Setting Up A Virtual Asset Business In Dubai: Mainland vs. Free Zone Under VARA

Introduction

Dubai has positioned itself as a global hub for virtual asset businesses, offering a clear regulatory regime under the Virtual Assets Regulatory Authority ("VARA"). For entrepreneurs and stakeholders (from startup founders and investors to compliance officers and legal counsel), a key decision is where to establish the company – on the Dubai mainland or in one of its free zones. Both options fall under VARA's oversight for crypto ventures, but they differ in terms of operational scope, licensing process, cost, and practical considerations.

This article focuses on Dubai only (excluding the Dubai International Financial Centre or Abu Dhabi's ADGM) and compares mainland vs. free zone setups for virtual asset firms under VARA's regime.

Dubai's VARA and the Crypto Regulatory Landscape

Dubai's VARA was established by law in 2022 (Dubai Law No. 4 of 2022) as a dedicated regulator for virtual assets in the Emirate. It is unique in that it is a crypto-specific regulator, separate from the financial free zone regulator in DIFC (the Dubai Financial Services Authority, DFSA). In fact, VARA is the sole authority regulating virtual assets across Dubai's mainland and free zones (except within DIFC). In practical terms, any business dealing in cryptocurrencies or other virtual assets in Dubai (outside DIFC) must obtain a VARA license before operating.

VARA's framework defines eight categories of regulated Virtual Asset Service Provider ("VASP") activities, covering the full spectrum of crypto services. These include Advisory Services, Broker-Dealer Services, Custody, Exchange, Lending/Borrowing, Token Issuance, Investment & Portfolio Management, and Transfer/Settlement services. Each category has its own requirements – for example, capitalization thresholds, license fees, and compliance rules – reflecting the risk and complexity of that business line. For instance, a startup offering simple crypto advisory services may only need to maintain AED 100,000 in capital, while a crypto exchange platform applying for a full trading license could face requirements of AED 500,000 or more, along with stricter cybersecurity audits. Notably, certain activities (like issuing privacy coins or anonymous assets) are outright prohibited under VARA's rules.

In summary, VARA provides a comprehensive, unified regulatory regime intended to foster innovation while enforcing robust compliance. It allows both local and foreign founders to tap into Dubai's crypto-friendly environment, but also requires serious commitments in governance, security, and consumer protection. Whether one sets up in a free zone or the mainland, the same VARA rulebooks and oversight will apply to the virtual asset activities. The choice of jurisdiction primarily affects corporate and operational factors, as discussed next.

Key Differences: Mainland vs. Free Zone under VARA

Both mainland Dubai and its various free zones (e.g. Dubai Multi Commodities Centre ("DMCC"), Dubai World Trade Centre Authority ("DWTC"), and others) permit 100% foreign ownership for most businesses, including crypto ventures, thanks to recent legal reforms. However, there are important differences to consider when choosing the base for a VARA-licensed firm. The table below summarizes the main distinctions:

Note: Whichever jurisdiction is chosen, the VARA license itself is mandatory for any regulated virtual asset activities, and it imposes identical compliance obligations in both cases. VARA does not differentiate rules based on free zone vs. mainland – the choice of entity location does not affect the scope of permitted crypto operations under the VARA license. The main differences lie in ancillary matters like taxation, ease of local market access, and the mechanics of setting up the company (which licensing authority handles the company formation, where the office is located, etc.).

Corporate Tax Considerations

One major factor tilting many crypto entrepreneurs toward free zones is taxation. In 2023, the UAE introduced a federal corporate tax of 9% on business profits, ending a decades-long tax-free regime for mainland companies. Free zone entities, however, can continue to enjoy 0% corporate tax on foreign-sourced income and qualifying income, as long as they comply with the conditions (such as not doing business in mainland UAE). This means a VARA-licensed exchange or fund set up in (for example) DMCC can potentially operate tax-free, whereas the same business on the mainland would be subject to 9% tax on its UAE-sourced profits.

It's important to note that even free zone companies must register and file tax returns to report their income, despite the 0% rate. Moreover, if a free zone company starts earning revenue from mainland clients or activities, that portion could be taxable and might jeopardize its tax-exempt status. Thus, firms expecting significant local UAE revenue might not gain much tax advantage from a free zone. For primarily international or trading businesses, the tax savings of a free zone are a clear advantage.

