Are you planning on setting up a company in the United Arab Emirates but feel unsure what type of company to incorporate? Like everything in life, there are a number of challenges – as well as opportunities – to navigate first.
The UAE is fully committed to maintaining a stable, proactive and business-friendly environment. A liberal, but soundly-based regulatory framework, coupled with several business growth promotion initiatives and a favourable tax environment, makes the country an extremely appealing choice for investors looking to set up a company.
One of the most common questions we are asked at Swiss Group is: “What are the advantages and disadvantages of setting up a free zone or mainland company in the UAE?”
There is no simple answer regarding which option is best. Instead, the question requires a thorough assessment and understanding of client needs and requirements to offer the right solution. When considering free zone versus mainland companies, it depends on customer location, (whether abroad or in the UAE), and the nature of the business activity to be carried out in, or from, the UAE.
You can rely on the experts at Swiss Group to offer you sound, specific company formation and set-up advice, to help ease the decision on where and how to set up your venture. Here is our list of pros and cons between Mainland and Free Zone Companies.
The UAE Commercial Agencies Law applies to most economic activities conducted in mainland UAE. Foreign companies intending to conduct business in mainland UAE can do so either through a limited liability company or a branch / representative office of a foreign entity.
The main advantages of having an onshore mainland entity include fewer restrictions on how business activities can be undertaken and that a mainland company can legally trade freely within the UAE. There is no restriction in business premises location, provided it is located onshore and in the respective emirate from which the license is issued.
Federal law stipulates that UAE nationals must own at least 51% of the company’s share capital (while the remaining 49% may belong to foreigners) for the majority of company activities from an official government list of more than 2,000 business activities.
Businesses that require a local sponsor, who owns at least 51% of shares in the company, can become a challenging and daunting experience for foreign investors and finding a reliable local partner in a foreign country can be difficult. Often, the main concern for an investor is how much involvement the sponsor will have and whether the local sponsor could potentially interfere in business operations request a percentage of profits or possibly make it difficult for the foreign investor to exit in future. While not all concerns can be eased, experienced business and legal partners such as Swiss Group can help set up the legal structure and corresponding agreements with reliable local partners, to minimize these risks.
Since June 2021, around 1,000 of the listed business activities (mostly commercial, trading and industrial activities) can now be conducted under 100% full foreign ownership. Professional Licenses, branches of foreign or free zone companies and Sole Proprietorship companies, can be directly registered in the UAE without the need to appoint a local service agent, as previously required. Dubai Economy has also stated that there will be no additional fees, guarantees or enhanced capital requirements in terms of activities now newly eligible for 100% foreign ownership.
In short, to penetrate the UAE mainland market and work with locally based customers and/or governmental bodies, UAE mainland establishments are the only option.
Free Zone Companies
As an alternative to setting up a mainland company, foreign investors can also establish a 100% foreign owned company, with a corporate or individual shareholder, or a branch, in one of the various free zones across the UAE.
The first UAE free zone opened in the 1980s, setting the framework for the many that followed. Today there are around 45 free zones across the UAE. Most of the free zones are ‘themed’, for example Dubai Health Care City and Dubai Internet City, and the activities permitted in the respective free zone were originally to be in line with the zone’s specific theme. While DIFC and ADGM are financial free zones also offering regulated financial activities, many other free zones, such as the Dubai Multi Commodities Centre (DMCC) and JAFZA are “generalist” free zones, offering a broad and comprehensive list of licensed trading and services activities.
One of the main advantages of operating as a free zone company is that it offers complete control over your business, with 100% foreign ownership. While this benefit may have been eroded by the June 2021 changes in mainland company ownership, (see above), the new mainland law is not universally applicable to all business types.
A free zone, by its very nature, is a clearly defined tax-free zone. Each free zone, established by an act of the competent Emirate, is administered and governed by its own regulatory authorities and operates under its own rules and regulations. Companies and individuals licensed in free zones are exempted from all taxes, including income tax, (depending on the free zone) for up to 50 years.
Exemption from import duties is also a key benefit. Free zone licensees are allowed to import goods or equipment into the free zone from a foreign country without payment of customs duties.
While a free zone set up means you have complete freedom to repatriate capital and profits, a free zone licence is only given on the proviso of working out of the UAE or between the free zones, not for trading within the UAE. In case this would be required, free zone companies can work with locally appointed distributors. In other words, legally, you can only trade outside of the country or between the free zones.
There is substantially less red tape in free zone company formation. It is easier and quicker to register a company in a free zone than to set up a mainland business. Most procedures are in English, while company documents are mostly bilingual (English/Arabic). If speed of set up is important to you, many free zones can help you register your venture in just ten days, certain free zones even in one week, usually depending on the shareholding structure.
Mainland vs Free Zone
With that brief overview of the benefits, we’ve summarized the key criteria of each set up type:
Many mainland businesses require 51% local ownership. Since June 2021, more than 1,000 activities can apply for full foreign ownership.p
100% full foreign ownership.
Scope of Business
Includes inside and outside the UAE.
Only permits the company to conduct business within the free zones jurisdiction or outside the UAE.
Minimum office space after one year of ownership only, size is depending on the number of visas required.
Free zones offer a company set up with or without office space depending on the business activity and the number of employees.
No restrictions on how many, but the number of visas you require is directly related to the office space you must rent.
Virtual office agreements, often called flexi-desks, can include between one and six visas.
Physical offices are available, linked to the number of visas that can be applied for.
Financial Record / Audit
Financial auditing is mandatory.
While not all free zone entities are required to undertake a financial audit, it is highly recommended.
No standard requirement of minimum share capital, it is determined by its legal structure.
Share capital deposit proof and amount varies from zone to free zone.
All in Arabic, the company founder(s) need to be present in the UAE to sign documentation – or a fully attested Power of Attorney needs to be in place to allow another signatory to take on the role.
The jurisdiction language is English and Arabic. Free zones usually offer digital, remote signing and payments. Certain free zones allow individual shareholders to virtually sign the incorporation documents.
This brief guide to company set up is by no means comprehensive, and as mentioned above, a thorough assessment and understanding of your needs and requirements is crucial to be able to offer the right solution.
Swiss Group provides clients with comprehensive and practical advice to navigate the potential legal and administrative pitfalls in the UAE. Under Swiss management, our international team of qualified practitioners, lawyers, accountants and business consultants have been combining expertise and capability with intimate and profound knowledge of the local requirements in the Middle East since the 1970s.
Ensuring your company complies with all administrative and statutory requirements can certainly be cumbersome. Outsourcing these functions to, and working with, a reliable and knowledgeable partner such as Swiss Group enables you to focus on what you do best – growing your business.