Global Registration

Differences between Free Zone and Mainland Company in UAE

Before starting a business in the United Arab Emirates, it is very important to get familiar with the concepts of Free Zone and Mainland Company. Both jurisdictions have their own pros and cons, and the entrepreneur must possess the required knowledge and information before registering their business. Hence, foreign investors need to understand the distinctions between these entities and make amalgamated business decisions. This article discusses the concept and difference between Free Zone and Mainland Company in UAE.

What is a Free Zone Company in UAE?

A Free Zone in UAE refers to a separate geographical area earmarked within UAE governed by a separate jurisdiction having its special laws related to taxation, customs and imports, which are significantly different from the companies established in the UAE mainland. They are regulated by their respective Free Zone Authorities, which have been entrusted with the power to issue trade licenses. There are around 45 Free Zones in UAE. Unlike mainland companies, a Free Zone company is allowed to trade within the free zone only and not outside.

What is a Mainland Company in UAE?

A Mainland company in UAE is also known as an onshore company. The license to establish and operate an onshore company/Mainland Company is issued by the Department of Economic Development of the respective Emirate. A mainland company is allowed to conduct business both in the local market and outside the local markets of the UAE. Any geographical limits do not bind them for trading purposes.       

Key Differences between Free Zone and Mainland Company in UAE

The key differences between Free Zone and Mainland Company in UAE have been laid down under the following heads:    

1. Ownership

Before 2021 Mainland companies were not a preferred business set up for foreign investors due to the restrictions imposed by the government with respect to the ownership of the Mainland company. After the recent amendment in the country’s company law, a foreigner can have 100 % ownership of the business. This partial ownership is still limited to certain kinds of businesses specified by the government, where 51% of the company is in the control of a UAE Local/Local Sponsor and Foreigners can have up to a maximum 49% stake in the business.

A Free Zone company does not have any such restriction over ownership, and a foreigner can have 100% ownership of any business. This is because a Free Zone company does not make it mandatory to have a local sponsor.

2. Office space specifications

Every Mainland company in UAE should have a minimum physical space of 200 sq. Ft. for official purposes.

There is no such hard and fast rule in the case of Free Zone companies to have a physical office space. A Free Zone company can work without an office or have virtual offices. 

3. Limitations to doing business

A Mainland Company in UAE has no geographical limitations in carrying out its business activities. A mainland company has been permitted to trade anywhere in the UAE, including the free zones in the UAE.

On the other hand, a free zone company has been restricted from carrying on its trade operations outside its respective free zone. They can only carry out their business activities within the boundary of their free zone.

4. Audit requirements

Every mainland Company is required to carry out a mandatory audit at the end of every financial year. The financial statement should be made by an independent Auditor in accordance with the International Financial Reporting Standards (IFRS)^[1] and submitted to the authorities in accordance with the code.

On the contrary, a compulsory audit is not a requirement for all Free Zone companies. However, certain forms of entities are required to conduct a mandatory audit of accounts. These entities are Free Zone establishments and Free Zone Companies.

5. Minimum capital requirements

Minimum capital requirements for a company established in mainland UAE vary depending on the business activity the company carries out. In the case of a Free zone company, the minimum capital requirement depends on the emirate where the free zone is located.

6. Authorities issuing setting up of a company

To set up a company in the mainland UAE, the promoters need to take permission from the Department of Economic Development (DED) of their respective emirate. The DED issues the trade license to a company established on the Mainland. There are other authorities from which the promoters need to take approvals to set up their business. The other authorities are the Ministry of Labour (MIL), Ministry of Interior (MoI), respective municipality etc.

As mentioned before, every Free Zone is governed by its own Free Zone Authority in the manner prescribed by the unique set of rules of such authority. They are not required to take permission from any authority outside the Free Zone.

7. Cost of setting up a company            

Given that a mainland company is required to have a physical space with a minimum requirement of 200 sq. ft., it becomes pretty expensive along with the ancillary expenses.

The fact that there are no hard and fast rules regarding the necessity of physical offices for setting up businesses in Free Zones makes it cheaper and economically viable to open companies in Free Zones.

Conclusion 

A number of differences have been discussed above between Free Zone and Mainland companies, where Free Zones have been found to be a little more flexible in ease of doing business. In order to drive development on the Mainland, the UAE government has introduced changes in the foreign investments laws and the Dual License scheme, allowing free zone companies to do business on the Mainland. To know which jurisdiction would be better suited for your business, get on a call with UAE incorporation experts at Enterslice.

Read our Article: How Can I Start My Own Company in UAE?