Free zone or Mainland –  Which one should you choose?

Free zone or Mainland –  Which one should you choose?

Free zone or Mainland –  Which one should you choose?

Investors from all over the world have different aims and preferences when it comes to setting up business in Dubai. It is always important to find the most suitable investor-friendly location to set up business. UAE is known as a business hub and the most common reason for this is the presence of different types of business opportunities for people with various preferences. UAE offers different business options to investors and among these options for setting up business are mainland and free zones. So he question is which one is better free zone or mainland which one should you choose.

Both have certain advantages and disadvantages and investment opportunities and both these sectors are designed to engage different types of investors. The choice between mainland set up and free zone set up completely depends upon the kind of activities and nature of business you want to opt for. Simply put if you want to conduct business within the UAE then you must opt for mainland set up and if you want complete ownership of your business and control of operations of the business then free zone set up should be your first preference.

Now let discuss some of the main differences between free zone setup and mainland setup in UAE.

 Mainland Company:

Mainland Company is an inland company which is able to conduct its business activities in the local market in United Arab Emirates and outside UAE. Mainland companies have freedom to carry its business in case of commercial and professional licenses. Mainland Company formation in Dubai needs a local sponsor or a UAE national and the general shareholding arrangement of Dubai Mainland Company is that, UAE national Sponsor holds 51% share in the company and the Foreign Shareholder (s) holds 49% share in the company. The mainland company offers flexible legal contract between foreign investors and local sponsor, where the local sponsor is paid annual fee or percentage of sales/profits. The foreign investor holds 100% control of the company and local partner has no involvement in the day to day operations of the business. For mainland business setup the Department of Economic Development (DED) is responsible for registration, licensing, commercial compliance and consumer protection of the company in Dubai.

Advantages of Setting up Mainland Business in Dubai

Dubai mainland is the most preferred option business setup in Dubai because of the various advantages which are:

  • Exemption from corporate tax is given to Mainland Company in Dubai
  • There is 0% minimum capital requirement for setting up of Mainland Company.
  • Mainland companies can conduct business with other mainland companies in Dubai or UAE and have the freedom to do their business in any part of UAE or beyond. This feature sets give them advantage over free zones companies because free zones are generally restricted to perform their business activities in their respective free zone only.
  • Unlike free zone businesses, the Mainland companies have multiple options for conducting business activities. There is absolutely no constraint for mainland business as

They can cater to wider UAE economy with much scope of diversity.

  • Mainland businesses have a choice to select their office location anywhere in Dubai. This characteristic not only allows them to conduct business with local market but can establish multiple branches of the company hence, allowing the company to form a solid presence in UAE.
  • Mainland companies are permitted to carry on governmental contracts unlike free zone companies which are only permitted to carry out only private commercial assignments.
  • There are no constraints on the number of visas on mainland license. However, in order to obtain visas for mainland company will depend entirely on office space acquired.
  • For mainland business in Dubai there is no currency restriction involved.
  • 100% repatriation of capital and profits are permissible.
  • Registration process for mainland companies is straight forward and requires no yearly audit.

Free Zone Company:

Free Zone Company is an independent business entity with its own unique set of rules and regulations. Each free zone is allowed to operate its activities inside the free zone or outside UAE. The fundamental difference between mainland and free zone is that Free Zone Company cannot conduct its operation in non-free zone without the support of a local agent whereas a mainland company freely operates its business activities anywhere in UAE. There are numerous free zones in Dubai. The basic reason that foreign investors opt for free zone venture is to get complete ownership benefits, apart from utilizing the world class infrastructure, assure their assets and relish tax exemptions.

Why choose to set up in a free zone?

If you intend to establish a company in the UAE, there are a number of reasons to choose a free zone.

Setup in free zone is easy:

Free zones set up process are extremely easy and simple. The application process for free zone setup depends on nature of business and chosen free zone. Investors will be required to produce a few necessary documentations such as passport copies and business paperwork. The complete processing will take about a week or so.

Tax and duty:

The taxation system is by far the most fascinating reason to set up a business activity in a free zone. Free zone set up offers 0% corporate and personal tax, VAT exemption, currently at 5%. And not only that, the Free zone businesses also offers exemption on import and export tax too and can conduct business with no currency restrictions.

Ownership:

Setting up business in a free zone offers foreign investors complete company ownership. Most foreign investors willing to set up in the UAE mainland must have a local sponsor to conduct business.

Conducting business within the UAE:

Free zone businesses are not allowed to trade directly in the UAE’s local market; however this has been easily tackled. You can conduct business with a locally appointed distributor whose job will be trade your goods and services in to market and in return you have to give him certain fee for his services. More preferably, start your free zone business and later open branch offices of your free zone company throughout the UAE. These branch offices can be utilized to sell your offering and commence business within the UAE mainland.

