Comparing Corporate Tax Rates in the UAE: Mainland vs. Free Zones

Comparing Corporate Tax Rates in the UAE: Mainland vs. Free Zones

Beginning your dream business in the United Arab Emirates (UAE) is an exciting prospect for emerging entrepreneurs. With its stable political and macroeconomic conditions, future-oriented government, excellent infrastructure, and strategic location, the UAE provides a favorable environment for business growth. However, when considering establishing a company in the UAE, it’s essential to understand the differences between the mainland and free zone jurisdictions. One crucial aspect to consider is the corporate tax rates, which can significantly impact your business’s financial planning and profitability. In this blog, we will delve into a comprehensive comparison of corporate tax rates in the UAE’s mainland and free zones, helping you make an informed decision for your business.

Understanding the UAE’s Tax Environment:

The UAE has been known for its business-friendly tax policies, attracting entrepreneurs and investors from around the world. The country’s federal corporate tax rate is 9% on profits exceeding 375,000 UAE dirhams ($102,000), with no taxes levied on income below that threshold. However, most companies in the UAE are exempt from corporate tax, and the Value Added Tax (VAT) stands at 5%. These favourable tax rates contribute to the UAE’s competitiveness as a global business hub.

Mainland UAE: The Alluring Market:

A mainland company, also known as an onshore company, is not restricted in terms of legal geographical limits and can conduct business both within and outside the UAE. Establishing a mainland company provides access to the local market, where businesses can leverage diverse trading opportunities with minimal restrictions. The Department of Economic Development of the respective emirate issues trade licenses for mainland companies. However, mainland companies are subject to the 9% corporate tax on profits exceeding the defined threshold. The mainland jurisdiction offers great potential for growth and expansion.

Free Zones: An Attractive Alternative:

The UAE boasts more than 30 free economic zones, each with its own unique set of rules and regulations. Free zones provide businesses with enticing incentives, including 100% foreign ownership, exemption from corporate tax, VAT, and import/export duties, and a streamlined process for company setup. However, free zone companies are limited to operating within the respective free zone jurisdiction and are not permitted to conduct business outside the UAE, except for specific zones that have international trading privileges. It’s important to note that recent updates indicate the possibility of 9% corporate tax being applicable to free zone companies conducting trade with mainland UAE from June 2023, pending further official notifications and guidelines.

Comparing Mainland and Free Zone Jurisdictions:

To help you understand the distinctions between mainland and free zone jurisdictions in more detail, let’s explore the key factors that differentiate the two:

1. Scope of Business:

  • Mainland: Establishing a company on the mainland offers entrepreneurs the advantage of conducting business both inside and outside the UAE. This means that companies can freely engage in local market activities while also exploring opportunities beyond the borders of the country. The flexibility provided by mainland jurisdiction allows businesses to tap into a wider market, target diverse customer segments, and seize potential growth opportunities. Whether it’s establishing partnerships with local companies or expanding into international markets, mainland companies enjoy the freedom to explore various avenues for business development.
  • Free Zone: On the other hand, companies operating within free zones are typically limited to conducting business activities within the specific free zone jurisdiction. Each free zone is designed to cater to certain industries or sectors, which means that the scope of business may be more specialised and focused compared to the broader reach of mainland companies. While this specialisation can be advantageous for companies operating within their niche, it may pose limitations when it comes to diversifying into different markets or sectors outside the free zone. However, it’s worth noting that some free zones offer specific advantages and attract businesses within their targeted sectors, creating a vibrant ecosystem for industry-specific collaborations and networking.

2. Office Space:

  • Mainland: Establishing a company on the mainland comes with a mandatory minimum office space requirement. Companies are typically required to have a physical office space of at least 140 sq. ft. This ensures that businesses have a designated space for their operations and activities. The physical office space provides a professional setting for conducting business, hosting meetings, and accommodating employees. It demonstrates the commitment of the company to establish a physical presence in the local market and allows for a more traditional office setup.
  • Free Zone: In contrast, free zones offer more flexibility when it comes to office space requirements. Virtual offices are allowed in many free zones, eliminating the need for a physical office space. A virtual office provides businesses with a professional business address, telephone services, and mail handling, without the necessity of maintaining a physical office space. This option is particularly beneficial for businesses that do not require a physical presence or have remote operations. It allows for cost savings on office space rent, utilities, and maintenance, while still maintaining a professional image and meeting the necessary legal requirements.

