Understanding mainland vs freezone company setup options in the UAE
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Understanding mainland vs freezone company setup options in the UAE

Understanding mainland vs freezone company setup options in the UAE

An investor’s guide to the advantages and challenges to expect when choosing to setup either a freezone or mainland company

Are you planning on setting up a company in the UAE but feel unsure what type of company to incorporate? 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 sound 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 is: “What are the advantages and disadvantages of setting up a freezone 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 freezone 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.

Here is our list of pros and cons for both mainland and freezone companies:

Mainland 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 or 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 the company can legally trade freely within the UAE. There are no restrictions for business premises location, provided it is located onshore and in the respective emirate from which the licence is issued.

Federal law stipulates that UAE nationals must own at least 51 per cent of the company’s share capital (while the remaining 49 per cent 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 per cent 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 can help set up the legal structure and corresponding agreements with reliable local partners, to minimise 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 per cent full foreign ownership. Professional licences, branches of foreign or freezone companies and sole proprietorship companies can be directly registered in the UAE without the need to appoint a local service agent, as previously required.

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.

Freezone companies
As an alternative to setting up a mainland company, foreign investors can also establish a 100 per cent foreign-owned company with a corporate or individual shareholder, or a branch, in one of the various freezones across the UAE.

The first UAE freezone opened in the 1980s, setting the framework for the many that followed. Today, there are around 45 freezones across the UAE. Most of the freezones are ‘themed’, for example Dubai Healthcare City and Dubai Internet City, and the activities permitted in the respective freezones were originally to be in line with the zone’s specific theme.

While DIFC and ADGM are financial freezones also offering regulated financial activities, many other freezones, such as the Dubai Multi Commodities Centre (DMCC) and JAFZA are “generalist” freezones, offering a broad and comprehensive list of licenced trading and services activities.

One of the main advantages of operating as a freezone company is that it offers complete control over your business, with 100 per cent foreign ownership. While this benefit may have been eroded by the June 2021 changes in mainland company ownership, the new mainland law is not universally applicable to all business types.

A freezone, by its very nature, is a clearly defined tax-free zone. Each freezone, 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 licenced in freezones are exempted from all taxes, including income tax, (depending on the freezone) for up to 50 years.

Exemption from import duties is also a key benefit. Freezone licensees are allowed to import goods or equipment into the freezone from a foreign country without payment of customs duties.

While a freezone setup means you have complete freedom to repatriate capital and profits, a freezone licence is only given on the proviso of working out of the UAE or between the freezones, not for trading within the UAE. In case this would be required, freezone companies can work with locally appointed distributors. In other words, legally, you can only trade outside of the country or between freezones.

There is substantially less red tape in freezone company formation. It is easier and quicker to register a company in a freezone than to set up a mainland business. Most procedures are in English, while company documents are mostly bilingual (English/Arabic). If the speed of set up is important to you, many freezones can help you register your venture in just 10 days and certain freezones can do so even in one week, usually depending on the shareholding structure.

Mainland vs Freezone
With that brief overview of the benefits, we’ve summarised the key criteria of each set up type:

Criteria Mainland Freezone
Business ownership Many mainland businesses require 51 per cent local ownership. Since June 2021, more than 1,000 activities can apply for full foreign ownership. 100 per cent full foreign ownership.
Scope of business Includes inside and outside the UAE. Only permits the company to conduct business within the jurisdiction of freezones or outside the UAE.

 

Office space Minimum office space after one year of ownership only, size depends on the number of visas required. Freezones offer a company set-up with or without office space depending on the business activity and the number of employees.
Residence visa 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 records / audit Financial auditing is mandatory. While not all freezone entities are required to undertake a financial audit, it is highly recommended.
Share capital No standard requirement of minimum share capital. It is determined by its legal structure.

 

Share capital deposit proof and amount varies between freezones.
Incorporation process 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. Freezones usually offer digital, remote signing and payments. Certain freezones allow individual shareholders to virtually sign the incorporation documents.

Michael Lane is the managing director at Swiss International Legal Consultants, Swiss Group

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