Support and assistance:

Free zone authorities are ready to provide support during and after company are set up. Numerous free zones offer assistance when you intend to apply for visas for both shareholders and dependants i.e. Spouse or other staff. Most free zones also provide assistance with opening corporate bank accounts, giving advice on the perfect bank according to your needs and also organizing meetings in-branch for you. In terms of current business support, it is common practice for free zones to provide business advice and networking support as well as connection to different startup hubs and growth initiatives to assist fresh businesses to achieve success.

Privacy protection:

Lastly, free zones are generally famous with privacy conscious investors as company ownership and other company information such as shareholder details are under no circumstances disclosed to general public.

Main advantages of free zone company:

  • Complete ownership offered to foreign investors
  • Complete repatriation of capital and profits
  • Complete free transfer of funds
  • Complete exemption from import and export duties
  • Free zone company formation is immediate as compare to incorporation outside in the city
  • Economical workforce and  relatively easy recruitment policy
  • 25 years lease plan, warehousing facilities, possibility of areas for production and assembling etc.

 

Disadvantages of Free Zones Dubai:

  • A Free zone company is not permitted to conduct trade directly with the local UAE market.
  • A free zone company can only commence the local business through locally appointed distributors.

Differences between free zone and mainland set up:

 Ownership:

If you are planning to commence trade in the Mainland Company, you will be required to have a United Arab Emirates National in every mainland licenses. It might be a local sponsor or a local service agent. In case a commercial license is opted for, the foreign investor who set up a company in mainland United Arab Emirates can obtain up to 49% share of the company and the rest 51% of the company’s shares lay with UAE National.

But in term of a professional license, 100% shares can be acquired by foreign investor but still needs services of local service agent. Responsibilities of the local service agent include signing all the government applications and apart from that has no stake involved. The foreign investor is the solely responsible for all operations related the business with no interference from the local service agent unless agreed upon.

In comparison with Mainland Company, foreign investors savour complete ownership of the business. Presence of United Arab Emirates National in the license is not mandatory. This is by far the best benefit of free zone Company in Dubai.

Scope of business:

Companies that are entrenched in mainland United Arab Emirates faces no limits related to scope of business. Business can operate anywhere in Dubai, i.e. in free zones and even outside Dubai. They can take up commercial, professional and even industrial activities apart from banking and insurance.

Compared to mainland set up, a free zone company can only operate within the area designated to free zone. If they wish to conduct business in local market then they will require local distributor or an agent for assistance. The free zones are based mostly near sea ports and airports. So the most favored business for these set ups are import and export related services.

Work space

The minimum requirement for annual leased out area is 200 sqft for a mainland company. Once you have obtained  the company with the required area then a license will be issued to your mainland company by Department of Economic Development.

While a free zone company does not necessarily require physical office space. Depending upon the activity and nature of business, the business might not have physical office. One benefit that a free zone company can opt for is a flexi desks service which by the way is cost effective and with the help of this license business can take advantage from the common centre desks for minimum 5 hours  availed by any common business, hence saving initial cost of registration by new ventures.

Visa facility

There is no no visa limitation for a mainland license. An electronic portion is circulated by the Ministry of Labour to each mainland company.  It shows their ability for visas acquisition and if the company needs more staff then it can also enhanced. Visa eligibility depends on the office space, that being said if you have more office space then you can apply for multiple visas for your company. Driver and sales staff for outdoor assignments are not eligible for visa facility.

Each free zone license are offered 2 visas on the package of smart office and varies as different free zones in UAE permits 3-6 visas on this package. If you require more visas then requirement to lease out a physical office or a warehouse can get a number of visas.

 Approval from government authorities

Mainland Company’s license requires standard government approvals to obtain a license i.e. DED, Labour Ministry, and Department of Naturalization and Residency affairs of Ministry of interiors or immigration.

Also some other approvals are needed from external government authorities for conducting particular business activities such as Knowledge and Human Development Authority for education related licenses, Dubai Health Authority for medical licenses, Food Department of Municipality for all food license and many others.

However, most of free zone companies are related mainly to imports and re-exports. In this case these companies are not required to external authority’s approval for issuing of license.  They might require approval of external authorities only if they choose to acquire any special services.

So, businesses are required to make a choice between Mainland set up and Free zone set up. The answer simply put completely depends upon the kind of activities and nature of business you want to opt for. So, if you want to conduct business within the UAE then you must opt for mainland set up and if you want complete ownership of your business and control of operations of the business then free zone set up should be your first preference.