Mainland vs free zone: which fits your business

Who you can sell to

A mainland company can operate inside and outside the UAE, including the wider GCC and the free zones. Invest in Dubai describes the mainland as having no territorial restrictions on business activities.

Free zone companies mainly do business outside the UAE. Invest in Dubai says a free zone company cannot trade directly on the UAE mainland unless it gets the relevant licence or sets up a mainland branch through DET. Six Dubai free zones offer dual licences that cover both onshore and offshore activity.

So if most of your customers are people or companies in the UAE outside the free zones, the mainland is usually the simpler fit. If you mainly sell abroad, or to other free zone companies, a free zone can fit well.

Ownership

Under Federal Decree Law No. 26 of 2020, foreign investors can fully own a mainland company in more than 1,000 commercial and industrial activities. Activities with a strategic impact are excluded. In free zones, foreign investors can own 100% of the company.

Office and visas

• Mainland: a physical workspace of at least 100 square feet, rented or bought anywhere. There is no fixed limit on visas, as long as the number fits the size of the premises and the business activity.
• Free zone: no compulsory physical office, and flexible desks or virtual offices are offered. If you lease space, it must be inside your free zone. Most free zone authorities set a visa quota per company, which you can raise by moving to a larger office or applying to the authority.

Corporate tax

For a mainland company, the corporate tax rates are 0% on taxable income up to AED 375,000 and 9% above it.

A free zone company can pay 0% on its qualifying income if it is a Qualifying Free Zone Person. The Federal Tax Authority (FTA) lists the conditions:

• Keep adequate substance in the free zone.
• Earn qualifying income.
• Keep audited financial statements.
• Follow the arm's length principle with related parties and keep transfer pricing documentation.
• Non qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue.
• Do not elect to be taxed under the standard rules.

Income that is not qualifying income is taxed at 9%, and a Qualifying Free Zone Person does not get the 0% rate on the first AED 375,000 of that income. A company that fails a condition, or elects out, loses the status for that tax period and the four after it.

Cost

Neither option has one price. On the mainland, DET says licence fees vary with the licence type and the activities, and you need a lease. In a free zone, each authority sets its own packages. Put both routes through the setup cost calculator to compare them for your business.

A quick way to decide

• Selling mostly to customers in the UAE outside the free zones: start with the mainland.
• Selling mostly abroad, or to other free zone companies: look at the free zone that serves your sector.
• A shop, restaurant or any place customers walk into outside a free zone: that is a mainland licence, or a free zone company with the right mainland licence or branch.
• A small team with no office yet: a free zone flexible desk can work, but check the visa quota first.