Mainland vs. Free Zone: How to Choose the Perfect Legal Structure for Your Business in the UAE 

When it comes to setting up your international business, there are some priorities, which include a liberal environment, economic opportunities, business-friendly laws, ease of business, suitable tax rates, availability of affordable workers, and peace.

In this regard, the United Arab Emirates offers everything that you may require to operate a successful business with a greater potential for revenue, as well as accessibility to all financial instruments that are available for business.

Yet, before starting your first business activity, it is crucial to set up your business with the right legal structure.

For that, the UAE offers two options: Mainland and Free Zone. Both options come with several advantages, as well as some specific limitations. In this post, you’ll learn everything about it, and in the end, you’ll be able to decide the right legal structure for your business.

Understanding Mainland Companies

A mainland company in the UAE is a corporate entity registered with the Government of the UAE that has no limitation on commercial activities, as well as, it is free to operate all over the UAE and outside the UAE. Yet, in many sectors, a mainland company cannot be formed without having a local sponsor, a UAE national. However, in some selective areas, the UAE allows the formation of companies without a local sponsor.

Characteristics

1. Traditionally, a local sponsor owning 51% of the company was required, but recent UAE laws now permit 100% foreign ownership in many sectors. 
2. Mainland companies are allowed to get government and public sector contracts.
3. Geographical flexibility of business operations is allowed for mainland companies. They can operate all over the UAE, including Free Zones.
4. There is no restriction on business activities for mainland companies.
5. A physical office space is a requirement for mainland companies.
6. Licenses from the Department of Economic Development are required, which are renewed every year.
7. Mainland companies have to pay Value Added Tax (VAT) and Federal Corporate Tax. Corporate tax is only applicable when a company earns a profit beyond a specific threshold that is AED 375,000. 
8. Audit and regulatory compliance are essential for mainland companies.
9. Mainland companies can trade in the international market.

Advantages

1. No restrictions on business activities throughout the UAE and the international market.
2. 100% exemption on personal income tax.
3. Can apply for an unlimited number of visas.
4. Allowed to work for Government and Public Sector contracts.

Disadvantages

1. 51% ownership for the local sponsor in many sectors.
2. Mandatory yearly audit
3. Annual renewal of licenses.
4. Mandatory compliance with regulations. Any negligence can lead to fines. 

Understanding Free Zone Companies

The UAE opened a Free Zone in 1980, and any company registered in it can have 100% foreign ownership. As of this date, the UAE operates 45 Free Zones, and each zone has its unique regulatory body and laws.

Characteristics

1. Foreigners can get 100% ownership without any local sponsor.
2. The company has to follow the laws of the jurisdiction.
3. A Free Zone company cannot operate on the Mainland without a local distributor, branch, or online means.
4. Only permitted business activities are allowed.
5. A minimum physical presence is allowed, eliminating the need for a big office.
6. Businesses can be set up at a faster speed than mainland companies.
7. Licenses have to be obtained from the Free Zone Authority.
8. Corporate and personal taxes are exempt.
9. Visa sponsorship is subject to the size of the company and the office space that it has for business activities.
10. No annual audit requirement with simplified reporting.
11. Freedom for unlimited international trade.

Advantages

1. Value Added Tax (VAT)is exempt.
2. Simple and easy company formation.
3. 100% foreign ownership
4. 100% exemption on import and export duties.
5. Shareholders remain private. Their details are hidden from the public.

Disadvantages

1. Trade directly in the UAE mainland requires a local distributor, branch office, or online means.
2. The number of sponsorship visas depends upon the size of the physical space of the company.
3. Approval is required from the Free Zone Authorities for business activities.

How to Choose the Right Legal Structure for Your Business in the UAE?

Consider the following points before choosing the legal structure for your business in the UAE.

1. What kind of business activities do you want to do? Do you want to trade in the local market, or do you want to trade internationally? With a heavy interest in the local market, it’s essential to opt for a mainland company. Remember, both mainland and Free Zone companies facilitate international trade.
2. What is your target market? If you want to penetrate the local market, the mainland will suit you the best. On the other hand, if your interests are global trade, a Free Zone company is the best option for you.
3. More or fewer legal requirements? Mainland companies have to comply with a greater number of regulations than Free Zone companies.
4. Ownership? If you want complete control and ownership, establish a Free Zone company. Otherwise, settle with your 49% share with a local sponsor on the mainland.
5. Cost? Operating a mainland company is more costly than a Free Zone company.

Wrap Up

Consider your interests, goals, targets, market, and budget to decide between mainland and Free Zone companies.

With a mainland company, you have to pay a high cost, deliver auditory and legal compliance, share ownership with a local, and pay taxes. But you have free access to the local market.

On the other hand, a Free Zone company offers you 100% ownership, privacy, fewer regulatory and auditory compliance, tax exemption, and access to the global market.

Still, have doubts? Contact us today. We’ll provide customized solutions for your business that’ll suit you the best. Get going, and have a great day.