Market Reach and Client Base

Choosing mainland vs. free zone can also affect how freely a crypto firm can engage the local market in the UAE:

• Mainland Company (Onshore): A mainland-incorporated company (licensed by DET and VARA) is by default allowed to offer services across the entire UAE. For example, a crypto exchange on the mainland can openly market to and onboard customers in Dubai or other emirates (once fully licensed by VARA) as part of its approved activities. There are no internal UAE market restrictions on a mainland entity – it can have offices or branches across different emirates if needed and serve UAE residents without additional regulatory hoops (since VARA covers Dubai and the SCA covers other emirates at a federal level, the VARA-licensed mainland company would generally be recognized when dealing with clients in other emirates under cooperation arrangements).

• Free Zone Company: A free zone company is technically restricted from directly "doing business" in the UAE mainland without adhering to certain protocols. In practice, many free zone-based crypto platforms still serve UAE residents online, but they must structure this carefully. For instance, a free zone VARA licensee might need to obtain a no-objection from the Securities and Commodities Authority (SCA) – the federal regulator – or appoint a local agent if it wants to actively target customers in other emirates. This is because outside of Dubai, the SCA is the authority for onshore crypto licensing. In Dubai, VARA covers the field; but if a Dubai free zone company were to, say, open a physical branch in Abu Dhabi or extensively market to clients there, it could trigger SCA oversight.

If a core part of the business model is to have a physical retail presence (e.g. a customer walk-in center or frequent in-person dealings with UAE customers), a mainland setup might be more straightforward. Free zone companies often focus on international business or a global user base, leveraging Dubai as a headquarters for operations without emphasizing on-the-ground services in other parts of UAE. Still, VARA's regime itself is globally oriented – it permits licensed firms to cater to both retail and institutional clients internationally (VARA does not impose a "professional investors only" restriction, unlike DIFC's DFSA regime). So, even a free zone VARA licensee can target global users and UAE residents online; the distinction comes down mainly to the legal form of the entity and complying with UAE commercial laws when reaching onshore customers.

Practical Setup and Timeline

Forming a company in Dubai – whether mainland or free zone – is normally a straightforward administrative task (often a few weeks) once approvals are in place. The gating item for crypto businesses, however, is the two-stage VARA licensing process, which is rigorous and can be time-consuming. In both mainland and free zone cases, the journey typically involves the following steps:

1. Initial VARA Approval (Pre-Incorporation): The founders prepare an Initial Disclosure Questionnaire ("IDQ") detailing the business model, intended activities, ownership structure, financial projections, and risk measures, and submit it to VARA as the first step. The application must be comprehensive – incomplete information or ambiguities will trigger follow-up queries and delays. VARA reviews the IDQ and, if satisfactory, issues an Approval to Incorporate ("ATI", essentially an initial approval). At this point, an invoice for 50% of the license application fee is paid (for example, around AED 50,000 for one major activity). Timeline: This stage can take several months of back-and-forth. Firms that engage with VARA early (through preliminary consultations) or use professional advisors to ensure all documents (business plan, compliance policies, KYC/AML frameworks, etc.) are well-prepared tend to move faster.

2. Company Incorporation: With the ATI in hand, the team proceeds to incorporate the Dubai entity. For mainland, this means registering an LLC with Dubai's DET; for a free zone, it means registering through that zone's authority (e.g. DMCC, DWTC, etc.). The ATI serves as the necessary regulator NOC to obtain the initial trade license from the economic department or free zone. The company will need to open a UAE bank account to deposit the required share capital (at least AED 100,000, and higher for certain activities as mandated by VARA). A physical office lease in Dubai must be secured by this point as well, since evidence of a Dubai office and address is required. Timeline: Company setup itself is relatively quick – often 2–4 weeks for paperwork once you have all documents in order. However, opening a bank account for a crypto-related company can be a challenge (discussed under "Challenges" below), which might extend this step. It's wise to initiate the bank account process early.

