Key Learnings:

• Mainland allows 100% foreign ownership since 2021.
• Mainland companies can operate freely throughout the UAE.
• Free zones generally have lower setup costs.
• Mainland offers broader operational flexibility compared to free zones.
• Mainland requires compliance with more complex regulations.

Over the last decade or so, the United Arab Emirates has deemed itself one of the fastest-growing hubs of business all across the globe. The country’s central location allows entrepreneurs to access its excellent strategic location for running businesses internationally. 

Further, it connects big centers of the world, such as Beijing, Hong Kong, Singapore, and London, etc. Several factors have led to this rise, including governance, innovation, prosperity, foreign investments, FDI inflows, and GDP per capita increment. 

The chosen business structure influences everything from taxes to day-to-day operations to how much of your personal assets are at risk. After all, you must select a business structure that gives you the perfect balance of benefits and legal protections. 

Before a business setup in Dubai, UAE, you will need to choose a business structure. Most businesses also need to file for appropriate permits and licenses and need to get a tax ID number. 

This article helps you decide which placement of your business organization is suitable for you—a mainland or free zone business. Various factors, such as environmental considerations, taxation policies, etc., matter here. Read below to learn more. 

1. Understanding Mainland and Free Zone

A mainland business operates inside the jurisdiction of the mainland of the UAE. The mainland offers the freedom to conduct business activities across the UAE and engage in various industries and sectors. 

However, a mainland business must hold at least 51% of the shares, support economic development and growth, and promote local participation. Restrictions are lower for mainland business setups in Dubai. 

The companies operating within designated free zones in the UAE are deemed freezone businesses. In order to attract foreign investments, these free zones have been established. 

Your free zone businesses will be limited to operating within the specific area of the free zone, allowing your organization to engage in activities related to specific industries within that specific zone. 

The main differences between mainland and free zone businesses in Dubai are the structure of ownership, tax exemptions, and access to the market. 

2. Ownership and Control

Mainland:

When it comes to business setup in Dubai, it is very important to understand the ownership and control. As of June 2021, foreign investors can own 100 percent of mainland businesses in the UAE. This is owing to the Federal Decree Law number 26 of 2020, which was known to amend the Law of UAE Commercial Companies. 

This amendment removed the necessity for a UAE national to own at least 51 percent of a mainland company’s shares. 

In addition, companies wishing to become joint stock companies can sell through IPOs, after the approval of relevant authorities, no more than seventy percent of the company, instead of the earlier limit of 30 percent. 

Free Zone:

Freezone companies always had the provision of 100 percent foreign ownership. Without the necessity of a local sponsor or partner, offshore companies can own the whole of a company in a free zone. International investors looking for 100 percent ownership of their companies find this offer lucrative. 

3. Market Access and Business Activities

Mainland:

Your business, if established as a mainland company, can directly engage with government entities and the UAE market. This provides you the opportunity to dive into a more extensive clientele within the country. 

The unrestricted operational scope allows businesses to diversify their operations and adapt to market changes much more quickly, allowing a competitive edge. 

Regarding business activities and geographic operations, the companies operating on the Mainland enjoy greater flexibility. Unlike free zones, these companies do not limit the scope of permitted activities. They can engage in almost any professional, industrial, and commercial activities within the laws of the UAE. 

Free Zone:

Each freezone business in Dubai has its own set of rules regarding the number of permissible business activities. Furthermore, a license is required to operate in free zone businesses. 

Free zones were specifically designed to attract specific types of businesses, such as media companies, tech startups, or manufacturing firms. 

Hence, the scope of permitted activities is often tailored to the focus of free zones. 

4. Taxation and Financial Considerations

Mainland:

The following corporate structure is followed for licensed businesses operating on the mainland of the UAE. A taxable person is subjected to a zero percent tax rate on taxable income up to AED 375,000. 

Furthermore, a nine percent corporate tax is applicable to taxable income above AED 375,000.

Free Zone:

Businesses operating in the free zones face a varied tax structure. A zero percent tax applies to the qualified income of businesses recognized as qualifying free zone persons (QFZP). 

A nine percent corporate tax may be levied on non-qualifying income in the free zone, although other reliefs and exemptions may be applied. This new tax structure affects all those businesses operating in the UAE, including foreign businesses with offices in different parts of the world. 

5. Regulatory Environment and Compliance

Mainland:

Your mainland business setup would involve more complex procedures and require proper compliance with federal and local regulations. However, mainland companies enjoy flexibility in terms of business processes. 

The regulatory landscape for mainland businesses is more extensive as it encompasses commercial regulations, labor laws, and other relevant legislation.  

Free Zone:

Streamlined procedures have to be followed by free zone setups. This allows quicker licensing and registration. Specific industries and activities are present in free zones that are altered explicitly. 

This limits the business’s range of operations within the zone. Compliance requirements in every free zone depend on the specific industry to which it applies. 

6. Costs of Setup and Operation

The cost of set up and operations in a company in the UAE depends on whether it is a free zone company or a mainland one. The cost to set up a company in the free zone can range between AED 5,000 and AED 50,000, depending on which freezone and the license type. 

Operational costs and the initial set-up cost are lower for a free zone company. Several biases and access to local markets can be restricted in the case of free zone companies. 

On the other hand, you can set up a company in the UAE mainland, ranging from AED 15,000 to 35,000 depending on the license type, business size, and other factors such as office space. 

Mainland companies enjoy higher market access and flexibility for a higher cost of setup and operations. 

7.  Ideal Business Scenarios for Each Option

When to choose Mainland and when to choose Free Zone?

A mainland company is ideal for businesses primarily focused on servicing a vast market with unrestricted access across the country. Free zone companies are best suited for businesses heavily involved in international trade, specifically when targeting markets outside the UAE. 

Companies looking for government tenders and contracts require a mainland company, while a free zone company is mostly technology start-ups, creative industries, and consultancy firms. 

A Quick Recap 

Criteria	Mainland	Free Zone
Ownership	100% foreign ownership allowed (since 2021)	100% foreign ownership
Market Access	Can operate throughout the UAE	Restricted to specific free zones
Operational Flexibility	Broader operational flexibility	Limited operational flexibility
Setup Costs	Higher setup costs (AED 15,000 – 35,000)	Lower setup costs (AED 5,000 – 50,000)
Tax Structure	9% corporate tax on profits above AED 375,000	Zero or varying tax rates based on activities
Regulatory Compliance	More complex regulations and compliance processes	Streamlined registration and compliance
Business Activities	Diverse range of activities permitted	Specific activities tailored to industry focus
Suitable For	Ideal for businesses targeting local market	Best for international trade and startups

Conclusion

The UAE has both benefits and loopholes regarding mainland and free zone companies, with their specific set of pros and cons. You should judge based on what market your company wants to cater to before business setup in Dubai, UAE. 

JSB Incorporation is here to help with business setup in the mainland or free zone. Visit our website today and book a free consultation.