What is a Mainland Company in UAE?
Mainland companies are legal entities registered with an Emirate authority (Department of Economy and Tourism). As a result, these companies enjoy a certain level of freedom in their operations and setup.
They can issue visas, do business freely with other companies in and outside the UAE, and potentially bid on government contracts.
According to new regulations, Foreigners can have 100% ownership of their mainland company in most activities. This is a significant change from older regulations where mainland companies needed to have a local owner with a 51% share in their company.
What is a Free Zone Company?
UAE has over 45 free economic zones also known as free zones with their own regulations and governing body known as Free Zone Authority (FZA). A free zone company is simply an enterprise registered with one of the designated economic zones in the UAE.
Free zone companies can offer their services to the global market and inside the free zones while benefitting from the zero tax policies. However, they cannot operate directly on the mainland. Moreover, it is generally faster to set up a free zone company compared to the mainland.
However, certain Free Zones have been considered by the UAE Cabinet to be outside the UAE for tax purposes. These Free Zones are known as Designated Zones. Trade conducted within or outside a Designated Zone is VAT-free, but there are certain exceptions to it.
Mainland Vs Free Zone: What’s the difference?
Here are some of the key differences between a mainland and a free zone company.
| Factor | Mainland | Free Zone |
| Scope of business | Can operate anywhere in the UAE and internationally | Can operate internationally and within the free zone |
| Taxation | 9% corporate tax on profits exceeding AED 375,000 | Option to choose 0% tax subject to conditions, else normal scheme |
| Customs and Import/Export | Subject to customs duty | Exempt from customs duty |
| VAT | 5% | Generally 5%, some zones also offer 0% VAT advantage |
| Physical office | Depends on the type of business license | Can have a physical or virtual office |
| Ownership | 100% foreign ownership is allowed in specific sectors as per the latest regulations. Otherwise, a local partner with 51% ownership is required. | 100% foreign ownership |
| Visa eligibility | No restrictions, depending on office size | Limited visas |
| Annual Audit | Obligatory | Depends on the free zone |
| Regulatory body | Department of Economic Development (DED) | Free Zone Authority (FZA) |
VAT Implications
| Zones | Goods or Services | From | To | Taxability | |
| 1 | Designated Free zone | Goods | Designated Zone | Designated Zone | Out of Scope |
| Designated Zone | Non-Designated Free zone | VAT @ 5% | |||
| Designated Zone | Mainland | RCM | |||
| Designated Zone | To other countries | Out of Scope | |||
| 2 | Non Designated Free zone | Goods | Non-Designated Zone | Non Designated Zone | VAT @ 5% |
| Non Designated Zone | Designated Free zone | VAT @ 5% | |||
| Non Designated Zone | Mainland | RCM | |||
| Non Designated Zone | To other countries | Zero Rated | |||
| 3 | Mainland | Goods | Mainland | Mainland | VAT @ 5% |
| Mainland | Designated Free zone | VAT @ 5% | |||
| Mainland | Non Designated Free zone | VAT @ 5% | |||
| Mainland | To other countries | Zero Rated | |||
| 4 | From Other Countries | Goods | From Other Countries | Designated Zone | Out of Scope |
| From Other Countries | Non-Designated Zone | RCM | |||
| From Other Countries | Mainland | RCM |
CT Implications
Mainland Companies:
In UAE, businesses earning less than AED 375,000 will not be taxed, while those earning more will be charged a 9% tax.
Freezone Companies:
With regards to the UAE Corporate Tax applicability, a Free Zone Person (FZP) can be categorized into two types.
- Qualifying Free Zone Person (QFZP): A QFZP meets certain specified conditions as set out in the tax regulations (to be explained later in this article). A QFZP can enjoy certain tax benefits (e.g. 0% tax on qualifying income), as stipulated in the legislation.
- Non-Qualifying Free Zone Person (NQFZP): An NQFZP, on the other hand, is a FZP that does not meet the specific conditions required to be a QFZP. As such, an NQFZP may not have access to the same tax benefits or exemptions as a QFZP.
Understanding the above two classifications is important, as it determines the tax liabilities and benefits applicable to an entity operating within a Free Zone.
Tax Rates for Free Zone Companies
Corporate Tax shall be imposed on a Qualifying Free Zone Person at the following rates:
- 0% on Qualifying Income.
- 9% on Taxable Income that is not Qualifying Income