3. Full License Application: Once the company is legally formed, Stage 2 is to submit the comprehensive VASP license application dossier to VARA. This includes detailed internal policies (AML/CFT programs, cybersecurity measures, governance frameworks), information on technology systems and security, appointed personnel in key roles (with CVs, background checks, and in some cases interviews for the Responsible Individuals), and any additional documents VARA specifically requests. VARA will scrutinize everything and likely engage in Q&A or even formal meetings with the team. This iterative review is normal – multiple rounds of queries are common as VARA ensures the firm can meet all obligations under its rulebooks. During this phase, the remaining 50% of the application fee is paid when VARA indicates the application package is complete and satisfactory. Once the company exists, Stage 2 is to submit the comprehensive VASP license application to VARA. This includes detailed internal policies (AML/CFT programs, cybersecurity measures, governance frameworks), appointed personnel in key roles (e.g. Money Laundering Reporting Officer, Compliance Officer, CEO, etc. with CVs and background checks), and any additional documents VARA requests. VARA will scrutinize everything and likely engage in Q&A or even meetings with the team. This iterative review is normal – multiple rounds of clarification are common as VARA ensures the firm can meet all Rulebook obligations. During this phase, the remaining 50% of the application fee will be requested and paid when VARA is satisfied the application is complete.

4. In-Principle Approval and Conditions: If all goes well, VARA issues an In-Principle Approval ("IPA"), which is a conditional license (non-operational) outlining certain final requirements. For example, VARA might require the firm to implement specific compliance tools, hire additional staff, or obtain certain insurance coverages before going live. The company must satisfy these conditions to VARA's satisfaction. Once the pre-conditions are met (and sometimes after a final inspection or on-site visit), VARA will issue the Operational License, i.e. the full VASP license. The company's name then gets listed on VARA's public register of licensed entities, and it can commence the regulated activities.

Overall Timeline: From initial application to operational license, the process can range widely – from a best-case of perhaps 4–6 months to more typically around 8–12+ months. Most reports indicate that a realistic timeline is about 6–10 months for new VARA applicants, given the thorough due diligence and the iterative nature of the review. VARA officials have indicated they aim to strike a balance – not rushing licenses out, but also not unduly delaying genuine projects. Recent developments: In 2023, VARA introduced a phased "Minimum Viable Product" (MVP) program, allowing certain select startups to launch under provisional approvals with close supervision before obtaining a full license. This helped a few firms get to market quicker. However, by early 2024 VARA announced that the MVP licensing program had served its purpose and would be phased out as the full regulatory regime was fully in place. Going forward, VARA is focusing on granting standard licenses (as evidenced by dozens of licenses and preliminary approvals issued by late 2023. As an applicant, one should still be prepared for a thorough process and avoid assuming any "fast track" – patience and proactive engagement with the regulator are essential in Dubai's compliance-driven environment.

Compliance and Practical Challenges

Setting up a virtual asset firm in Dubai under VARA comes with significant compliance responsibilities and practical hurdles. All founders should be prepared for the following real-world challenges:

