Many entrepreneurs and investors inquire to us about setting up a business in either a free zone or the mainland. To provide the needed clarity,Dubai business advisors has devised a blog covering the key differences between these two jurisdictions.

What is a Free Zone Company?

A free zone company (FZCO) is a company which is located in a designated area,

Here is a list of popular free zone locations in the UAE:

The scope of business is limited to:

  •   Trading inside the free zone
  •   Trading with local markets via a mainland distributor
  •   Importing & exporting (typically re-exporting).

 

How are Distributors & the Local Market VAT relevant to a Free Zone Company?

FZCOs use distributors to trade goods with the local market as it cannot be done directly.

The distributors are charged a 5% VAT fee when selling products into the local market, hence the fee is transferred to the FZCO. It is possible to negotiate the fee to be lower than 5% of the local market invoice.

FZCOs are exempt from distributor customs fees/VAT charges when importing or re-exporting goods. In addition, the advantage of a free zone company is tax optimization where the company is exempt from tax as per the Double Tax Avoidance Agreement (DTAA).

Providing professional services to the local market is relatively easier for FZCOs as it does not require a distributor. However, it is still not possible to physically conduct business activities (e.g face-to-face sales & promotion) outside of the free zone. If you wish to learn more about the scope of professional activities conducted outside of a free zone, refer to one of our consultants.

 

Does a Free Zone Company need government approvals?

As the FZCO operates in a separate jurisdiction to the mainland, it does not require approvals from government bodies other than the respective Free Zone Authority such as the Jebel Ali Free Zone Authority (JAFZA). However, if the FZCO wishes to expand its scope of business or to conduct special activities – they will require approvals from UAE government bodies such as the Department of Economic Development (DED).

What is a Mainland Company?

Unlike FZCOs, mainland firms can be located anywhere in the UAE and have a broad scope of business activities as determined by their trade license. They are free to conduct business activities both inside and outside the UAE, hence, they require licensing and approvals granted by a variety of government bodies such as:

 

mainland dubai

In addition, certain activities require approvals from designated bodies such as:

  • Knowledge and Human Development Authority (KHDA, educational activities)
  • Dubai Health Authority (DHA, medical activities)
  • Food Department of Municipality (food-related activities)
  • Civil Defense (both construction safety & education)
  • Dubai Land Department (DLD, property rental activities)
  • Real Estate Regulation Authority (RERA, real estate)

Does a Mainland Company require a UAE National’s ownership?

If the company is under a commercial license (limited liability company (LLC), then yes, the ownership structure allocates 51% of share ownership to a UAE National (local partner) and 49% to the expat partner.

Professional licenses permit 100% expat ownership while the UAE National is appointed as a local service agent. This agent deals with government approvals and licensing and is not required to be a part of the company’s activities unless he or she volunteers to do so.

Is there a minimum office space requirement for mainland companies?

Yes, the rented office size must be at least 200ft2, if the requirement is not met the business will not be licensed by the DED.

The DLD issues the Ejari Certificate which is presented along with the yearly tenancy contract to the DED for the business license.

Does a Free Zone Company have any office requirements?

Luckily no, free zone companies can be licensed without having a physical presence in the UAE.

Free Zone Authorities (FZAs) permit the usage of “Flexi-desks” (for a minimum of 5 hours per week) instead of renting an office.

FZCOs are thus considered friendlier to market-entrants in relation to mainland firms.

However, the number of visas that can be procured to an FZCO depends on the office size. If the company does not have an office and is using Flexi-desks then they are permitted 2-6 visas depending on the Free Zone. If you require more visas, then you are required to lease an office in the respective free zone.

Does a Mainland Company also have a limit on visas?

No. Fortunately, visas are unlimited for mainland firms. However, the MoL determines the electronic quota of visas based on staffing requirements and office space amount. The staffing requirements do not include outdoor employees such as sales staff, PRO, delivery staff or drivers.

What is the best license choice for my businessMainland or Freezone?

To answer that question, you require advice from a Market-Entry Specialist. Dubai Business Advisors has 17 years of experience in launching start-ups or helping MNCs establish a foothold in the heart of the Middle East. We can assess the market feasibility of launching any business and provide PRO, Business Setup, HR, Financial Advisory and Intellectual Property solutions to ensure your growth in the future!

To learn more about these business-jurisdictions, get in touch with one of our specialists via:

Get In Touch!

You can directly get in touch with us by using the live chat or sending a message using the contact form 

Alternatively, you can also send an email to info@adamglobal.ae or Call +971 4 341 9701

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