Introduction to Set Up a Company in UAE
The set up a company in the UAE is a smart move for a number of logistical, repetitional and tax reasons.
The UAE offers a dynamic business environment that attracts entrepreneurs and corporations from around the world. One of the most critical decisions investors face when setting up a business in the UAE is choosing between establishing their business in the mainland or in one of the country's numerous Free Zones. Each option comes with its own regulatory framework, benefits, and limitations. This publication aims to provide a clear understanding of these two business structures to help investors make informed decisions.
What Are Mainland Businesses?
Mainland businesses, also known as onshore companies, are governed by UAE Federal Law, particularly the UAE Commercial Companies Law (Federal Decree Law No. 32 of 2021). These businesses are licensed by the Department of Economic Development (DED) of each Emirate and can conduct business both within the UAE and internationally.
Key features of mainland businesses include:
- Ownership and Control: Following amendments to the UAE Companies Law in 2020, foreign investors are now allowed to own up to 100% of the shares in certain mainland business sectors. However, some activities, particularly in sectors such as defense and utilities, may still require a UAE national partner or agent.
- Flexibility in Business Operations: Mainland companies have no limitations on where they can operate within the UAE. They can freely trade with both private and government entities, making them ideal for businesses that aim to have a broad market presence in the region.
- Taxation: Mainland businesses are subject to the UAE's corporate tax regime, which includes the new corporate tax law effective from June 2023. Mainland companies also need to comply with VAT regulations.
What Are Free Zones?
Free Zones are special economic zones established to boost foreign investment by offering attractive incentives, such as tax exemptions and 100% foreign ownership. Each Free Zone has its own regulatory authority and legal framework.
Key features of Free Zone businesses include:
- 100% Foreign Ownership: One of the biggest advantages of setting up in a Free Zone is that foreign investors can own 100% of the company without the need for a UAE national partner.
- Tax Exemptions: Most Free Zones offer tax incentives, including exemptions from corporate tax, import and export duties, and personal income tax for a specific number of years (often renewable).
- Geographic Restrictions: Free Zone companies can only conduct business within the Free Zone or internationally. If a Free Zone business wants to operate within the UAE mainland, it must work with a local distributor or establish a mainland branch office.
- Simplified Set-Up Process: Free Zones offer streamlined procedures for company registration, making the process faster and more straightforward compared to mainland business registration.
Key Differences Between Mainland and Free Zone Businesses
| Aspect | Mainland Business | Free Zone Business |
|---|---|---|
| Ownership | Up to 100% foreign ownership (in most sectors) | 100% foreign ownership |
| Business Scope | Operate freely within the UAE and internationally | Operate within the Free Zone and internationally |
| Government Contracts | Eligible to tender for government contracts | Typically not eligible for UAE government contracts |
| Taxation | Subject to UAE corporate tax laws | Generally exempt from corporate and import/export tax |
| Office Space Requirements | Must lease physical office space within the UAE | Must lease office space within the Free Zone |
| Visa Quotas | Flexible depending on office space | Restricted by Free Zone regulations |
Choosing the Right Option for Your Business – Set up a Company in UAE
Choosing between the set up of a company in UAE is not complicated. The selection between a mainland business and a Free Zone setup largely depends on the nature of your business activities and future plans. Let's take a closer look at some scenarios to help you decide which option may suit your business best:
Scenario 1: Consulting Firm with Local and International Clients
A company specializing in management consulting wants to service clients both in the UAE and globally. Since the firm intends to have contracts with both UAE-based clients and international companies, a mainland company would be the most appropriate option. Mainland businesses allow the company to operate freely within the UAE, contract with local and government entities, and expand internationally without limitations. Additionally, if the company wants to open multiple branches across different Emirates, a mainland license would offer that flexibility.
Mainland Business Advantages for This Scenario:
- Ability to engage with both UAE-based clients and international markets.
- Opportunity to bid on government contracts and access the local market.
- No geographic restrictions within the UAE.
Scenario 2: E-commerce Business Targeting International Sales
An entrepreneur planning to launch an e-commerce platform focused on selling high-end fashion products to international markets would benefit from a Free Zone setup. By choosing a Free Zone like Dubai CommerCity or Jebel Ali Free Zone (JAFZA), the business can enjoy 100% foreign ownership, tax exemptions, and streamlined customs processes. Since the company's operations are mostly export-focused, and it doesn't plan to target local UAE consumers immediately, the Free Zone offers significant cost savings through tax incentives and a simplified regulatory process.
Free Zone Business Advantages for This Scenario:
- 100% foreign ownership without a local partner.
- Tax exemptions on corporate profits and export duties.
- Ability to focus on international markets without the need for a mainland presence.
Scenario 3: Real Estate Development Firm
A real estate development firm looking to build residential and commercial properties in Dubai would find a mainland company the most suitable. In the UAE, property developers must operate on the mainland to access the local real estate market, including purchasing land for development and selling properties to UAE residents. Free Zone companies are generally restricted from owning property outside their designated zones unless they establish a branch on the mainland.
Mainland Business Advantages for This Scenario:
- Ability to buy, sell, and develop properties within the UAE.
- Full access to the UAE's real estate market, including local clients and projects.
Scenario 4: Technology Start-Up Focusing on Innovation
A technology start-up that develops innovative software for global clients would thrive in a Free Zone such as Dubai Internet City or Abu Dhabi's Hub71. These Free Zones cater to technology-driven businesses by offering industry-specific support, such as access to incubators, accelerators, and specialized networking opportunities. Additionally, Free Zones provide fast-track registration processes and allow full foreign ownership, which is attractive for start-ups looking to maintain control of their business.
Free Zone Business Advantages for This Scenario:
- Full control of the business with 100% foreign ownership.
- Access to industry-specific Free Zones with specialized resources for tech firms.
- Simplified registration process and cost-efficient licensing.
Scenario 5: International Trading Company
A global trading company that imports and exports electronics between the UAE and other countries would benefit from a Free Zone setup, particularly one with easy access to logistics hubs, like JAFZA or Dubai South Free Zone. These Free Zones provide logistics infrastructure, warehousing facilities, and direct access to major shipping routes, simplifying international trade operations. However, if the company wants to sell its products to UAE consumers, it would need to partner with a mainland distributor or establish a branch on the mainland.
Free Zone Business Advantages for This Scenario:
- Tax exemptions on imports and exports.
- Easy access to logistics hubs for international trade.
- Cost-effective setup tailored to international trading companies.
Common Challenges and Considerations at the Time of Set Up a Company in UAE
- Free Zone Restrictions on UAE Trade: Free Zone companies must partner with a mainland distributor to conduct business within the UAE, which may increase costs.
- Legal Compliance: Both mainland and Free Zone businesses must comply with UAE regulations such as anti-money laundering laws, VAT, and, if applicable, corporate tax compliance.
- Cost Considerations: Setting up a mainland business often involves higher costs due to office space requirements and licensing fees. However, Free Zone companies may have additional fees for visa quotas and renewals.
Conclusion to Set Up of Company in UAE
Both mainland and Free Zone structures offer unique advantages and limitations, and your decision should be based on the specific needs of your business. For those looking to access the full UAE market, including government contracts, or operate in sectors like real estate or retail, a mainland setup is likely the best choice. On the other hand, if your focus is on international trade, tech innovation, or export-oriented industries, the cost savings and flexibility of a Free Zone might be more appealing.
Consulting with legal professionals familiar with UAE business laws is essential to ensure compliance and maximize the benefits of either structure.
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.
