The landscape of business setup in the UAE has been witnessing dramatic changes right from the last two years. Permitting 100% foreign ownership in mainland companies is considered the biggest among all the recent economic reforms in the UAE. With the rollout of the new ownership regime, the strategic question of whether you should set up a business in a free zone or mainland has become pertinent. For years, free zones have been attracting foreign investors by highlighting full foreign ownership as their USP.
Since the laws of company formation in the UAE have changed, should the investors ditch the free zone and go to the mainland? As one of the top business setup consultants in Dubai, we can say that there is no ultimate answer to this question. It all depends upon what particular advantage is you are aiming to achieve by setting up a company in the UAE. For example, while some entrepreneurs want cost-effective solutions, others aim for location advantages. To help you decide between the free zone and mainland company formation, we have listed some useful insights in this article. Let’s explore further:
Pros of Mainland
Access to Lucrative UAE Market
With a trade license issued in the UAE mainland, you can trade anywhere in the UAE. This benefit was already there, however, the requirement to appoint a local UAE national sponsor was a major roadblock. With a mainland license, a foreign investor can build a good customer base while enjoying full ownership.
Freedom to Choose Activities
Mainland businesses are regulated by the Departments of Economic Development ( DED) in the respective emirates. Every DED offers a large number of business activities from which the investors can choose their preferred activity. For example, DED Dubai offers more than 2,000 economic activities for company formation in Dubai.
Cons of Mainland Company Formation
Dealing with Multiple Government Departments
The investors have to navigate a series of steps to get hold of a trade license in the UAE. If your activity falls under special activities such as consultancy, accounting, healthcare, architecture, legal firms etc., you need to obtain special approvals from concerned ministries or government departments. If you are opening a cafeteria, approval should be obtained from the Municipality. Furthermore, most consultancies in the mainland require the general manager to clear management skills placement courses and test with the American University in Dubai.
Hidden Costs
Unlike free zones, exports and re-exports may come at a higher cost in the mainland. The custom duty in exports is not free on the mainland. Investors may not know about such costs at the time of incorporation and the hidden costs may derail their business plans. Consult with the best business setup consultants in Dubai to avoid such situations.
Pros of Free Zone Company Formation
Industry-specific Opportunities
There are more than 40 active free zones in the UAE that provide a wide range of business activities. Some of these free zones provide industry-specific infrastructure for the companies. For instance, the Jebel Ali Free Zone (JAFZA), Dubai Airport Free Zone (DAFZA) or KIZAD Free Zone have a robust infrastructure that may fit perfectly for a trading and logistics company over a mainland location. JAFZA has direct access to its port, and DAFZA access to the airport, which make the customs clearance processes more efficient.
They can network with entrepreneurs of such companies, help win contracts, refer clients or even collaborate. In a mainland business environment, you are mostly on your own or you have to scout for such opportunities by putting in some extra effort.
Services under One Roof
When it comes to a stress-free incorporation process, free zones remain to be the first choice for foreign investors. Entrepreneurs need not worry about the procedure while applying for a trade license in a free zone in the UAE. All services are provided under one roof in a free zone and you can obtain the license in a few weeks.
VAT Advantage in the Free Zones
The Federal Tax Authority (FTA) has classified 25 free zones as Designated Zones for Value Added Tax (VAT). Although the Designated Zones are situated in the UAE, they will be treated as ’outside the state’ under VAT. This will imply that no Value-Added Tax is charged on the transactions for import of goods in these Designated Zones, supply of goods within the Designated Zone or between the Designated Zone, with some exceptions noted. On the contrary, the transactions that happen in the mainland companies won’t be treated as ’outside the UAE’, giving the free zones a competitive advantage.
Cons of Free Zones
Limited Location Options
Free zones are specially designated areas that are located far from the city. An investor who forms a business in the free zone can trade only within the free zone area. If an investor wants to trade in the UAE market, an agreement with a distributor is mandatory. The goods can be traded outside the free zone through the distributor only.
Expensive Rental of Spaces
While obtaining a free zone license in the UAE, an investor should opt for any of the Flexi-desk or office options that come with it. Some businesses, especially manufacturing firms, have to rent warehouses or land plots from the free zone. The rent of such spaces is fixed and expensive. Here, the investors don’t have the bargaining power to reduce the rental scheme.
Free Zone or Mainland? Let Business Setup Consultants in the UAE Help you Decide
You have done through some pros and cons associated with both free zone and mainland trade licenses in the UAE. Even though full foreign ownership is now available in the mainland, a decision should be made based on what suits your business best. If you are attracted to free zone advantages, you can initiate the process of business setup in the UAE free zones as full ownership is already guaranteed.
The same rule applies from the mainland as well as 100% ownership is now a reality in the mainland. If you are still unable to make a decision, dial up the best business setup consultants in the UAE such as Jitendra Business Consultants (JBC). Our company formation advisers will help you make the choice apart from advising you on activities, bank account opening, VAT, and visa processing.