The United Arab Emirates (UAE) has emerged as a leading global hub for business and investment. Its strategic location, developed infrastructure, and favourable policies make it highly attractive for entrepreneurs looking to set up operations in the region. A key decision that businesses need to make when establishing themselves in the UAE is choosing between free zone and mainland company formation. While both offer benefits, there are some fundamental differences between the two models. This article will provide a comprehensive guide to understanding these key differences similar to business consultants in the UAE.
Introduction
The UAE provides two primary options for company formation in Dubai – setting up in one of the many free zones or forming a mainland company under the jurisdiction of the UAE Department of Economic Development (DED). The right choice depends on factors like your business activities, target markets, and ownership preferences. Outlining the differences between free zones and mainland entities will enable you to make an informed decision that is aligned with your objectives.
Overview of Free Zone Formation
Free zones are special economic zones in the UAE that allow 100% foreign ownership of companies within a designated area. Some key features of free zone companies include:
- 100% foreign ownership – No requirement for an Emirati partner or sponsor
- Tax exemptions – No corporate tax or personal income tax
- Simplified registration – Streamlined setup processes through free zone authorities
- Repatriation of capital and profits – Ability to repatriate funds outside the UAE easily
- Virtual offices – Options for registering with minimal physical office presence
Some of the most popular free zones in the UAE are the RAKEZ, IFZA, MEYDAN, Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone (JAFZA), Dubai Airport Free Zone (DAFZA), Abu Dhabi Global Market (ADGM), and Sharjah Airport International Free Zone (SAIF Zone). Each caters to specific industries like trading, manufacturing, or services.
Setting up a business in the freezone
- Determine the Nature of Your Business Activity
UAE free zones offer several types of business licenses to investors and entrepreneurs based on the nature of business. Some of them are:
- Commercial Trade
- Consultancy Services
- Industrial
- Educational
- Media
- eCommerce
- Determine Your Company’s Legal Structure
The legal structure of a company depends on the nature and requirements of the business. It defines the laws and regulations to which companies have to adhere to.
- There are 3 legal forms of businesses in UAE free zone
- Free Zone Limited Liability Company (FZ LLC)
- Free Zone Company (FZ Co.)
- Free Zone Establishment (FZE)
- Register the Trade Name
Trade name refers to the name of the company. It must be unique and must not be similar to the name of any other registered companies. You can apply to obtain a trade name through the respective departments of economic development via its website or smart application.
- Select Business Space and Location
- There are more than 40 free zones in the UAE. To set up a new company, you can choose one that matches the nature of your business activity.
- Choose a business space for your company
- Free zones in the UAE give you several options to own or rent an office, or buy land to set up your factory or office building. If you want to obtain an independent/professional license, you can rent an office or register with a virtual office. The office space will depend on the number of employees and the type of commercial activity of your company.
- Office spaces in free zones come either fully equipped or partially furnished, and can be rented or purchased after a commercial license is issued.
- In most cases, it is the free zone authority that issues rental contracts.
- Access to public utilities, communications and the internet
- The services and facilities offered vary from one free zone to another. In general, infrastructure at all zones is well-developed, with-IT support services including telephone and high-speed internet connections.
- Obtaining the Initial Approval
- You must complete all requirements and submit necessary documents to obtain the initial approval to open a new company. Some activities such as tourism, travel and health will require additional government approvals that must be obtained from the relevant authorities.
- Documents commonly required for companies
- Completed application form
- Business plan
- Copy of existing trade license/registration certificate (if applicable)
- Passport copies of the company’s shareholders and appointed manager
- Registry Identification Code Form (RIC) for appointed manager (original and notarized)
- Specimen signatures of the company’s shareholders and appointed manager
- Title deeds (if applicable)
- A brief letter clarifying the investment idea and the investor’s plan (Letter of Intent)
- 2 years audited financial reports or certificate of reference from a bank (as required)
- Documents commonly required for freelancers/professionals
- Application for registration
- Curriculum vitae or profile
- Reference letter from a bank
- Registry Identification Form (RIC) for Director (original and notarized document)
- Registration and Payment of Fees
- Pay fees and secure company license
- Fees include company license issuance fee, which depends on the type of license
Overview of Mainland Formation
Mainland companies operate under the jurisdiction of the DED and can be established across the seven Emirates. Some features include:
- Wider market access – Can operate throughout the UAE after setup
- Local partner – Local partner is required for certain activities
- Broader activities – A wider range of economic activities permitted
- Government ties – Easier to conduct business with government entities
Common mainland company structures are Limited Liability Company (LLC), sole proprietorship, branch of a foreign company, and civil company. Overall, mainland UAE company registration provides greater opportunities to penetrate the domestic UAE economy.
Setting up a business in the mainland:
- Identify the Nature of Your Business Activity
The UAE offers 6 main types of economic licenses
- Occupational
- Tourism
- Industrial
- Commercial
- Agricultural
- Professional
- There are more than 2,000 economic activities in the UAE
- Economic licenses can include several economic activities. The nature of the company’s activity determines the type of license that will be issued.
- Determine Your Company’s Legal Structure
- A business structure is primarily based on the needs of the business and will determine the laws and regulations the company must adhere to.
