Freezone vs Mainland Company. Which one to choose?

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.

1. 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.
2. 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