3. Visa Permits:

  • Mainland: For mainland companies, the number of visa permits that can be applied for is based on the available physical workspace. As the company expands and requires more employees, it can acquire additional physical office space to accommodate the growing workforce. This allows for flexibility in obtaining the required number of visas to meet the staffing needs of the business. However, it’s important to note that there may be certain restrictions or limitations on the maximum number of permits that can be obtained, depending on factors such as the size of the office space and the nature of the business.
  • Free Zone: In the case of free zone companies, the number of visa permits available is limited. Each free zone has its own regulations and guidelines regarding visa allocation. Generally, there is a maximum limit on the number of permits that can be applied for, and once this limit is reached, further visa applications may become subject to restrictions. To apply for additional visas, free zone companies are required to acquire more physical workspace within the free zone. This means that expanding the workforce in a free zone company is directly linked to the availability of physical office space. It’s important for businesses to consider this limitation when planning for future growth and staffing requirements.

4. Taxation Laws:

  • Mainland: Corporate tax of 9% applies to profits exceeding the defined threshold, while VAT stands at 5%.
  • Free Zone: Free zone companies are typically exempt from corporate tax, VAT, and import/export duties, provided they comply with the relevant regulations and do not conduct business with mainland UAE (subject to potential changes from June 2023).

5. Number of Partners:

  • Mainland: Mainland companies in the UAE offer greater flexibility in terms of the number of partners involved. They can have a maximum of 49 partners, allowing for the possibility of forming larger business entities. This flexibility is particularly beneficial for businesses that require multiple stakeholders or want to accommodate a larger pool of investors. With the ability to have more partners, mainland companies can distribute ownership and decision-making responsibilities among a larger group, potentially bringing diverse expertise and resources to the table.
  • Free Zone: On the other hand, free zone companies have restrictions on the number of partners allowed. While the exact limitations vary depending on the specific free zone jurisdiction, it is generally more limited compared to mainland companies. Free zones typically impose restrictions to maintain control and ensure efficient operation within their specific jurisdictions. These limitations on the number of partners may range from a few partners to a specific maximum number, which can vary from one free zone to another. Therefore, entrepreneurs considering a free zone setup should carefully review the rules and regulations of the chosen free zone to understand the specific restrictions on the number of partners.

6. Statutory Audit:

  • Mainland: An audit is mandatory for mainland companies.
  • Free Zone: Certain free zone entities, such as free zone establishments (FZE) and free zone companies (FZCO), require yearly audits.

7. Cost of Incorporation:

  • Mainland: The cost of incorporating a mainland company is relatively higher compared to free zone setup.
  • Free Zone: The cost of incorporating a company in a free zone is generally lower.

8. Authorities for Setup:

  • Mainland: Establishing a mainland company requires obtaining approvals from multiple authorities. These include the Department of Economic Development (DED), the Ministry of Labour (MOL), the Dubai Municipality, and the Ministry of Interior (MOI), among others. Each authority plays a specific role in the setup process, ensuring compliance with legal requirements and regulations. The DED oversees the registration of businesses and issuance of trade licenses, while the MOL manages employment-related matters such as labor contracts and work permits. The Dubai Municipality focuses on zoning regulations and permits related to physical establishments, and the MOI handles matters such as visas and residency permits. Navigating these authorities can be a comprehensive process, but it allows mainland companies to operate across the UAE without geographical restrictions.
  • Free Zone: In contrast, free zones in the UAE operate under their own regulatory framework, with each free zone having its own dedicated regulatory body. These regulatory bodies, such as the Free Zone Authority, oversee the setup and operation of companies within their respective jurisdictions. They handle the approval process for company registration, issue trade licenses, and ensure compliance with the specific rules and regulations of the free zone. By having dedicated regulatory bodies, free zones provide a streamlined and efficient setup process tailored to the specific needs of businesses within the free zone. This allows for faster processing times and simplified procedures, as businesses do not need to deal with multiple authorities outside of the free zone jurisdiction.

Choosing between a mainland and free zone jurisdiction is a significant decision when setting up a company in the UAE. While mainland companies provide access to the local market and broader business opportunities, free zones offer attractive benefits such as 100% foreign ownership and tax exemptions. Understanding the key differences, including scope of business, office space requirements, visa permits, taxation laws, number of partners, statutory audit obligations, and setup procedures, is crucial for making an informed choice aligned with your business objectives. Consider consulting with professionals specialising in UAE company formation to ensure compliance with regulations and maximise the potential of your business in this thriving economic landscape.