- Legal forms of businesses in the UAE
- Sole establishment
- Branch of a GCC company
- Civil company
- Branch of a local company
- Limited liability company
- Holding company
- Public joint stock company
- Representative office of a foreign company
- Private joint stock company
- Register the Trade Name
- The trade name is the name of the company, which must be unique and not be similar to the name of any other registered company. You can apply for a trade name through the chosen emirate’s Department of Economic Development either on its website or smart application, or in person.
- Apply for Initial Approval
- An initial approval is the UAE Government’s ‘no objection’ towards a particular business being established in the country. This approval also allows the investor to proceed with the next steps to set up a business and for the authorities to issue the license. It does not, however, grant the investor permission to run the business or practice the business activity.
- Create LSA or MOA
- A Memorandum of Association (MOA) is required if the legal form of the company is a civil company, limited liability company, public shareholding company, or private shareholding company. A local service agent agreement (LSA) is required if it is a sole proprietorship.
- Choose Your Business Location
- All businesses in the UAE must have a physical address to operate from. The company premises and location must comply with requirements specified by the emirate’s Department of Economic Development, as well as zoning policies and regulations of local municipalities or other competent authorities. In Dubai, the tenancy contract for office or warehouse space has to be registered through the Dubai Land Department’s Ejari portal.
- Apply for Additional Government Approvals
- In some cases, additional approvals from government entities governing certain business activities are required.
- Submit Required Documents
- Receipt of initial approval and copies of all previously submitted documents
- Copy of lease contract, duly attested
- Memorandum/s of Association, as required
- Approvals from other government entities, as required
- Pay Fees and Collect License
- Customers can collect the business license from service centres of the economic department or through their website.
- Register Your Company with the Chamber of Commerce and Industry
- Registration of the company must be in the same emirate where it has been
- incorporated.
- Federation of UAE Chambers of Commerce & Industry• Abu Dhabi Chamber of Commerce and Industry
- Dubai Chamber of Commerce and Industry
- Sharjah Chamber of Commerce and Industry
- Ajman Chamber of Commerce and Industry
- RAK Chamber of Commerce & Industry
- UAQ Chamber of Commerce and Industry
- Fujairah Chamber of Commerce and Industry
Key Differences Between Free Zone and Mainland Company
While free zones and mainland offer their pros and cons, understanding how they differ in key aspects is critical for decision-making:
Ownership Structure
- Free Zone: 100% foreign ownership permitted
- Mainland: A local partner is required for certain activities
Governing Authority
- Free Zone: Free zone authorities like DMCC, JAFZA, etc.
- Mainland: Department of Economy and Tourism (DET)
Business Activities
- Free Zone: Restricted to activities tied to the free zone
- Mainland: Significantly wider range of activities. Cross-functional activities are possible
Geographical Scope
- Free Zone: Limited to free zone area
- Mainland: Can operate across all seven Emirates
Office Space
- Free Zone: Flexible physical office options (flexi- desk, dedicated desk, separate office) inside a freezone.
- Mainland: Facility can be obtained from anywhere in a Mainland
Taxation
- Free Zone: Liable for VAT and potential corporate taxes (subject to conditions)
- Mainland : Liable for VAT and potential corporate taxes
Customs Duty
- Free Zone: Exempt for goods imported into the free zone
- Mainland: Subject to customs duty
Visa Quotas
- Free Zone: Restricted employment visas tied to office
- Mainland: More flexible visa quotas based on activities
Pros and Cons of Free Zone Company
Pros
- 100% foreign ownership
- Business activity aligned with free zone
- Tax exemptions
- Minimal bureaucracy and quick setup
- Option for virtual office
Cons
- Limited to free zone geographical area
- Constrained local market access
- Restrictions on business activities
- Limited employment visas tied to office space
Pros and Cons of Mainland Company
Pros
- Access to the broader UAE market
- Freedom to operate across the Emirates
- No restrictions on activities
- Easier trade with government entities
- More flexible employment visa quotas
Cons
- Higher business setup and operating costs
- Subject to VAT and potential corporate taxes
- Bureaucracy and delays in licensing
Which One Should You Choose?
The right choice between free zone and mainland company formation and business setup in Dubai, UAE depends on your business model and priorities:
Go for the mainland if you:
- Plan to service the domestic market significantly
- Require broader business activities
- Have a local partner or sponsor readily available (for certain business activities only)
- Are willing to navigate greater bureaucracy
Go for the free zone if you:
- Wish to retain 100% ownership
- Have a focused/niche business activity
- Are looking to minimize taxation
- Prioritize quick and simple business setup
Conclusion
While free zones and the mainland offer their unique advantages, your priorities regarding ownership, activities, taxation, market access, and setup costs should drive the decision. Assessing your short- and long-term business goals will enable you to choose the model that’s best aligned for success. With this comprehensive comparison, you can make an informed decision on company formation in Dubai. To navigate the complexities of company formation and ensure you select the right model, Profound’s expert business setup services are here to assist. From initial consultation to handling legal formalities, they provide end-to-end solutions for setting up your business in Dubai. Visit Profound UAE to get personalized guidance and start your journey towards business success in the UAE.
