Arguably, the biggest consideration when starting your own business in Dubai is to choose the right type of business entity. You generally have 2 main choices: mainland or free zone entity. Each has its own advantages and disadvantages with the right choice depending on the business activities performed by your company, intended trading partners, ownership structure and several other factors.
What is a Freezone Company?
Free zones are economic areas where services and goods can be traded, usually with tax. By operating in a free zone, you can enjoy benefits such as 100% foreign ownership, 100% corporate tax exemption, 100% repatriation and capital funds.
A free zone, is a clearly defined tax-free zone . Each free zone, established by an act by its respected emirate is administered and governed by its own regulatory authorities and operates under its own rules and regulations. Companies and businesses licensed in free zones are exempted from all taxes, including income tax for up to 50 years. However this depends on the free zone itself.
Today there are around 45 free zones across the UAE. Most of these free zones are ‘themed; , for example Dubai Internet City and Dubai Healthcare City, the activities permitted in each free zone are usually specific to the zone’s specific theme. There are also “generalist” free zones which offer a broad and comprehensive list of licensed trading and services activities
There is usually less restrictions in setting up a company in a free zone. It is easier and quicker to register a company in a free zone than to set it up in the mainland . Most procedures are in English while company documents are mostly bilingual (English/Arabic) . This makes it attractive for entrepreneurs and foreign investors and leads to them being more inclined to set up the business in the free zone.
Cost of Freezone Company Setup
The cost to set up a business in a Free zone varies from free zone to free zone. There are 4 main costs involve with setting up a company in a free zone.
1. Company Registration Fee (aed9,000- aed10,000)
2. Office Fee (aed15,000 – aed20,000)
3. License Fee (aed10,000 – aed50,000)
4. Share Capital(aed1,000 – aed1,000,000)
What is a Mainland Company?
Mainland companies benefit by having access to the local market as well as markets outside the UAE. In order to be registered as a Mainland LLC Company, you must obtain a license by the Department of Economic Development (DED) of the respective emirate.
The UAE Commercial Agencies law applies to most economic activities conducted in mainland UAE. Foreign companies intending to conduct business in the mainland can only do so through limited liability company or a branch or representative office of a foreign entity .
According to Federal law, UAE nationals must own at least 51% of shares in the company . This can be difficult for foreign investors as it would be hard to find reliable local partners in a foreign country.
This can grow into a big concern for an investor as well as how much involvement the sponsor will actually have in setting up the business and whether the sponsor could potentially interfere with business operations. In order to avoid this from happening , the entrepreneur must obtain assistance from experienced legal partners who can set up the legal structure with local partners minimizing risks of being exploited.
Costs Of Mainland Company Setup
Mainland Companies have more costs and procedures in place that they have to go through during business setup , these costs include:
– License Fee- the DED offers various license options , but the standard trade license is usually 5% of the rent. This does not apply to a general trading instant license , merchant license and launch licenses.
– Approval from DED
– Dubai Chamber of Commerce
– Approval of Trade Name
– Office Rent
– Attestation of Memorandum of Association (MoA)
– Drafting of contract and court agreement attestation
– Registration with Ministry of Economy
– Trade license fee
– UAE local sponsorship fees depend on the nature of the business
Ownership and Business Scope
If you establish a company on the mainland as a foreigner, you were only allowed to own 49% of the company whilst the remaining 51% is owned by the Emirati sponsor. Companies established in free zones have no ownership restrictions and doesn’t require the need for local sponsors , therefore entitling you to 100% ownership from the moment you set up your business. However recently according to the UAE government, 100% foreign ownership is allowed for a selective number of businesses registered on the mainland.
However, Free zone business cannot have business operations outside of the said free zone without the assistance and help of a local agent. This restriction does not apply to mainland companies who are free to operate everywhere and anywhere in the UAE.
Workspace and Visas
A mainland company’s physical office must have a minimum of 200square ft. The DED will issue a license for the company . On the other hand, it isn’t mandatory for free zone companies to ensure a physical location as many free zones allow companies to have virtual workplaces.
Mainland Companies are not subject or bounded to any visa restrictions; however, the number of visas issued is dependent on the workspace area. SO if your company requires additional visas, it first has to acquire a larger workspace. Unlike mainland companies, free zone companies do have restrictions on the number of visas they are able to apply for. Typically, the number of visas available depend on the regulations of the free zone as different free zones have different regulations .
Business Setup Approvals
You will require government clearance from several government agencies for a mainland company. These include the Department of Economic Development, the Municipality of Dubai, the Ministry of Labor, etc. On the contrary, each free zone follows their own regulations for any new businesses established inside its jurisdiction. Furthermore, you don’t need permission from any governmental authorities or agencies before starting your company in a free zone.
Audits
All companies established and operating in the mainland have to prepare a financial audit at the end of each fiscal year . However not all free zones require companies to process their yearly financial audits.
There are different advantages to setting up a mainland company and setting up a free zone company.
Incorporation Process
Mainland companies need to have all their documents in Arabic and the company’s founders need to be present in the UAE itself to sign all required documentation – or a fully attested Power of Attorney needs to be set in place to allow another individual to take on the role and sign documentation .
On the other hand, the jurisdiction language in Free zones is usually both, English and Arabic. Free zones usually offer digital, remote signing and payments. Certain free zones allow individual shareholders to virtually sign the incorporation documents.
Advantages of a mainland company include
– No limit on number of visas
– No limit on where they can set up their offices can be located within the registered emirate
– Can establish multiple company branches in the emirate
– Free to access global markets
Advantages of a Freezone company
– Full 100% ownership without the need of a local sponsor
– Free zones provide business advice and networking support
– 100% exemption from import and export duties
– 100% repatriation of capital and profits
There is no answer that solves the question of “Which option is better?” . Both Free zone and mainland businesses come with their benefits and drawbacks, therefore it depends on the activities of the business and the target audience/market that the business plans to market towards in the UAE.
Sources:
https://blog.dmcc.ae/company-registration-in-dubai-mainland-vs-free-zone-vs-offshore
Understanding mainland vs freezone company setup options in the UAE
