The UAE is becoming a really popular jurisdiction among high-net-worth individuals and aspiring entrepreneurs to set up companies, trusts, and foundations. One of the things we at SetHub have learned advising them on setting up trusts, foundations, and companies is that most of them don’t really understand the UAE’s legal and free zone system. We understand, it can be a little difficult to navigate, and we hope to set the record straight and show you the Advantages of Holding a Dubai Free Zone License for International Businesses. Understanding the UAE’s legal and free zone system is key to setting up the right type of entity in the right UAE jurisdiction. In this blog, we are going to give you a basic overview of the UAE’s legal and free zone systems.

Understanding the Legal Structure and Free Zones

So here’s a little bit of an overview in case you didn’t know: UAE stands for the United Arab Emirates. Now, the UAE consists of seven different emirates, and each emirate is kind of like its own state. We start with Abu Dhabi, which is the capital; Ajman; Dubai, which of course is the most famous emirate; Fujairah; Ras Al Khaimah; Sharjah; and Umm Al Quwain.

Now, the UAE’s legal system is a little different than it is in many countries you’re probably familiar with. We have UAE federal law that applies emirate-wide, so this applies in all of the emirates within the UAE. Then we have the laws of each emirate, much like you would have the laws of a state in the United States, for example. And then you have the free zone laws. So, within each emirate, there are designated geographic areas known as free zones, and they have their own rules and regulations governing the business conducted within those free zones.

Mainland Companies vs. Free Zone Companies

So, incorporating in the UAE, you have your mainland companies, which are companies incorporated in an emirate, and then you have your Free Zone License for International Businesses, which are companies incorporated within one of these free zones we just mentioned. So, they’re incorporated in the geographic area of the free zone.

First, let’s talk a little bit about mainland companies. Mainland companies can conduct business anywhere in the emirate where they are incorporated. Think about stores, hotels, restaurants, stuff like that. Now, 100% foreign ownership of mainland companies is permitted, but a lot of times it’s easier to take on a local partner who owns 51%. Now, that doesn’t mean they’re going to get 51% of the profits; you can negotiate that separately. A lot of times, you can get a local partner for a flat fee or a small percentage of revenue or profit, which often makes setting up the mainland company much easier and more efficient. 

You can rent real estate anywhere in the emirate where your mainland company is incorporated. You can sponsor employees, bring them from abroad, and give them employment visas here in the UAE. Starting next year, mainland companies will be subject to a corporate income tax of 9%, which comes into effect in the middle of next year. Mainland companies generally qualify to take advantage of tax treaty benefits. The UAE has a lot of tax treaties—117, I think—more than Switzerland. Mainland companies are probably the most flexible business entity type in terms of what types of businesses you can do and where.

Now let’s talk a little bit about Benefits of Obtaining a Free Zone License in Dubai. Free zone companies can only conduct business within the free zone where they’re incorporated, so you’re generally not going to see a free zone company that’s a store, hotel, or restaurant. Free zone companies are generally trading companies or service businesses located within the geographic area of the free zone. They can only rent real estate within that free zone. However, they can sponsor employees, so they can provide employment visas to employees they bring from abroad. They can also conduct business with the mainland from within the free zone. For example, you could have an accounting firm that provides services from within the free zone to companies outside it—that would be permitted. 

You can trade with businesses on the mainland, so you can sell products to them. One of the nice things about free zones compared to mainland companies is that free zone companies are exempt from the UAE’s 9% income tax. Now, there’s a catch, though: if the free zone company has any revenue from doing business with the mainland, it becomes subject to the UAE’s income tax. So, you have to be very careful if you have a free zone company when doing business with the mainland, as it could trigger tax liability. Free zone companies generally also qualify for treaty benefits. They’re a bit more restrictive than mainland companies in terms of the type of business they can conduct and where, because they’re restricted to doing business within the geographic area of the free zone and to the lines of business that the free zone offers licenses for.

Offshore Companies in UAE Free Zones

Within free zones, there are also offshore companies. When we talk about free zone offshore companies, we mean IBCs, international business companies, like a Cayman or BVI company. These offshore companies can’t do business with UAE residents or companies. They can’t rent office space or premises anywhere in the UAE, including the free zones where they’re incorporated. They can’t sponsor employees and generally don’t qualify for treaty benefits. You can incorporate this company in the UAE, but it can only do business outside of the UAE or with people or businesses outside of the UAE.

Trusts and Foundations

The UAE has trusts and foundation laws available under both federal and free zone laws. Not all free zones offer trusts and foundations, but I’m going to cover which ones do. First, let’s talk about trusts. You can form a trust under UAE federal law, which means it’s a mainland trust and can operate anywhere within the UAE. You can also set up trusts in the Dubai International Financial Centre (DIFC) or in the Abu Dhabi Global Markets Free Zone (ADGM). Foundations are available in three different UAE free zones: DIFC, ADGM, and the Ras Al Khaimah International Corporate Centre (RAK ICC).