconceptions About Mainland and Free Zone Companies

"Mainland companies always need a local sponsor"

This is outdated. After the FDI reforms, majority of commercial and professional mainland activities now allow 100% foreign ownership and a local partner or service agent is only needed for a restricted number of strategic sectors.

"Free zone companies can trade anywhere in the UAE"

Not correct. Free zone businesses are licensed to work within their own zone and internationally. Selling directly into the UAE mainland usually needs a distributor arrangement and a mainland branch or paying applicable customs duty on goods leaving the zone.

"Free zone setups are always cheaper than mainland"

Not necessarily. While a lot of free zones provide bundled packages, the true cost relies on your visa allocation and office needs along with business activity and ongoing compliance obligations. A mainland business setup can prove to be more affordable sometimes depending on your operational needs.

Mainland or Free Zone - Which Should You Choose?

Choose a mainland company if you:

• Wish to sell directly to customers or companies across the UAE
• Plan to bid for government contracts or tenders
• Want to grow your team and require higher visa allocations
• Require a physical retail or office presence in a particular emirate
• Want unlimited access to the full UAE market for long term

Choose a free zone company if you:

• Mainly cater to international clients or re-export goods
• Plan to keep starting setup costs and office commitments low
• Are a solo founder or small remote team
• Work in a particular sector with a dedicated free zone
• Don’t require selling directly with UAE mainland customers

Frequently Asked Questions

Do mainland companies still need a UAE National partner?

No. Mainland companies does not require a UAE National partner for most activities. Full foreign ownership is available for most of the commercial and professional mainland licenses after the Foreign Direct Investment reforms.

Can a free zone company sell directly to UAE mainland customers?

A free zone company cannot direct trade in most cases. A free zone company usually requires a local distributor or must pay necessary customs duty on goods sold into the mainland market which depends on the licensed activity.

Is a free zone company always cheaper to set up than a mainland company?

It not necessary that a free zone company is always cheaper than a mainland company. Free zone packages are usually bundled and appear cost effective upfront. The cost relies on your visa requirements and office needs along with business activity. In a lot of cases a mainland setup can be priced or better valued in long term.

Do both mainland and free zone companies pay UAE Corporate Tax?

Yes both mainland and free zone companies pay UAE Corporate Tax. Mainland businesses are taxed at 9% on taxable income of more than AED 375000. Free zone businesses may be eligible for a 0% rate on qualifying income if they fulfil Qualifying Free Zone Person conditions. The non eligible income is taxed at the standard 9% rate.

Can I convert my free zone company to a mainland company later?

In a lot of cases businesses can restructure or set up a parallel mainland entity as they scale but the process differs by free zone and business activity. It is best to consult a business setup consultant such as Flyingcolour Business Setup to confirm the needs for your specific situation.

This blog is written by Mamta Joshi in Flyingcolour business setup services. For a detailed discussion about mainland company formation and Dubai Freezone company setup please contact +971 44542366 or email him at info@flyingcolour.com.