Choosing between a free zone and mainland setup in the UAE is one of the most important legal decisions a founder or investor makes. In 2025, the landscape has shifted with the Federal Decree-Law No. 20 of 2025, which brings mainland corporate flexibility closer to that of offshore free zones, making the choice more about business scope than just legal structure.
Legal Fundamentals: Jurisdiction and Regulation
The primary difference lies in the regulatory authority and the geographic scope of the license:
- Mainland Companies: Licensed by the Department of Economy and Tourism (DET) or DED of each emirate. They fall under federal commercial laws and can trade freely anywhere in the UAE and internationally.
- Free Zone Companies: Regulated by specific authorities (e.g., DMCC, DIFC, ADGM). They are designed for international trade or specialized clusters and have geographic restrictions on “onshore” physical trading.
Ownership and Control in 2025
While 100% foreign ownership was once the main draw for free zones, it is now widely available on the mainland for over 1,000 commercial and industrial activities. However, free zone vs mainland legal advice often highlights that certain “strategic” sectors (like defense or oil and gas) still require UAE national partnership on the mainland.
Key Differences at a Glance
| Feature | Mainland (DED) | Free Zone |
|---|---|---|
| Business Scope | Unlimited trade across the UAE and govt. tenders. | Limited to the zone and international/exports. |
| Office Requirements | Physical office in the emirate is mandatory. | Flexi-desk, virtual office, or zone-specific space. |
| Corporate Tax | Standard 9% on profits over AED 375,000. | Potential 0% on “Qualifying Income” (strict rules apply). |
| Share Classes | Now allowed (2025 Law) for LLCs. | Standard feature in many free zones (DIFC/ADGM). |
Corporate Tax and Economic Substance
In 2025, tax-informed legal advice is mandatory. Simply being in a free zone does not guarantee 0% tax. To qualify for the 0% Free Zone Corporate Tax rate, an entity must:
- Maintain “Adequate Substance” (staff and assets) within the zone.
- Derive income from “Qualifying Activities” (e.g., re-export, fund management).
- Avoid certain types of “Mainland Source” income.
When to Choose Mainland
- B2C Retail: If you are opening shops, restaurants, or clinics.
- Government Tenders: If your primary revenue comes from UAE federal or local government contracts.
- Professional Services: If you need to consult on-site for various clients across different Emirates.
When to Choose a Free Zone
- International SaaS/Tech: If your customers are global and you need a tech-focused ecosystem.
- Regional Holding: If the entity is meant to hold IP or shares in other global subsidiaries.
- Regulated Finance: Jurisdictions like DIFC or ADGM offer specialized common-law courts preferred by global financial institutions.
The Hybrid Approach: Mixed Structures
Many mature businesses now use a Dual-Licensing strategy or a mixed structure: a Free Zone holding company for IP and ownership, and a Mainland operating branch for local sales and government work. This combines offshore structural flexibility with onshore market access.
Frequently Asked Questions (FAQ)
1. Can a free zone company sell directly to mainland customers?
Generally, for physical goods, you need a mainland distributor or agent. For services, many free zone entities are restricted from providing “onshore” services without a mainland branch.
2. Is the 2025 Companies Law relevant to free zones?
The law primarily governs mainland companies, but it introduces a re-domiciliation feature allowing free zone companies to move to the mainland more easily.
3. Which setup is faster?
Free zone setups are often faster as they offer “bundled” packages (license + visa + desk), whereas mainland licenses may require more external approvals depending on the activity.
4. Do I need a local partner for a mainland LLC in 2025?
For most commercial activities, no. 100% foreign ownership is now the standard for mainland businesses, except in specific strategic sectors.
5. Is the corporate tax rate different?
The base rate is 9% for both. However, “Qualifying Free Zone Persons” can benefit from a 0% rate on specific types of income if they meet all regulatory criteria.
