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When starting a business in the United Arab Emirates, one of the first questions a foreign entrepreneur faces is choosing one of the 3 jurisdictions available to set up their business in. But before choosing one, it is important to know the difference between mainland, free zone, and offshore companies. Making the wrong choice when registering a company can result in fines and penalties, as well as restricted business opportunities.
In this article, we explore the difference between mainland and free zone companies, which are popular choices for entrepreneurs looking to do business inside the country.
What are the differences between the 3 main Jurisdictions in the UAE?
Simply put, the UAE offers three primary jurisdictions where you can register your company. Mainland, free zones, and Offshore. Here is a basic description of how the 3 differ.
Mainland Companies
These are companies that are registered directly with an Emirate’s authority (Department of Economic Development). As a result, these companies enjoy a certain level of freedom in their operations and setup. They can also issue visas, do business freely with other companies in the UAE, and expand. However, because of this added freedom, the setup and maintenance of a mainland company is slightly more complicated.
Free zone / Dedicated Zone Company
These are companies that are registered with one of the 50+ specific designated “zones” in the UAE (DMCC in JLT Dubai, SHAMS in Sharjah, etc). Registering a company in a designated zone has its own advantages. These include faster setup, access to businesses within that area, and specific tax cuts. But they also have restrictions on business activity outside their zone. They also have restrictions on visas and expansions, among other limitations.
Offshore Company
An offshore company is relevant to entrepreneurs that want to have a holding company in the UAE, without doing business inside the UAE. It can be used to facilitate international payments, manage trade, and take advantage of a favorable tax regime. It can also help manage ownership of a separate company inside the UAE.
How to choose between mainland and free zone company registration in the UAE for your business
Choosing a jurisdiction for your business without knowing the pros and cons of each is difficult. However, here are a few considerations that can help with the process.
What is your business activity?
The UAE has strict laws that govern what economic activity a business can do. These activities have to be chosen carefully when registering a business. While both mainland and free zones allow you to have multiple activities on one business license, it costs extra to add any more than one category and 2-3 activities to a single license.
A major difference between mainland and free zones is the availability of activities. Not all activities that are available in mainland are available in freezones. While the mainland has over 2k possible activities that a business can opt for, most 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.
Some freezones are more suited for certain activities than others though. For example, if you wish to start an e-commerce business, it would be prudent to set it up in Dubai Commerce City (DCC). This zone gives you access to a thriving community of e-commerce businesses, as well as networking opportunities, warehousing options, access to payment gateway vendors, and more.
On the other hand, if you plan on starting a real estate business to buy and sell properties, registering a company in the mainland is the right way to go.
Who are your clients/customers?
Another difference between businesses in the 3 jurisdictions is who they can do business with. Mainland companies are free to do business with any other business in the region. Free zone companies can only do business with other companies within their designated zone or with companies outside the UAE. If a free zone company wishes to do business with companies outside their zone, they would require additional NOCs or permits.
An offshore company, by definition, can not do business inside the UAE.
Also, if your company deals with government or semi-government customers, a mainland company is the only option.
Note that this law is not fully enforced in the private sector. However, it’s an important consideration when deciding whether to register a company in a free zone or the mainland.
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 expatriates, it is safe to assume that anyone that you hire will need a visa, including yourself.
A mainland company does not have a restriction 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.
On the other hand, a free zone company gets a quota of anywhere between 0-6 visas per license. And the cost of visas is significantly higher.
If your business is not labor intensive, a free zone company is the way to go. However, registering in the mainland is more future-proof as your organization may grow beyond the quota you might get in a free zone.
An offshore company does not get any visa quotas.
Corporate tax and tax breaks
The UAE’s biggest attraction for foreign entrepreneurs has always been tax breaks. While the country does boast 0% personal tax, other taxes need to be considered before setting up your company.
As of today, mainland companies are required by law to file and pay a 9% Corporate Tax on earnings every year. However, this tax is only applicable if the business has an annual turnover of over AED 1 million.
For example, if a company’s annual income is AED 1.2 million, they are liable to pay corporate tax. However, the taxable amount is calculated after deducting the cost of the business. Let’s say the company has a net profit of AED 900,000, their tax will be calculated on that amount instead. Also, the company will be able to benefit from a 0% rate on the first AED 375,000 of Taxable Income. So their actual taxable income will be AED 525,000, resulting in a tax of AED 47,250.
On the other hand, free zone companies are not liable to pay corporate tax at the moment. However, this break depends on their economic activity, regulatory compliance, and audited financials. Crucially, their income must be from within the Zone or other Zones, not from Mainland entities.
Offshore companies enjoy a similar 0% corporate tax.
Value Added Tax
Companies in the mainland and free zones are by default required to pay 5% VAT on their services. However, certain designated free zones can enjoy 0% VAT. For example, the Jabel Ali free zone, which primarily entertains companies involved in the import/export of goods at the Jabel Ali port.
It is important to note that the mandatory VAT registration threshold is AED 375,000 and the voluntary registration threshold is AED 187,500.
Office or Warehouse location
As evident in the names, a mainland company can only have an office in the mainland, while a free zone can only have an office in its designated free zone. However, an exception can be made if a free zone company can get an NOC from their zone to set up an office in other areas of the UAE.
Similarities between mainland and free zone companies
The laws in each jurisdiction are significantly different. However, they also share certain similarities.
- Shareholder requirement: A minimum of 1 shareholder is required to register a company in any jurisdiction.
- Foreign Ownership: Foreigners can have 100% ownership 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.
- Bank accounts: A company in any jurisdiction can open a corporate bank account in the UAE.
How does Emerhub help your business in choosing the right jurisdiction in the UAE?
The considerations mentioned above are true for most businesses. However, knowing what to do in each case only comes from an understanding of every option available. Emerhub has over a decade of experience in assisting foreign entrepreneurs to start and excel in their businesses in the UAE and beyond. Our experienced company formation consultants understand your specific business case. They 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.
