UAE Free Zone vs. Mainland Business Formation: What’s the Difference?

Dubai View

Of all the territories in the MENA region, Dubai has proven itself to be one of the most promising places for company formation. Not only does it have a favorable tax environment and rich natural and financial resources, but it also comes with a highly diverse workforce and ample trading opportunities.

More importantly, Dubai gives your business the potential to expand its reach to over 1 billion customers. This is all thanks to its prime central location and proximity to nations across the Middle East, Eastern Europe, Asia, and Africa.

When planning a business setup in the UAE’s most populous city, one of many considerations that will arise is your company’s operating jurisdiction. You’ll have several options when setting up shop in Dubai, but your primary choices would be between a mainland limited liability company and a free zone company.

Here, you’ll learn the key differences between the two to help you decide the best-suited setup for your business.

What Is a Mainland Limited Liability Company?

Before proceeding to the jurisdiction part of this guide, you must first learn what a limited liability company or LLC is. In essence, this kind of setup defines the liabilities of a firm based on its shares. Considered one of the oldest business structures internationally, an LLC can have two to 50 shareholders.

In Dubai, for an LLC to be established as a mainland company, it needs to be onshore and licensed by the Department of Economic Development (DED). Companies under this operating jurisdiction have a flexible geographic reach that covers both the local and international markets (more on this later).

What Is a Free Zone Company?

The UAE Free Zone company setup entails the establishment of a company under separate business jurisdictions in Dubai. These so-called “free trade zones” are separate from the mainland and every jurisdiction has its own policies and regulations.

A UAE free zone firm can operate its business within its free zone and outside of the country. Most of them are categorized according to the specific industries they cater to, though some are more flexible than others.

There are plenty of free zones all over the UAE, but most of them are located in Dubai. Here are some examples of the free zones in the emirate and the types of businesses set up there:

  • Dubai Academic City – This free trade zone is focused on educational institutions and recruitment companies.
  • Dubai Airport Free Zone – This free zone welcomes all kinds of international trade business activity.
  • Dubai Biotechnology & Research Park – This is focused more on medical and pharmaceutical research and the development and implementation of modern biotechnology.
  • Dubai Cars & Automotive Zone – This is a free zone for companies involved in vehicle trade, both used and brand-new.
  • Dubai Design Centre – All companies here are part of the interior design and furniture and accessories production sector.
  • Dubai Flower Centre – This free zone caters to companies offering services for the selling, purchase, storage, and logistics of fresh flowers, plants, and other perishable goods.
  • Dubai Healthcare City – Here, you’ll find plenty of medical institutions and health centers in Dubai.
  • Dubai Industrial City – Business activities here concentrate more on the manufacturing industry.
  • Dubai International Financial Centre – This is the place for banks, consulting and financial services, and stockbrokers.
  • Dubai Internet City – If your niche is telecommunications, information technology, and programming, this is your kind of free zone.
  • Dubai Knowledge Village – This zone is for training and educational institutions.
  • Dubai Logistics City – In this free zone, you can put up companies offering services related to the logistics and transportation of goods.

Mainland vs. Free Zone Companies: How Do They Differ?

Although both types of firms operate within the UAE, mainland and free zone companies have significant differences that may affect how you do business.

1. Ownership

In the past, operating a mainland LLC in Dubai entails having a UAE national owning at least 51 percent of company shares. The rest is allotted to other shareholders of the firm.

However, the UAE cabinet has amended the rules, now allowing foreign investors in 122 categories from the following sectors 100 percent company ownership (We can also include the possibility of amending 122 business categories)

  • Agriculture
  • Manufacturing
  • Service

Moreover, in the case of a professional license, the expat owner can hold 100 percent of the shares provided that the company appoints a UAE national as a local service agent.

For free zones, foreign investors are granted complete ownership of the business. This means that the foreign entrepreneur will have full control over the business operations.

2. Scope of Business

As mentioned earlier, mainland companies have a more flexible reach in the UAE. This simply means that business operations can be run from anywhere in the country, regardless of the industry or specific activities.

They can also do business outside the country, though they need to get licenses from several government agencies. This includes the Dubai Municipality (DM), the Ministry of Labor (MOL), General Directorate of Residency and Foreigners Affairs Dubai (GDRFA/DNRD), and the Ministry of Interior (MOI).

For free trade zones, business scope is limited only to what specific zone their physical office is located in (see the list of examples above) or the international setting.

3. Office or Workspace

Another major difference between a mainland LLC and a free zone company is the floor area of the office space they are required to have.

For mainland firms, at least 200 square feet of office should be leased every year to get a license from the DED.

On the other hand, free zone companies don’t have any physical workspace requirement, though the rules vary from one jurisdiction to another. For example, some free zones have a plug-in-and-go kind of setup where licensees use business center desks for at least five hours every week called “flexi desks.”

4. Visa Eligibility and/or Requirements

Mainland entities can be eligible for as many visas as they need for their employees, though this is based on the floor area of their office. The MOL issues electronic quotas that reflect how many visas they can have, depending on the size of their place of business.

As a general rule, 80 square feet of office space is equivalent to one visa allocation. That said, companies can apply for a different set of quotas for staff members who are not in the office, like drivers or members of the sales team.

As for free zone firms, their license in the smart office package comes with two visas. Again, this may vary, as some free trade zones allow three to six visas on the same package.

Set Yourself Up for Success

Setting up a business is an undertaking that needs thorough preparation, especially when it comes to the type of company you’re putting up.

Use this article as a guide and set yourself up for success when launching your firm in the UAE.