Mainland or free zone: the decision after corporate tax
Mainland or free zone is the first structural decision a UAE business makes and the hardest to reverse. It used to be answered on ownership rules and office cost. Since corporate tax arrived, the answer turns on something else entirely: who your customers are.
This guide compares the two on the terms that now matter — market access, corporate tax, VAT, visas, cost and reversibility — and sets out the four questions that decide it.
The comparison that matters now
| Mainland | Free zone | |
|---|---|---|
| Ownership | 100% foreign ownership available across most activities | 100% foreign ownership |
| Selling to UAE mainland customers | Unrestricted | Restricted — typically needs a mainland distributor or branch, and the income is non-qualifying |
| Corporate tax | 0% to AED 375,000, then 9% | 0% on qualifying income, 9% on the rest, if QFZP conditions are met |
| The AED 375,000 band | Available | Not available to a QFZP on its non-qualifying income |
| Small Business Relief | Available if revenue is at or below AED 3m | Not available to a QFZP |
| Audited accounts | Depends on the activity and licence | Mandatory for every QFZP |
| VAT | Normal rules | Normal rules; Designated Zone relief applies to goods only |
| Government tenders | Generally accessible | Generally not |
| Visa allocation | Tied to office space | Package-based, often lower and capped |
| Setup and running cost | Usually higher | Usually lower, though the audit requirement narrows the gap |
Four questions that decide it
- Who buys from you? If your customers are UAE mainland businesses or individuals, the free zone route means either a mainland presence anyway, or income that is non-qualifying — which puts your de minimis allowance under pressure from the first invoice.
- Is your activity on the qualifying list? The list is finite: manufacturing, processing, qualifying commodity trading, holding securities, ship operation, regulated reinsurance and fund or wealth management, headquarter and treasury services to related parties, aircraft leasing, distribution in or from a Designated Zone, and logistics. Marketing, general consultancy and most agency work are not on it.
- Can you carry the substance and audit? A QFZP needs real employees, premises and expenditure proportionate to its income, plus audited financial statements from a UAE-licensed firm with no small-company exemption.
- What is your revenue mix likely to be in three years? The de minimis limit is the lower of 5 per cent of revenue or AED 5 million, and a breach costs QFZP status for five years. A business planning to grow into the UAE domestic market is planning its own breach.
Two businesses, opposite answers
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It is fixable, and the routes differ in cost and disruption.
- Add a mainland branch or distributor and keep the free zone entity for its qualifying stream. Clean where the two revenue streams genuinely separate, but it means two licences, two sets of books and careful transfer pricing between them.
- Convert or relicense. Some zones and authorities allow a migration path. It preserves the trading history, which matters for banking.
- Form the new entity, migrate, close the old one. Simplest to execute and most disruptive — new licence, new bank account, new contracts, and the old entity must be closed properly rather than left to lapse.
- Stay and accept 9 per cent. Often correct. If your taxable income is modest, the tax at stake can be smaller than the cost and disruption of restructuring.
Whichever route you take, close the old entity deliberately. A licence left to expire carries on generating registration, filing and record-keeping obligations, and the penalties for those run whether or not anyone is trading.
The mistakes that cost the most
- Choosing a free zone for the 0 per cent without checking whether your activity is on the qualifying list.
- Planning to sell to the mainland from a free zone entity and discovering the de minimis limit at the year end.
- Forgetting that a QFZP loses the AED 375,000 band and cannot use Small Business Relief.
- Budgeting free zone cost without the mandatory audit.
- Assuming Designated Zone means something for a services business. It is a goods concept.
- Deciding once and never revisiting. The right answer changes as the customer mix changes.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
Questions people also ask
Is a free zone always cheaper on tax than the mainland?
No, and often the opposite for a small business. A Qualifying Free Zone Person gets 0 per cent only on qualifying income, loses the AED 375,000 zero band on everything else, and cannot elect Small Business Relief. A mainland company with revenue under AED 3 million can currently pay nothing at all. Model both before assuming the free zone wins.
Can a free zone company sell to customers on the UAE mainland?
It can, but with two consequences. Commercially it usually needs a mainland distributor or branch, depending on the activity and authority. For tax, that revenue is non-qualifying and counts against a de minimis allowance that is the lower of 5 per cent of revenue or AED 5 million — so mainland sales eat the 0 per cent position quickly.
Which activities actually qualify for the 0 per cent?
A finite list: manufacturing, processing, trading of qualifying commodities, holding shares and securities for investment, ship operation, regulated reinsurance, fund management and wealth management, headquarter and treasury services to related parties, aircraft financing and leasing, distribution in or from a Designated Zone, and logistics, plus ancillary activities. Marketing, general consultancy and most agency work are not on it.
I set up in the wrong place. How hard is it to change?
There are four routes: add a mainland branch or distributor alongside the free zone entity, convert or relicense where the authority allows it, form a new entity and migrate, or simply accept 9 per cent. The last is more often right than people expect — if taxable income is modest, the tax at stake can be less than the cost and disruption of restructuring.
Do free zone companies still have to register for corporate tax and VAT?
Yes to both, and regardless of expected rate. Free zone entities register for corporate tax like everyone else and claim any 0 per cent on the return, and VAT registration thresholds are identical to the mainland. Designated Zone treatment affects qualifying movements of goods, not services and not the obligation to register.
Send the tax year and the transaction or filing involved, and we will tell you what is actually required.
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