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Sohaib Ikram
Sohaib Ikram serves as the Director of Emerhub in Malaysia.
When starting a business in the United Arab Emirates, one of the first questions a foreign entrepreneur faces is about which jurisdiction to choose.
There are 3 different jurisdictions in the UAE: mainland, free zone, and offshore. It is crucial to choose the right one as the wrong choice can result in restricted business opportunities as well as fines and penalties.
In this article, we will explore the difference between mainland and free zone companies, two of the popular choices for entrepreneurs looking to start their businesses in the UAE.
What is a Mainland Company in UAE?
Mainland companies are legal entities registered with an Emirate authority (Department of Economic Development). As a result, these companies enjoy a certain level of freedom in their operations and setup.
They can issue visas, do business freely with other companies in and outside the UAE, and potentially bid on government contracts.
According to new regulations, Foreigners can have 100% ownership of their mainland company in most activities. This is a significant change from older regulations where mainland companies needed to have a local owner with a 51% share in their company.
However, because of this added freedom, the setup and maintenance of a mainland company is slightly more complicated.
What is a Free Zone Company?
UAE has over 45 free economic zones also known as free zones with their own regulations and governing body known as Free Zone Authority (FZA). A free zone company is simply an enterprise registered with one of the designated economic zones in the UAE.
Free zone companies can offer their services to the global market and inside the free zones while benefitting from the zero tax policies. However, they cannot operate directly on the mainland. Moreover, it is generally faster to set up a free zone company compared to the mainland.
What is an Offshore Company in UAE
An offshore company is relevant to entrepreneurs who want to have a holding company in the UAE, without doing business inside the UAE.
It can facilitate international payments, manage trade, and take advantage of a favorable tax regime. An offshore company can also help manage ownership of a separate company inside the UAE.
Mainland Vs Free Zone: What’s the difference?
Here are some of the key differences between a mainland and a free zone company.
| Factor | Mainland | Free Zone |
|---|---|---|
| Scope of business | Can operate anywhere in the UAE and internationally | Can operate internationally and within the free zone |
| Taxation | 9% corporate tax on profits exceeding AED 375,000, no income tax | Exempt from corporate or personal income tax |
| Customs and Import/Export | Subject to customs duty | Exempt from customs duty |
| VAT | 5% | Generally 5%, some zones also offer 0% VAT advantage |
| Physical office | Depends on the type of business license | Can have a physical or virtual office |
| Ownership | 100% foreign ownership is allowed in specific sectors as per the latest regulations. Otherwise, a local partner with 51% ownership is required. | 100% foreign ownership |
| Visa eligibility | No restrictions, depending on office size | Limited visas |
| Annual Audit | Obligatory | Depends on the free zone |
| Regulatory body | Department of Economic Development (DED) | Free Zone Authority (FZA) |
How to Choose Between a Mainland and a Free Zone Company in the UAE for Your Business
Choosing the right jurisdiction in the UAE depends entirely on your business needs and long-term goals. However, here are a few considerations that can help with the process.
What is your planned business activity?
A major difference between mainland and free zones is the availability of activities. The mainland has over 2k possible activities that a business can opt for while most free zones have a subset of them based on the zone’s specialization.
As a result, before registering a business, it is essential to know which jurisdiction offers the activity that is relevant to your business.
Additionally, both mainland and free zones allow you to have multiple activities on one business license. However, it costs extra to add any more than one category to a single license.
Who are your clients/customers?
Another important aspect that you need to consider when choosing between the mainland and the free zone is your customers.
If you want to sell your products or services inside the UAE, a mainland company is the way to go. Mainland companies can trade freely across the UAE and abroad.
However, If you want to establish your business presence in the UAE while dealing with international clients, you can register a free zone company. That is because free zone companies can internationally and within the free zone, not on the mainland.
Here are some examples of when to use a free zone company and when to go with a mainland company.
| Activity | Common practice |
| International e-commerce store | Free zone company |
| Retail outlets in the UAE | Mainland company |
| Construction and contracting services | Mainland company |
| Media and advertising services for global clients outside the UAE | Free zone company |
| Consulting services targeting local UAE businesses | Mainland company |
As for an offshore company, by definition, it can not do business inside the UAE.
How many visas do you need?
Visas play an important role in the UAE. Given that over 80% of the population in the UAE is expats, it is safe to assume that anyone that you hire will need a visa, including yourself.
A mainland company does not have any restrictions on the number of Visas they can issue. The only consideration for them is to have a Labor Card, an AED 3,000 deposit for each employee visa requested, and the size of their office space. Also, the cost of Visas for mainland companies is significantly lower.
In comparison, a free zone company gets a quota of anywhere between 0-6 visas per license while the cost of visas is significantly higher.
Therefore, a mainland company can be the right choice if your business is labor-intensive.
An offshore company in the UAE does not get any visa quotas.
Corporate tax and tax breaks
As of today, mainland companies are required by law to file and pay a 9% Corporate Tax on profits exceeding AED 375,000 every year. However, this tax is only applicable if the business has an annual turnover of over AED 1 million.
On the other hand, free zone companies are not liable to pay corporate tax at the moment.
Value Added Tax (VAT)
When it comes to VAT, companies in both the mainland and free zones have to pay 5% VAT on their services. However, companies in certain designated free zones can enjoy 0% VAT. For example, the Jabel Ali free zone primarily entertains companies involved in the import/export of goods.
It is important to note that the mandatory VAT registration threshold in the UAE is AED 375,000 and the voluntary registration threshold is AED 187,500.
How does Emerhub help your business in choosing the right jurisdiction in the UAE?
Emerhub has over a decade of experience in assisting foreign entrepreneurs to start and excel in their businesses in the UAE and beyond. Our experts understand your specific business case and advise on the best type of mainland, free zone, or offshore company. This can give you the ability to do business and enjoy the best tax benefits.
Get in touch today for a free consultation.
