UAE Company Formation: The Ultimate Mainland vs. Free Zone Guide (2025)

Setting up a business in the UAE presents a critical first question: Mainland or Free Zone?

This single decision will define your company's jurisdiction, market access, compliance rules, and—most importantly in the post-Corporate Tax era—your potential tax liability.

In the past, the choice was simple: Mainland for local trade, Free Zone for 100% foreign ownership and international trade. Today, with 100% foreign ownership now common on the mainland and the introduction of a 9% Corporate Tax, the landscape is far more nuanced.

This comprehensive guide covers everything from basic setup costs to advanced tax- structuring strategies, helping you choose the right path for your business.

1. At a Glance: Mainland vs. Free Zone Comparison

Before we dive deep, here’s a high-level comparison of the two jurisdictions.

2. Formation Time & Cost: The Need fior Speed vs. Budget

Your budget and timeline are often the first practical hurdles.

• Cost:

  • Mainland: Costs are higher due to mandatory, non-negotiable requirements. You must lease a physical office and get an Ejari (lease registration), which is often the largest upfront expense. You also have fees for DED, notarization of your Memorandum of Association (MOA), and potential external approvals.

  • Free Zone: This is the most cost-effective entry point, especially for startups and solopreneurs. The key cost-saver is the flexi-desk or virtual office package, which satisfies the requirement for an address without the expense of a full-time lease. Fees are bundled by the Free Zone Authority, making them predictable.

• Time:

  • Mainland: The process is multi-layered. It involves approvals from the DED, the Municipality (for your office), and sometimes other government ministries depending on your business activity. This takes time.

  • Free Zone: The process is fast and streamlined. You are dealing with a single authority (the FZA) that handles all registration and licensing. Some free zones, like IFZA or RAKEZ, can issue a license in just a few days.

3. Who Should Use What? (Beneficial Circumstances)

This is the most critical strategic question. The answer depends almost entirely on your target customer.

Choose a Mainland Company if..

• Your primary business is selling goods or services directly to the UAE local market (e.g., a restaurant, retail shop, or local marketing agency).

• You need to bid on official government contracts or tenders.

• Your business requires a specific physical location in a non-free zone area (e.g., a clinic in Jumeirah or a store in the Dubai Mall).

• You plan to open multiple branches across Dubai or other emirates.

Choose a Free Zone Company if..

• Your clients and customers are 100% outside the UAE (e.g., international consulting, e- commerce, or global trading).

• You are a startup, solopreneur, or freelancer who needs a residency visa and a legitimate business license at the lowest possible cost.

• Your business is in a niche industry and can benefit from a specialized hub (e.g., Dubai Media City for media, DMCC for commodities, or Dubai CommerCity for e-commerce).

• Your primary goal is tax optimization and you can structure your business to meet the "Qualifying Free Zone Person" criteria (more on this below).

  
  

  4. Compliance & Tax: The New Frontier

This is where the game has changed. Understanding these rules is critical for your company's long-term financial health.

Mainland Compliance

• Tax: Subject to 9% UAE Corporate Tax on taxable profits exceeding AED 375,000.

• Audit: A mandatory annual financial audit is required for most LLCs.

• UBO: Must maintain an Ultimate Beneficial Ownership (UBO) register and submit it to the authorities.

• Office: Must maintain a valid physical lease (Ejari) at all times.

  
  

Free Zone Compliance: The Path to 0% Tax

Free Zone compliance is now a two-part story: the FZA's rules and the Federal Tax Authority's (FTA) rules.

1. Free Zone Authority (FZA) Rules:

   • You must adhere to the rules of your specific free zone.

   • You must renew your trade license annually.

   • You must operate within the scope of your licensed activities.

2. Federal Tax Authority (FTA) Rules:

This is the most important part. To achieve the coveted 0% Corporate Tax rate, your company must be a "Qualifying Free Zone Person" (QFZP).

To be a QFZP, you must:

1. Maintain Adequate Substance: You must have real operations and decision-making in the UAE (i.e., you can't be just a "shell company").

2. Derive "Qualifying Income": This includes income from:

   • Transactions with other Free Zone entities.

   • Transactions with non-Free Zone entities (international).

   • Specific "Qualifying Activities" like manufacturing, logistics, and fund management.

3. Meet the De Minimis Test: This is crucial. Your "non-qualifying" income (e.g., revenue from the UAE mainland) must not exceed 5% of your total revenue or AED 5 million, whichever is lower.

4. Maintain Audited Financials: As of 2025, all Free Zone companies must prepare IFRS- compliant audited financial statements, regardless of whether they are a QFZP.

