We are very often asked what the difference is between a Free Zone company and a Mainland company. Although this point may seem fairly simple, it is often misunderstood, even though it is the foundation of any company formation project in the Emirates. As is often the case in the Emirates (and elsewhere!), the answer lies in the law.
What is a Free Zone company in Dubai?
First of all, when we talk about a
Free Zone company, we mean a company registered with a Registry located in a Free Zone. A Free Zone is a special geographically defined area. This explains why there is sometimes confusion between the name of the Registry (for example: DMCC) and the defined geographical location associated with that Registry (for example: Jumeirah Lake Towers – JLT).
It is a special area because it is a free-trade zone: this means that goods entering and leaving it (exported outside the UAE) are not subject to customs duties. For service companies (consulting, etc.) registered in a Free Zone, the concept of customs duties is not applicable. It is therefore better to focus on the question: "
where is the sold service performed?" In the case of a Free Zone company, this service must be performed from the geographical area in which the company is registered. The consequences of this definition are that a Free Zone company may have offices and staff located only within the geographical boundaries of the Free Zone.
What is a Mainland company?
As for a Mainland company, it is registered with the
DED (Department of Economic Development) Registry of Dubai, Abu Dhabi, etc. It is sometimes called an LLC (Limited Liability Company), but this is not entirely accurate (a Free Zone company may legally be an LLC, and a Mainland company is not always an LLC). Unlike a Free Zone company, it may rent offices throughout the Emirates (outside Free Zones). A trading company can therefore import and sell its goods locally. A service company can perform all its services there.
The question we are often asked is therefore:
"Can I work in the Mainland with a Free Zone company?"
For a service company, a Free Zone company may have clients (B2B or B2C) in the Mainland. This does not pose any problem as long as its services are performed from its offices located within the Free Zone. For a trading company (sale of goods), it must go through a distributor/importer (registered in the Mainland) in order to sell on the local market.
Article 6 of Law No. 13 of 2011 states: “
A natural or legal person may conduct an Economic Activity in the Emirate only through a Business licensed by the DED.” An “Economic Activity” is defined as “Any commercial, industrial, artisan, occupational, agricultural, service, or any other for-profit activity authorised in the Emirate”.
This law therefore clearly states that conducting business with a Free Zone company in the Mainland is illegal.
It is therefore important to have the appropriate type of company to operate legally in the Emirates. We are often told, "
I know that I do not have the right type of company, but it doesn't matter, everyone does it." It should be noted that Article 29 of the law referred to above provides for a fine of up to AED 100,000 in the event of non-compliance with these provisions…
Furthermore, in the event of a dispute (civil or criminal proceedings before Dubai Court, a complaint filed with Consumer Rights, etc.) involving the entrepreneur's liability, failing to have the appropriate legal status will have serious consequences (no limited liability, a fine, lack of insurance coverage, etc.).
Finally, since the introduction of VAT in the Emirates and the upcoming arrival of Corporate Tax, there will be more and more inspections.
We can therefore only advise you to have the right type of company for your business!
Our firm, based in Dubai since 2009, assists you with all the administrative procedures involved in setting up your company in the Emirates. Our team consists of legal professionals, accountants, and PROs. We invite you to contact us at:
support@merritt.group.
Merritt Group