1. Capital and Resources: VARA mandates a paid-up share capital for VASPs, which must be deposited in a UAE bank. The minimum is AED 100,000 (≈ USD 27k) for a basic license, scaling up to AED 500,000 or more for exchanges, brokerages, or other higher-risk activities. This capital is essentially locked as a show of financial robustness. Additionally, firms need to budget for substantial license fees (as noted earlier, tens of thousands of dirhams for application and annual supervision) and annual compliance costs (e.g. audits, VARA liaison fees). All told, launching a VARA-regulated crypto business is a costly endeavor, often suitable for well-funded startups or established companies rather than bootstrappers.
2. Local Substance Requirements: VARA is not a "light-touch" regime that allows nominal or purely remote setups. It explicitly requires real substance in Dubai – meaning the company must have a physical office in Dubai and staff who are resident in the UAE. At least two Responsible Individuals (often a Chief Executive and a Compliance/MLRO) must be full-time and locally based. VARA expects senior management to be "fit and proper," which implies a credible track record in finance or crypto for those individuals. Companies must plan to relocate founders or hire qualified talent in Dubai, which entails sponsoring work visas, providing relocation support, and paying competitive salaries to attract the necessary expertise (particularly for compliance and technical roles). All of this adds to the operational overhead and must be accounted for in the business plan.
3. Banking Difficulties: A commonly reported challenge is opening corporate bank accounts for crypto-related companies. Despite Dubai's progressive stance on crypto, many local banks remain cautious due to perceived risks. Banks will generally not onboard a crypto company without at least an In-Principle VARA approval or license, and even then will subject the company to enhanced due diligence. Expect extensive scrutiny: banks will ask for detailed AML/KYC policies, descriptions of the business model, proof of robust IT security measures (especially if dealing with customer assets), information on the founders' and investors' source of funds, and more. It is not unusual for account opening to take several months and require multiple meetings with bank compliance teams. Some startups initially rely on alternative solutions (e.g. fintech payment institutions or offshore accounts) for interim banking, but ultimately a local bank relationship will be needed for day-to-day operations and client fund handling. Engaging with banks early, preparing a strong documentation package, and seeking introductions through free zone authorities or advisors can help mitigate this hurdle.
4. Regulatory Compliance and Rulebooks: VARA has issued detailed rulebooks covering areas such as company governance, compliance & risk management, technology & information security, and market conduct. Upon licensing, firms must adhere to ongoing obligations: e.g. regular audits and financial reports to VARA, strict advertising and marketing content rules, robust AML/CFT monitoring and reporting in line with UAE federal law and FATF standards, and more. The rulebooks are quite prescriptive in what policies and controls a VASP must implement. For example, a VARA-licensed exchange will need to have transaction monitoring systems, procedures for wallet security (like maintaining most client assets in cold storage), segregation of client funds from the company's funds, appropriate insurance or compensation arrangements for custodial assets, and periodic compliance training for staff. Drafting and implementing these frameworks can be challenging, especially for startups without prior regulated industry experience. Many firms engage specialized compliance consultants or law firms to help craft their internal policies and set up systems that meet VARA's standards. The penalties for non-compliance are severe – VARA can impose fines up to AED 50 million or 15% of annual revenue for a single violation, and can suspend or revoke licenses for serious breaches. There are also provisions for public censure (naming and shaming) of offenders. In short, obtaining the license is only the beginning – maintaining full compliance is an ongoing commitment that requires resources and attention at the board level.
5. Timeline Uncertainty: As noted earlier, the licensing timeline can be unpredictable and is largely at VARA's discretion. There is no guaranteed turnaround time – much depends on the quality of the application and the back-and-forth of clarifications. Sometimes regulatory feedback may send the team back to the drawing board (for instance, to revise a section of the business plan or strengthen a cybersecurity control). Companies should plan for a lengthy pre-revenue period where they are incurring costs (office rent, staff salaries, professional fees) before any business operations can commence. This requires having sufficient funding in reserve. It can be frustrating from an entrepreneur's perspective to wait 6+ months, but this is part of operating in a rigorously regulated environment. Patience, and maintaining a constructive dialogue with VARA throughout the process, is necessary. The good news is that Dubai authorities are generally accessible – VARA often provides feedback rather than outright rejections if they see a serious applicant, so use that feedback to improve your plans
6. Differences in Free Zone Implementation: If you opt for a free zone company, be aware that each free zone authority might have additional internal requirements beyond VARA's. For example, DMCC's Crypto Centre may ask for a preliminary questionnaire or background check before it endorses your VARA application. Some zones might have higher minimum share capital for certain legal forms, or they may bundle services like office space and visas into their formation packages. The free zone will also be your interface for any post-licensing administrative needs (employee visa processing, office renewals, etc.), whereas a mainland company deals with Dubai government departments directly. These nuances mean you should consult the specific free zone's guidelines or engage a company setup advisor familiar with that zone. In short, the VARA part of the process is the same across Dubai, but the company formation part will slightly differ in timeline, cost, and paperwork depending on the jurisdiction chosen.

Decision Factors and Checklist: Choosing the Right Setup

Deciding between a mainland or free zone setup under VARA ultimately comes down to your business priorities, resources, and long-term vision. Below is a checklist of key factors to consider:

