What is the Difference between Mainland and Freezone Company?

The UAE is a top spot in the Middle East for starting a business. It is known for its welcoming environment for various industries and nationalities. It offers a stable, business-friendly setting, attracting investors worldwide. Entrepreneurs can incorporate their business within a free zone or on the mainland. This decision often prompts questions like, 'What is the difference between mainland and freezone companies?' and 'Which option best aligns with my business needs?'

Each choice presents its own set of advantages, limitations, and opportunities tailored to your venture's specific requirements. This article aims to guide you through these considerations, help demystify the process, and inform you of your decision on where to establish your business in the UAE.  

Looking to establish your business in the UAE, whether in the mainland or a free zone? At Filings.ae, we're ready to assist with every aspect of your business setup journey in the UAE.

Mainland company: What is it?

A mainland company in the UAE is a business entity registered under the Economic Department of the particular emirate it operates. Unlike freezone companies, mainland entities can conduct business anywhere within the UAE and beyond without geographical restrictions.

Here are the benefits of establishing a mainland company:

• Unrestricted ability to operate across the entire UAE.
• Full exemption from personal income taxes.
• Complete freedom to return all profits and capital to the investor's home country.
• Eligibility to compete for and undertake government projects in the UAE.
• No limit on the issuance of visas, facilitating workforce expansion as needed.
• Flexibility to choose office locations within the emirate of registration and open multiple branches, enhancing local market presence.
• Free access to international markets without any limitations.

Freezone company: What is it?

A freezone company in the UAE is a business set up within one of the country's special economic zones. Each free zone caters to specific industry sectors and offers a business-friendly environment with its own set of rules and regulations, separate from those governing mainland businesses. It is ideal for companies targeting regional and global markets from a UAE base.

Establishing a company in a free zone comes with several advantages:

• Complete ownership by foreign investors without requiring a UAE national sponsor.
• Streamlined and efficient company setup process.
• Full repatriation rights for both capital and profits.
• Total exemption from import and export duties.
• Confidentiality of shareholders' information from public disclosure.
• Simplified recruitment procedures, making it easier to build a team.
• Access to business advisory services and networking opportunities provided by free zone authorities.

Key Differences Between Mainland and Freezone Company

Key differences between Mainland and Free Zone companies in the UAE are outlined in the following sections, highlighting the distinct features and regulations that set these two business entities apart:

Ownership

Ownership is a fundamental aspect that differentiates mainland companies from free zone entities in the UAE:

Mainland Company

Before 2021, international investors less favoured mainland companies due to ownership restrictions. Traditionally, the UAE law required a local Emirati sponsor to hold at least 51% of the business, limiting foreign ownership to 49%.

The recent amendment to the UAE's company law has significantly shifted this landscape, allowing foreign investors to own 100% of mainland companies in many sectors. However, this full ownership privilege is sector-specific and determined by the government, maintaining the traditional ownership structure for certain business activities.

Free Zone Companies

Freezone companies in the UAE are not bound by these ownership constraints. From the outset, foreign investors are entitled to 100% business ownership without needing a local sponsor.

This autonomy in ownership is a key attractor for foreign investment in freezones, as it allows international business owners full control over their operations without mandatory local partnership.

Office Space Requirements

• Mainland Companies: In the UAE, mainland businesses must secure a physical office space depending on the type of business license to meet the regulatory requirements for operation.
• Free Zone Companies: Freezone entities enjoy more flexibility regarding office space. No stringent rules enforce a physical office; companies can opt for actual offices, work without a traditional office setup, or utilize virtual office services.

Business Scope and Operational Boundaries

The core distinction in operational scope between mainland and freezone companies in the UAE lies in their geographic and market access:

• Mainland Companies: These entities can conduct business freely across the entire UAE, including all seven emirates and their freezones, without any restrictions.
• Free Zone Companies: While freezone entities benefit from incentives like tax exemptions and full foreign ownership, they need to improve their direct operational reach within the UAE mainland market. To conduct business outside their designated freezone, free zone companies must either partner with a local distributor or agent who holds the necessary licenses or establish a mainland branch.

Auditing Requirements

• Mainland Companies: In the UAE, mainland companies must undergo an annual audit at the end of each fiscal year. This audit must be carried out by an independent auditor who prepares the financial statements in compliance with International Financial Reporting Standards (IFRS).
• Free Zone Companies: The requirement for an annual audit is not uniformly enforced across all free zone entities. While some free zones and certain types of businesses within these zones must conduct annual audits of their accounts, others may not be subject to this obligation.

Minimum Capital Requirements

• Mainland Companies: In the UAE, the minimum capital requirement for a mainland company is determined by the nature and scope of its business activities. The specific amount varies depending on the type of business and the licensing requirements set forth by the Department of Economic Development (DED) in the respective emirate.
• Free Zone Companies: For businesses established within free zones, the free zone authority dictates the minimum capital requirement and can vary from one free zone to another.

Regulatory Authorities and Business Setup

• Mainland Companies: Establishing a mainland company in the UAE requires obtaining approval from the respective emirate's Department of Economic Development (DED). The DED is responsible for issuing trade licenses to businesses operating on the mainland.
• Free Zone Companies: In contrast, each free zone in the UAE operates under its own Free Zone Authority, which sets the rules and regulations for businesses within its jurisdiction.

