The UAE is home to more than 40 free zones, each offering its own regulatory framework and licensing model. For new investors, this abundance of choice can be overwhelming. Technology hubs like Dubai Internet City, logistics-driven zones such as JAFZA, media clusters such as TwoFour54, and financial centres like DIFC and ADGM all serve different strategic purposes.
Historically, businesses were drawn to free zones primarily because they allowed 100% foreign ownership at a time when mainland companies required a local partner or sponsor. With the relaxation of UAE commercial laws in recent years, full foreign ownership is now permitted for most mainland activities (with limited exceptions for strategic sectors). As a result, the choice between free zone and mainland is no longer driven by ownership but increasingly by tax, substance, regulatory environment and operational needs.
1. How do Free Zones and Mainland differ today?
The biggest historical advantage of free zones, full foreign ownership, is now largely available on the mainland. Investors can now incorporate a mainland entity with 100% foreign ownership for most commercial and industrial activities, except for a small number of sectors considered strategically sensitive.
Certain free zones operate under specialised legal systems, such as:
- DIFC and ADGM apply common law frameworks and have their own courts.
- Sector-specific zones (e.g., Dubai Healthcare City, Dubai Media City) offer licensing tailored to particular industries.
- Mainland companies, by contrast, are subject to UAE federal law and the relevant emirate’s Department of Economic Development (DED).
Free zone entities may face restrictions when conducting business directly with the UAE mainland unless they appoint a local distributor or obtain special approvals. Mainland companies, on the other hand, can trade freely across the UAE without structural limitations.
2. Tax: a key new differentiator
For many years, free zones marketed multi-year tax holidays (e.g., 15–50 years). With the introduction of UAE Corporate Tax, this model no longer applies. Under the new tax regime, Free zone companies are considered UAE tax residents, not exempt entities, they are subject to corporate tax unless they qualify for a specific incentive: the Free Zone Tax Regime.
Despite this, many investors, and sometimes even corporate service providers, believe the old tax holiday system still exists. This misconception can create compliance risks if businesses structure operations based on outdated assumptions.
3. The Free Zone Tax Regime
The UAE Corporate Tax Law provides a preferential 0% rate for “Qualifying Income” earned by a Qualifying Free Zone Person (QFZP). However, the regime is far more stringent than the tax holidays of the past. To access the Free Zone Tax Regime, a business must meet all of the following conditions:
A. Be incorporated in a Qualifying Free Zone
Only free zones recognised by Cabinet Decision are eligible. A Cabinet Resolution was issued, but the decision itself does not include a list of Qualifying Free Zones. This means companies must confirm with their free zone authority whether the zone has been formally recognised for CIT purposes.
B. Conduct “Qualifying Activities”
Only certain activities are eligible for the 0% rate. Activities outside the list are generally taxed at 9%, even if the entity is in a free zone.
C. Maintain Sufficient Substance
This includes hiring adequate employees, maintaining adequate premises, and incurring adequate operational expenditure in the free zone itself.D. Other requirements
Other requirements inlclude:
- Preparing audited financial statements,
- Maintaining transfer pricing documentation and complying with transfer pricing regulations,
- Staying within the de minimis limit, and
- Not electing for the standard tax regime.
If a company fails any requirement (even unintentionally) it loses access to the Free Zone Tax Regime for the current financial year and the following four years. This “five-year lockout” makes strategic planning essential.
4. What Should Investors Consider?
When deciding where to set up, investors should evaluate:
- Whether their business model actually qualifies for the 0% Free Zone Tax Regime;
- Where operations and employees will be based;
- Whether clients are primarily in the UAE mainland or abroad;
- Whether a specialised regulatory environment (e.g., DIFC, ADGM) is needed; and
- Whether compliance costs and substance requirements align with the business model
For many companies, especially those serving local markets, a mainland entity may be simpler and more flexible. For others, a free zone structure provides strategic advantages, but only if carefully aligned with tax and business objectives.
5. How Middle East Advisory Group Can Help
At Middle East Advisory Group, we assist clients in:
- Assessing whether a free zone or mainland setup best suits their business model,
- Determining whether a free zone qualifies as a Qualifying Free Zone,
- Planning operating structures to maintain Free Zone Tax Regime eligibility,
- Evaluating substance, transfer pricing and CIT implications, and
- Restructuring existing free zone businesses that may inadvertently breach the regime’s requirements.
Choosing the right jurisdiction in the UAE is a strategic decision. With the new Corporate Tax landscape, it is more important than ever to ensure that licensing, operations and tax planning are aligned from day one.