Free Zone or Mainland: Pros and Cons Of Company Formation In The UAE

Establishing an entity on foreign land is not easy since you may not be well accustomed to the work culture, ethics and practices. However, UAE welcomes one with open arms and supports a conducive environment where each entity gets the best infrastructure, resources and market susceptibility for growing to its full potential; therefore, business setup in Dubai Free Zones has many advantages that one must leverage for their establishment.

However, to make the right place, home for your business, you need to identify everything the land offers, like choosing a Free Zone or Mainland for company formation in the UAE. To determine what’s better or best for your venture, we will observe the pros and cons of both the Free Zone and the Mainland and ascertain what it has for you.

Difference between Free Zone and Mainland In UAE:-

(1) Free Zone Company 

There are 45 Free Zones in the UAE. They have unique regulations governing them. Each Free Zone is permitted to operate its activities inside the Free Zone only or outside UAE. So it is more like an industrial bubble providing all the resources for the business and limiting its operation.

(2) Mainland Company 

On the other hand, a Mainland company is an inland company that can conduct its business activities in the local market in UAE and outside UAE. It gives freedom to carry the business in case of commercial and professional licenses. However, it can only be initiated by a foreign investor with a local sponsor onboard.

Both Mainland and Free Zone cater to diverse needs of varied industries and have their share of pros and cons, which are:

Pros and Cons of Free Zone Company Formation in UAE:-

The Pros 

(i) Industry targeted opportunities 

All the Free Zones operating in the UAE provide industry-specific infrastructure. For example, the coveted Jebel Ali Free Zone (JAFZA) and Dubai Airport Free Zone (DAFZA) have perfectly fitting infrastructures for a trading and logistics entity company over a Mainland location. While JAFZA has direct access to the port, DAFZA has uncompromised access to the airport, making the custom clearance process exceptionally efficient.

(ii) All service at one place 

Free Zones provide an easy and swift incorporation procedure to foreign ventures. Investors don’t have to unnecessarily bother with applications for a trade license in the Free Zone of UAE. all the related service is offered under one roof and is issued within a few weeks.

(iii) VAT Advantage 

There are 25 Free Zones classified as Designated Zones for VAT by the Federal Tax Authority. These specific zones will be treated as ‘outside the state’ under VAT. That is to say that no VAT will be liable on the transactions for import of commodities in these Designated Zones, supply of goods within the zone or between the zones.

(iv) 100% foreign ownership 

Business groups no longer are required to have Emiratis as a sponsor with 51% shareholding.

(v) 100% repatriation of capital and profits 

Businesses are not required to pay any direct taxes on corporate profits and therefore can avail 100% of capital and profits repatriation.

(vi) 100% corporate and personal income tax exemptions

Tax imposition is limited to foreign gas or oil-producing companies and branches of international banks operating within the UAE only. Therefore, all other companies established in the UAE are not liable for corporate tax. Furthermore, the UAE Federal Government does not impose any form of tax on income earned by individuals in the UAE, making an individual’s earnings free from tax.

The Cons 

(a) Limited Location

Since they are dedicated industrial locations, they are set up far from the city. The setting up their business in the Free Zones can trade only within the Free Zone area. An investor wishing to trade in the UAE market must compose an agreement with a distributor necessarily. Then the goods will be traded outside the Free Zone through that distributor only.

(b) Rental space expense 

An investor should choose a Flexi-desk or office option while obtaining the Free Zone license in the UAE. Establishments such as manufacturing units have to rent warehouses or land plots in the Free Zone. However, the rent of such spaces is quite expensive and fixed. Therefore one cannot bargain or negotiate for a reduction in the rental scheme.

Reasons why one should choose Free Zone:-

(1) Easy setup 

Setting up a business in a Free Zone is extremely easy and lucid. The application process depends entirely on the nature of the business and the Free Zone chosen. After submitting a few necessary documents, including passport copies and business paperwork, the processing takes not more than a few weeks.

(2) Support and assistance  

Before and after the post-setup of the business, intensive support is provided by the Free Zone authorities, such as aid in the visa application of shareholders and dependents such as spouses and other employees. They also help open corporate bank accounts and organise meetups with the right bank for your business, hosting networking camps and connecting freshly brimming start-ups.

(3) Privacy

Investors who are privacy-conscious choose Free Zones since information like shareholder details are not disclosed to the general public under no circumstance.

Pros and Cons of Mainland Company Formation in UAE:-

The Pros 

(a) Relaxed legal contract 

A Mainland company offers fluid legal arrangements between the local sponsor and foreign shareholders. The local sponsor is conveniently paid the annual fee or percentage of sales or profit. On the other hand, the Foreign shareholder retains 100% control of the company. The local partner has no indulgence in the business’s regular or day-to-day operation and administration.

(b) Freedom in conducting business 

Mainland entities are allowed to conduct business with other Mainland entities in Dubai or UAE and have the liberty to do their business in any part of the UAE or beyond, unlike Free Zone entities, which can conduct business only in that particular zone.

(c) Government tender 

Only Mainland companies can carry on governmental contracts, unlike Free Zone companies that can only deal with private commercial projects.

(d) Free to choose the office location 

Mainland businesses have the choice to select the location of their office anywhere in Dubai. This allows them to enter into business with the local market and even establish multiple company branches and, therefore, capture a solid presence in the market.

(e) No constraints on the number of visas issued on Mainland license 

There are absolutely no constraints on the number of visas issued on a Mainland license, and obtaining the visa for the Mainland depends entirely on the office space required.

The Cons 

(i) Need for a local sponsor 

A Mainland company formation in Dubai necessarily requires a local sponsor or UAE national onboard. As per the general arrangement of shareholding of the company, the UAE national sponsor holds 51% of the company’s share and the Foreign shareholder or shareholders hold the remaining 49% of the share.

(ii) Multiple State bodies 

An investor has to deal with multiple government departments to obtain a trade license in the UAE. Furthermore, suppose your business activity is in the form of consultancy, accounting, healthcare, architecture, legal firms etc. In that case, you will have to procure special approvals from concerned authorities. In addition, the general managers in the Mainland consultancies must pass the placement courses and tests of American University in Dubai.

(iii) Hidden costs 

Exports and re-exports come at a higher cost in the mainland, unlike Free Zones, and export customs duty is not accessible on the mainland. As a result, investors might be wary of it at the time of incorporation, and this might alter their business plans.

Reasons why one should choose Mainland incorporation:-

(1) No currency restriction 

There is no currency restriction involved with Mainland businesses in Dubai.

(2) Simple registration 

The registration process for Mainland companies is not cumbersome and very straightforward and does not require any yearly audits.

Therefore, choosing between Free Zone and Mainland form of business entirely depends on your business model, type of industry, target market, capital and stakeholders. Both provide resources for a business to grow competitively and cater to an establishment’s diverse needs in different ways. Therefore the choice of the company incorporation lies entirely on one pillar, and that is what you wish for it to achieve.

Future Vision helps you make this crucial decision and helps you further in the process of applying for the license that you need and is ideal for your entity. From application to issuance, to set up to further consultation needed in future, at no point of time you will ever feel alone in your journey of carving your mark in the UAE market, with Future Vision.

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