What happens if you fail these conditions? Your Free Zone company loses its QFZP status and will be subject to the standard 9% Corporate Tax on all its profits.

5. Setup Procedure & Documents

Here is a simplified checklist for each path.

Real-World Case Studies: Structuring for Tax & Residency

The real optimization is no longer just "Mainland vs. Free Zone" but how you structure them together. Your residency visa is a benefit of any company setup; the real goal is tax efficiency.

Case Study 1: The Hybrid Model (Clients of Ours (Company A) Strategy)

• The Company: "Company A," a software development firm in a Dubai Free Zone.

• The Challenge: They have major international clients (80% of revenue) but also want to service a few large clients on the Dubai mainland (20% of revenue).

• The Problem: The mainland revenue is "non-qualifying" and exceeds the 5% de minimis

  threshold, which would disqualify them from 0% tax on all their income.

• The Solution: The Hybrid Structure

  1. Company A remains in the Free Zone. It services all international clients and earns "Qualifying Income" eligible for 0% tax.

  2. They register a Mainland Branch (a "Domestic Permanent Establishment") of the Free Zone company.

  3. This Mainland Branch only services the UAE mainland clients. Its income is ring- fenced and subject to 9% Corporate Tax.

• The Result: The company legally separates its income streams. The main Free Zone entity preserves its QFZP status and pays 0% on 80% of its income. It only pays 9% tax on the 20% of income earned through its mainland branch. This is the new face of tax optimization.

Case Study 2: The Pure Free Zone (The "ABC Logistics" Strategy)

• The Company: "ABC Logistics FZCO" in Jebel Ali Free Zone (JAFZA).

• The Business: They provide warehousing and logistics services exclusively for other companies also located in JAFZA and other UAE Free Zones.

• The Solution: By ensuring 100% of their clients are other Free Zone entities (and are "Beneficial Recipients" of the service), their entire revenue is considered "Qualifying Income."

• The Result: The company easily meets the QFZP criteria and pays 0% Corporate Tax on 100% of its profits. This structure is perfect for B2B businesses operating within the Free Zone ecosystem.

Case Study 3: Restructuring (From Mainland to Hybrid)

• The Company: A successful Dubai Mainland trading company that built its business on local sales.

• The Challenge: They are now expanding internationally and want to separate this new, low-margin international business from their high-margin (and 9% taxed) mainland business.

• The Solution: Business Restructuring Relief

  1. The owners establish a new Free Zone company.

  2. They use Article 27 of the CT Law ("Business Restructuring Relief") to perform a "spin-off." They transfer their international client contracts and logistics operations from the Mainland company to the new Free Zone company. Because this is a qualifying reorganization (with common 75%+ ownership), the assets can be transferred at their "net book value," meaning no taxable gain is recognized on the transfer itself.

• The Result: The company is now a hybrid group. The Mainland entity continues to pay 9% on local sales, while the new Free Zone entity handles all international trade, payin 0% tax on its qualifying income.

Final Verdict: Which One is Right for You?

• Go for Mainland if: You are a "boots-on-the-ground" business focused 100% on the local UAE market. You need a physical shop, restaurant, or clinic, or you plan to work with the government.

• Go for a Free Zone if: You are an international entrepreneur, consultant, e-commerce store, or trader. Your priority is low cost, speed, a residency visa, and, crucially, a structure that allows you to legally achieve 0% Corporate Tax on your qualifying profits.

• Consider a Hybrid Structure if: You are an established business with income from both the mainland and international markets. This is the advanced strategy for optimizing your tax liability across the entire group.

The choice is no longer just about a license—it's about designing your entire corporate and tax future.

FAQs

Q: What is a Qualifying Free Zone Person (QFZP)? 

A: A Free Zone Person that meets all specified conditions such as adequate substance in a free zone, deriving qualifying income, not electing standard tax regime, complying with transfer pricing etc. 

Q: Can I own 100% of a mainland company in 2025? 

A: Yes, in many sectors the UAE allows 100% foreign ownership on the mainland as per recent reforms. The key is whether your business activity, licence, and location qualify.

Q: How much does it cost to start a business in a UAE free zone? 

A: Typical costs vary widely depending on the free zone, licence type, office type, visas required. Some setups are possible with modest budgets within a few weeks.

Q: What are the best free zones for tech startups? 

A: Free zones focusing on technology, media, logistics or light manufacturing offer targeted incentives. Evaluate those based on your industry, cost, location and business plan.

Q: How do I maintain QFZP status to achieve 0% tax? 

A: Keep core income-generating activities within the free zone, meet substance requirements (employees, assets, activities), limit non-qualifying revenue under de-minimis, submit audited financial statements, register for tax and meet transfer pricing rules.