The United Arab Emirates (UAE) remains a premier jurisdiction for foreign investment and business incorporation. As regulatory frameworks continue to evolve, particularly with the implementation of the federal corporate tax regime and amendments to the Commercial Companies Law, investors must carefully evaluate the appropriate legal structure for their businesses. One of the most fundamental decisions involves choosing between incorporating a company in a UAE free zone or on the mainland. This article outlines the legal and strategic considerations relevant in 2025 for structuring businesses in either jurisdiction.
Legal and Regulatory Framework
Mainland companies are governed by Federal Decree-Law No. 32 of 2021 on Commercial Companies (“CCL”), as amended, and are licensed by the Department of Economic Development (DED) in the respective Emirate. In contrast, free zone companies are regulated under the specific rules of their respective Free Zone Authority (FZA). However, both types of entities are subject to overarching federal legislation, such as the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”), the Economic Substance Regulations (Cabinet of Ministers Resolution No. 57 of 2020), the Ultimate Beneficial Ownership (UBO) Regulations (Cabinet Decision No. 58 of 2020), and the Anti-Money Laundering (AML) framework.
This blog is a part of our Investment Funds in the UAE: A Complete Guide to Structuring, Regulation, and Opportunities Blogpost.
Ownership and Licensing Regime
A significant reform came into effect with the Foreign Direct Investment Law and subsequent amendments to the CCL, allowing 100% foreign ownership in most commercial activities on the mainland, except for those listed in the UAE Cabinet’s Negative List. This has largely leveled the playing field between mainland and free zone companies from a foreign ownership perspective. Free zones have traditionally offered full foreign ownership, and continue to do so without limitation.
Mainland licenses are broader in scope and allow direct engagement with the UAE onshore market. Free zone licenses, however, restrict direct trade with mainland customers unless a local agent or distributor is appointed under a compliant arrangement pursuant to the UAE Commercial Agencies Law (Federal Law No. 3 of 2022).
Corporate Tax Implications
The implementation of the UAE Corporate Tax Law, which took effect for financial years beginning on or after 1 June 2023, is a critical consideration. Mainland companies are subject to the standard 9% corporate tax rate on taxable income exceeding AED 375,000. They must also comply with transfer pricing documentation requirements under Ministerial Decision No. 97 of 2023.
Free zone companies may be eligible for a 0% corporate tax rate if they qualify as “Qualifying Free Zone Persons” (QFZPs) under Ministerial Decision No. 265 of 2023. However, this preferential rate only applies to qualifying income—such as income derived from transactions with other free zone entities or with foreign customers—and subject to stringent substance, governance, and reporting requirements. If a free zone company earns non-qualifying income, such as direct revenue from mainland clients without an appropriate structure, it risks losing its QFZP status and being taxed at the full 9% rate on its entire income.
Economic Substance and UBO Reporting
Both free zone and mainland companies are required to comply with the Economic Substance Regulations, where applicable, especially if they carry out Relevant Activities such as holding company business, distribution and service centers, leasing, finance, shipping, or IP-related business. Companies must file annual notifications and ESR Reports, and demonstrate adequate local substance, including full-time employees and physical presence within the UAE.
Similarly, under the UBO Regulations, all UAE companies (excluding those wholly owned by UAE governments or listed on a UAE stock exchange) must maintain an internal UBO register, appoint a nominee director, and report beneficial ownership to the licensing authority. Non-compliance may result in penalties ranging from AED 50,000 to AED 100,000, and possible suspension of licenses.
Office, Visa, and Operational Requirements
A practical distinction between the two structures lies in office and visa requirements. Mainland companies are generally required to lease commercial space (Ejari) and can then apply for employee and investor visas based on the office size. Free zones often offer flexi-desk or shared office packages, which are sufficient to obtain a limited number of visas. In 2025, many free zones, such as IFZA, Meydan Free Zone, and SPC Free Zone, continue to provide cost-effective packages for startups and SMEs.
Additionally, free zones increasingly offer dual licenses in cooperation with DEDs, allowing companies to operate legally within the mainland without a separate legal entity. However, such models often require approval from multiple authorities and are activity-dependent.
Audits, Compliance, and Record-Keeping
Under the Corporate Tax Law, businesses, whether mainland or free zone, are expected to maintain audited financial statements if they exceed income thresholds or intend to qualify for QFZP status. Free zones such as DIFC, ADGM, and DMCC have long mandated annual audits, but in 2025, more free zones are extending this requirement to align with federal tax compliance.
Businesses must also maintain accounting records for at least seven years, and may be subject to audit or review by the Federal Tax Authority (FTA). The increasing emphasis on tax compliance has made the role of legal and tax advisors more critical in planning business structure and operations.
Market Access and Exit Strategy
Mainland companies enjoy unrestricted access to the UAE market, including eligibility for government contracts, customs import codes, and corporate banking relationships with less scrutiny. Free zone companies, while often easier and faster to set up, may face limitations in tendering for government work or opening bank accounts, especially in less-established zones.
From an exit perspective, mainland companies are generally preferred for mergers, acquisitions, and IPOs, particularly those considering listing on UAE’s financial markets such as DFM or ADX. Free zone companies often require more complex restructuring for equity transfers or migration to mainland status, subject to FZA and DED approvals.
Conclusion
In 2025, the decision between a mainland and free zone company depends on several intersecting legal, operational, and commercial factors. While free zones continue to offer benefits such as 100% foreign ownership, lower startup costs, and potential tax exemptions, mainland companies provide broader commercial access, greater flexibility, and increasingly competitive regulatory advantages following liberalisation of ownership laws and the implementation of corporate tax.
Investors and entrepreneurs are strongly advised to undertake structured legal and tax due diligence before incorporating in the UAE. Engaging a professional legal advisor ensures that the company’s structure complies with evolving laws and maximizes tax efficiency, operational control, and growth opportunities in the UAE market.
