FREE ZONE VS MAINLAND : 7 STEPS TO DETERMINE YOUR BUSINESS LOCATIONS

Introduction:

Setting up a business in the UAE isn’t just about choosing a location—it’s a strategic decision that influences your growth, profitability, and market reach. The right choice can unlock tax benefits, simplify business operations, and set the foundation for long-term success. Whether you opt for a Free Zone or Mainland setup, your decision should align with your business model, target audience, and expansion plans. In this blog, we’ll walk you through 7 essential steps to help you determine whether a Free Zone or Mainland setup is the right fit for your business.  

1. Corporate Tax – Overview

The UAE Government introduced a Corporate Tax under Federal Decree-Law No. 47 of 2022, which came into effect on June 1, 2023. It is a direct tax levied on the net income or profit of businesses operating in the UAE. The applicable tax rate depends on the business jurisdiction, as outlined below:

· Mainland: 9% corporate tax on taxable income exceeding AED 375,000

· Free Zone: 0% corporate tax on Qualifying Income (subject to specific conditions)

Note: Choosing between a Free Zone or Mainland setup is critical for businesses to optimize their taxable income and benefit from potential exemptions.

2. Differences Between Free Zone and Mainland Companies

Feature	Free Zone	Mainland
Corporate Tax	0% on qualifying income	9% on taxable income above AED 375,000
Ownership	100% foreign ownership	May require a local service agent (except for select activities)
Customs Duties	0% on trade within the Free Zone; 5% on trading with Mainland clients	5% on imported goods
Office Space Requirements	Must lease an office in Free Zone	Mandatory lease in Mainland
VAT Registration	Needed if the turnover exceeds AED 375,000	Needed if the turnover exceeds AED 375,000
Audits	Depends on their zone of business	Most businesses require annual audits

3. Qualifying vs Non-Qualifying Income for Free Zone Businesses:

Businesses operating in a UAE Free Zone are eligible for a 0% corporate tax on Qualifying Income. However, to benefit from this exemption, specific conditions must be met. The income is categorized into Qualifying Income and Non-Qualifying Income based on the nature of the transactions.

Qualifying Income (Taxed at 0%)

· Transactions between Free Zone Persons (B2B transactions within Free Zones).

· Income from exporting goods or services outside the UAE.

· Revenue was generated from Qualifying Activities as defined under Decision No. 265 of 2023.

Non-Qualifying Income (Taxed at 9%)

· Revenue earned from Mainland UAE customers (unless related to qualifying activities).

· Income from Excluded Activities (e.g., financial services, real estate transactions).

· Failure to comply with the De Minimis Rule.

4. De Minimis Rule:

The De Minimis Rule is a crucial condition for Free Zone companies to retain their 0% corporate tax benefit. It sets a limit on the amount of Non-Qualifying Income a Free Zone company can earn without losing its tax exemption. If this threshold is exceeded, the company will become subject to a 9% corporate tax on all of its income — not just the excess amount.

Conditions:

· Free Zone companies can earn up to 5% of their total revenue or AED 5 million, whichever is lower, from Non-Qualifying Income.

· If this limit is exceeded, the company will lose its 0% corporate tax benefit and will be taxed at 9% on its entire income.

5. Tax Implications for Mainland Businesses

Unlike Free Zone entities, Mainland companies are subject to a 9% corporate tax on their net taxable income exceeding AED 375,000. However, Mainland businesses benefit from unrestricted market access across the UAE.

Key Benefits of Mainland Business Setup:

· No restrictions when dealing with Mainland clients.

· Ability to repatriate 100% of profits without limitations.

· Flexibility to operate across all sectors without requiring a Free Zone distributor.

· Freedom to engage in both B2B (Business-to-Business) and B2C (Business-to-Consumer) activities without restrictions.

· Option to avail of Small Business Relief if the total revenue is below AED 3 million.

6. Free Zone vs Mainland – How to Choose?

1. Choose Free Zone if:

· You are exporting goods or services outside the UAE.

· You are dealing with other Free Zone companies.

· You prefer 100% foreign ownership and want to benefit from tax incentives.

· You have international clients or global business operations.

· You want to operate with no currency restrictions.

2. Choose Mainland if:

· Your customers are based in the UAE Mainland.

· You want direct market access within the UAE without restrictions.

· You plan to expand locally without limitations.

· You intend to bid for UAE government tenders and projects.

7. Case Study: Business Setup in Free Zone vs Mainland

Scenario: 

Mr. Abraham Kuresi plans to establish a startup for his clients in the UAE, but he needs to decide whether to set up in a Free Zone or the Mainland. His decision will depend on factors such as tax benefits, client location, and long-term business goals.

1. Free Zone Option:

· If Mr. Kuresi has international clients, he can establish his business in a Free Zone.

· In the Free Zone, he will benefit from a 0% corporate tax on Qualifying Income.

· However, if he intends to sell goods or services directly to UAE Mainland customers, he will need to set up a branch, distributor, or commercial agent to facilitate Mainland trade.

2. Mainland Option: 

· On the UAE Mainland, Mr. Kuresi can serve Mainland customers directly without the need for intermediaries.

· He will be subject to 9% corporate tax if his net taxable income exceeds AED 375,000.

Result:

Mr. Abraham Kuresi should evaluate his target clients and business objectives before choosing the jurisdiction:

· If the majority of his clients are located within the UAE Mainland, the Mainland setup is recommended to allow unrestricted trade and market access.

· If his business is focused on international clients and export activities, the Free Zone setup would be more beneficial due to the 0% corporate tax on qualifying income.

How can PNPC Global assist you?

At PNPC Global, our team of seasoned professionals is committed to supporting your business journey—from entity registrations, trade licenses, and audits to bookkeeping and compliance services. With a strong presence in India (Chennai, Bangalore, Hyderabad) and the UAE, we deliver innovative and tailored solutions for both domestic and international businesses.

Whether you are setting up a new entity, ensuring compliance, or streamlining your financial processes, PNPC Global is here to simplify and strengthen your business operations.

For assistance and queries, feel free to contact our team or simply send a “Hi” on WhatsApp to the number relevant to your location:

• Chennai: +91 98843 82100

• Bangalore: +91 98443 72100

• Hyderabad: +91 98852 82100

• Dubai: +971 58 560 0554

Partner with PNPC Global to enhance your financial strategies, optimize business processes, and achieve sustainable growth.

Conclusion:

Choosing the right business zone in the UAE can be more challenging than setting up the entity itself. The decision between a Free Zone and Mainland setup is crucial, as it directly impacts your business’s growth, tax benefits, and long-term success. In this blog, we’ve outlined the top 7 key steps to help you determine the ideal location for your business in the UAE. Align your right decisions to enjoy tax advantages and business operations seamlessly.