 Cost of Establishing the Company

• Mainland Companies: Setting up a business on the UAE mainland involves securing a physical office space that meets the minimum requirement of 200 square feet, which can be a significant cost factor. Besides leasing or purchasing office space, additional costs, such as utility bills, fit-out expenses, and maintenance fees, contribute to the financial outlay required to establish a mainland company.
•  Free Zone Companies: Establishment costs for free zone companies can be more economical due to their flexible office space requirements. Many free zones offer various office solutions, including shared workspaces, serviced offices, and virtual offices, which can significantly reduce the initial and ongoing costs associated with physical premises.

Read our article on Dubai Company Registration Cost

Workspace Requirements

The workspace prerequisites for companies in the UAE vary significantly between mainland and free zone entities:

• Mainland Companies: A physical office space is a mandatory requirement for businesses on the mainland, with a minimum size of 200 square feet. Once the requisite office space is secured, the Department of Economic Development (DED) in the respective emirate will issue the necessary business license, allowing the company to commence its operations.
• Free Zone Companies: In contrast, free zone entities enjoy greater flexibility regarding their workspace arrangements. Many free zones in the UAE offer the option of virtual offices or flexi-desks, catering to businesses that may not require a permanent physical office or those looking to minimize overhead costs. This adaptability makes free zones particularly attractive to startups, freelancers, and international companies seeking a foothold in the UAE without the commitment of a conventional office lease.

Visa Allocation

• Mainland Companies: There are no inherent visa restrictions for mainland entities, allowing them the flexibility to apply for as many visas as needed. However, the actual number of visas a mainland company can obtain is directly tied to the size of its office space. Larger office spaces qualify for more visas, meaning companies needing more visas must expand their physical premises accordingly.
• Free Zone Companies: Free zone entities face certain limitations on the number of visas they can secure, which is governed by the specific rules of each free zone authority. The visa quota for free zone companies typically varies, often ranging from one to six visas, based on the office size or the type of business package chosen by the company.

Also read: Freezone Visas in the UAE

Taxation

The taxation landscape for companies in the UAE differs between mainland and free zone jurisdictions:

• Mainland Companies: As part of the UAE's effort to align with global tax standards, a corporate tax regime has been introduced, imposing a 9% tax on profits exceeding AED 375,000. This move marks a significant shift in the taxation landscape for mainland businesses.
• Free Zone Companies: Companies established in free zones continue to enjoy significant tax advantages, including corporate and personal income tax exemptions.

Customs and Import/Export

• Mainland Companies: Entities set up on the UAE mainland are subject to customs duties when importing goods. These duties are typically levied at a standard rate, part of the broader regulatory framework governing trade and commerce across the UAE's borders.
• Free Zone Companies: In contrast, companies established within the UAE's free zones are generally exempt from customs duties on imports and exports within the free zone or for goods re-exported to international markets. This exemption is a key benefit for businesses operating within these zones.

Value-Added Tax (VAT)

• Mainland Companies: Mainland businesses are subject to a 5% VAT on taxable goods and services.
• Free Zone Companies: While the general VAT rate of 5% also applies to transactions conducted by free zone companies, certain zones and specific business activities may qualify for a 0% VAT rate under designated conditions.

Regulatory Body

• Mainland Companies: The Department of Economic Development (DED) in each emirate oversees the regulation and licensing of mainland companies. The DED's mandate includes ensuring compliance with local business laws, issuing trade licenses, and facilitating various services to support business operations on the mainland.
• Free Zone Companies: Companies established in free zones are governed by that zone's respective Free Zone Authority (FZA). Each FZA sets its own rules and regulations tailored to the free zone's specific business environment and industry focus.

Legal Structure and Activities

• Mainland Companies: Can engage in a wider range of activities and are not confined to the specific industries dominant in the free zones. They have more flexibility regarding legal structure options, catering to diverse business models.
• Free Zone Companies: Typically have to align with the specific business activities permitted within the free zone, which are often industry-specific, such as media, healthcare, technology, etc.

Market Access and Clientele

• Mainland Companies: Have direct access to the UAE market, allowing them to conduct business with a wider range of clients across all emirates without restrictions.
• Free Zone Companies: These companies primarily target international markets and can only serve the local UAE market under certain conditions, such as through partnerships with local distributors.

Government Contracts

• Mainland Companies Are eligible to bid for government contracts, which allows them to participate in large-scale projects across the country.
• Free Zone Companies: Typically do not have direct access to government contract opportunities unless they establish a mainland branch or collaborate with a mainland company.

External Approvals and Documentation

• Mainland Companies: Depending on their business activities, they may require additional approvals from specific government bodies, such as the Ministry of Health for healthcare services or the Ministry of Education for educational services.
• Free Zone Companies: Usually only require approvals from the respective free zone authority, simplifying the process of obtaining licenses and permits for operations within the zone.

Expansion and Branches

• Mainland Companies: Can easily open branches or outlets across the UAE without significant additional regulatory hurdles.
• Free Zone Companies: To expand outside their free zone, they often need to incorporate a mainland entity or operate through a local commercial agent.

Mainland Vs Free Zone: What is the difference?

Below is a table summarizing the key differences between mainland and free zone companies in the UAE:

Conclusion

Deciding to start a business in the UAE's mainland or a free zone depends on your needs. Mainland companies are great for those wanting to do business all over the UAE, offering wide market access. Free zone companies are perfect for those focusing on international trade, offering benefits like 100% foreign ownership and no taxes. Recent changes now allow more foreign ownership in mainland businesses too. Your choice should match your business plan, whether you're aiming for a local presence or global reach from the UAE.

 Are you planning to start a business in the UAE in the mainland or a free zone? We at Filings.ae are here to guide you through every step of your business setup in the UAE.