1. Target Market: If you plan to aggressively target the UAE domestic market (Dubai/UAE residents and institutions) with on-the-ground services, a mainland company might serve you better, providing unrestricted access to UAE customers and simpler compliance with onshore rules. If your clientele is mostly international or you will operate an online-only platform, a free zone company could suffice (and offers tax benefits), as long as you navigate any onshore customer acquisitions carefully.
2. Tax Optimization: Evaluate how important the 0% free zone corporate tax is to your financial model. For profit-generating exchanges, funds, or high-margin trading businesses, saving 9% in taxes can be significant – giving free zones a clear edge. However, if you expect modest profits in the near term (e.g. a startup in R&D mode) or plan to reinvest earnings into local expansion, the tax factor might be secondary. Also consider where your revenue will come from: if largely UAE-sourced, the tax advantage of a free zone diminishes.
3. Capital and Budget: Can you meet the capital requirements and upfront costs comfortably? Both setups require substantial investment (paid-up capital, VARA fees, professional services, office rent, etc.). A free zone setup doesn't necessarily reduce the VARA-related costs, but certain zones may offer marginally lower incorporation fees or more flexible office arrangements that can help with cash flow. Be sure to budget at least 12 months of runway given the licensing timeline and the fact you will have expenses long before revenue.
4. Operational Needs: Consider where you want to base your team and operations. Free zones like DMCC Crypto Centre are attractive for being vibrant crypto/tech hubs with like-minded firms nearby. Mainland Dubai offers the flexibility to office anywhere in the city, potentially at lower rent if you choose non-free zone locations. If you need to hire a larger number of people or very specialized talent, think about where those individuals would prefer to work and live. (Some expats might like the idea of a well-known free zone cluster with modern offices, while others may not mind a standalone office outside a zone.) Also, if you anticipate needing multiple branches or offices across the UAE (e.g. expanding to Abu Dhabi in the future), starting on the mainland could ease that expansion because you are already an onshore UAE entity.
5. Reputation and Ecosystem: Assess any strategic benefits of a given jurisdiction's brand. Being part of a renowned free zone like DMCC can offer marketing value — DMCC often publicizes its Crypto Centre members and hosts events which could raise your profile. On the other hand, a mainland company might leverage broader Dubai business networks or government innovation programs not tied to a specific free zone. In the eyes of investors or banking partners, what matters most will be the VARA license, but there can be subtle perceptions (e.g. some banks internally might categorize free zone companies differently than onshore LLCs for risk, even though legally both are in Dubai). If possible, speak to peers or advisors about experiences in one setup versus the other.
6. Legal and Regulatory Trajectory: Think long-term about regulatory alignment. Dubai's VARA regime is new (as of 2022/23) and continuously evolving. The free zone vs mainland distinction is largely about Dubai company law rather than differences in crypto regulation (since VARA standardizes that). However, if you ever needed to migrate from one to the other (for example, a free zone company converting to a mainland company to broaden domestic reach), it's doable but can be cumbersome (requiring new licenses, transfers of assets/contracts, etc.). Choose the setup that you can foresee serving your needs for the next 5+ years. Also consider outside Dubai: if there's a chance you might relocate or expand the business to another emirate's jurisdiction (or seek an ADGM or DIFC license for specific activities), factor in how your Dubai entity will fit into that plan.

Finally, remember that Dubai offers multiple pathways for crypto businesses. Outside VARA's scope within Dubai, there is the DIFC with the DFSA regime, and in Abu Dhabi the ADGM with its own well-established crypto framework (and even a new digital assets-focused free zone in Ras Al Khaimah launched in 2023). Each option has its pros and cons in terms of target market and regulatory style. Within Dubai, some free zones previously issued limited crypto permissions (such as for proprietary crypto trading) without full VARA regulation, but since the VARA law came into effect, those have largely been unified under VARA's oversight. Therefore, for any serious virtual asset venture in Dubai today, the fundamental choice within VARA's domain comes down to mainland vs. free zone – a decision of onshore vs. zone jurisdiction while operating under VARA's umbrella.

Conclusion

Setting up a virtual asset (crypto) business in Dubai is an exciting opportunity due to the city's pro-innovation stance and VARA's clear regulatory framework. However, it requires careful planning and a significant commitment to compliance. The decision between a mainland or free zone setup will influence your tax exposure, ease of doing business locally, and integration into the crypto ecosystem. Mainland Dubai offers full access to the UAE onshore market and alignment with the broader economy, whereas free zones offer zero-tax environments and often vibrant tech communities – both under the watchful eye of VARA. By considering the factors outlined above – from cost and compliance burdens to practical timelines and market strategy – companies can choose the setup that best aligns with their goals.

Whichever route you choose, success will depend on robust compliance and local engagement. Dubai's regulators and financial institutions expect crypto firms to uphold high standards of transparency, security, and governance. For founders, that means not just meeting the minimum license requirements but continuously investing in strong anti-financial-crime measures, cybersecurity, customer protection, and open dialogue with regulators. The free zone vs. mainland question is ultimately one piece of the puzzle – with a solid plan and an understanding of Dubai's legal landscape, virtual asset firms can confidently navigate VARA's framework and establish themselves in one of the world's most dynamic crypto jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.