When setting up a business in the UAE, one of the most important decisions is whether to establish in a Free Zone or on the Mainland. This choice impacts not only your operational flexibility but also your tax obligations, audit requirements, and long-term compliance.
With the implementation of UAE Corporate Tax in June 2023 and the first full compliance cycles beginning in 2025, business owners must carefully evaluate where the real advantages lie.
In this article, we provide a 2025 update on the tax differences between Free Zone and Mainland companies, helping you make an informed decisio
What is a Mainland Company?
A Mainland company is licensed by the Department of Economic Development (DED) in each Emirate.
Key features:
- Can do business anywhere in the UAE and internationally
- Can trade directly with UAE mainland clients without restrictions
- Subject to UAE Corporate Tax (9%) on taxable profits above AED 375,000
- Must comply with full VAT regulations if revenue thresholds are met
- Often required to submit audited financial statements (for banks, CT, and some licensing renewals)
Best for: Companies targeting the local UAE market and government contracts.
What is a Free Zone Company?
A Free Zone company is established in one of the UAE’s many designated free zones (e.g., DMCC, JAFZA, DAFZA, RAKEZ, SHAMS, ADGM).
Key features:
- 100% foreign ownership
- Easier setup process with fewer restrictions
- Allowed to repatriate profits fully
- Exempt from customs duties on imports and exports within the zone
- May benefit from 0% Corporate Tax if classified as a Qualifying Free Zone Person (QFZP)
- Restricted in trading directly with UAE mainland unless through a distributor or mainland branch
Best for: Companies focusing on international trade, e-commerce, and holding structures.
Corporate Tax in 2025: Free Zone vs Mainland
Mainland Companies
- 0% on first AED 375,000 profit
- 9% on taxable income above AED 375,000
- Must comply with all CT filing obligations, regardless of size
Free Zone Companies
- Can enjoy 0% Corporate Tax on Qualifying Income if they maintain QFZP status.
- Qualifying income includes:
- Transactions with other free zone entities
- Exports of goods and services to foreign clients
- Certain passive income streams (dividends, royalties, interest)
- Non-qualifying income (e.g., sales to mainland UAE customers without a proper distributor arrangement) → taxed at 9%
Key 2025 update: Free zones are under tighter scrutiny — companies must demonstrate substance, economic activity, and proper documentation to claim the 0% tax.
VAT in Free Zone vs Mainland
- Mainland Companies: Must charge 5% VAT on most goods and services, file returns (monthly/quarterly), and comply with full VAT record-keeping rules.
- Free Zone Companies: VAT treatment depends on whether the free zone is “designated” or “non-designated”:
- Designated Zones: Treated as outside UAE VAT for certain transactions (mainly goods).
- Non-Designated Zones: Treated as within UAE VAT scope.
Either way, once a free zone business exceeds AED 375,000 in taxable supplies, it must register for VAT.
Audit & Financial Statement Requirements
- Mainland: Audits are not always mandatory for licensing, but increasingly required by banks, investors, and CT compliance.
- Free Zones: Most free zones (e.g., DMCC, JAFZA, DAFZA) require annual audited financial statements for license renewals.
From a CT perspective, maintaining IFRS-based accounts is mandatory for both setups
Pros & Cons at a Glance
| Aspect | Mainland Company | Free Zone Company |
| Ownership | 100% foreign (since 2021 reforms) | 100% foreign |
| Market Access | Can trade anywhere in UAE & abroad | Limited direct mainland trading |
| Corporate Tax | 9% on profits above AED 375,000 | 0% on qualifying income (otherwise 9%) |
| VAT | Always within scope | Depends on designated vs non-designated |
| Audit Requirement | Often required by banks/CT | Mandatory in most free zones |
| Setup Cost | Moderate to high | Competitive, varies by zone |
| Best For | Businesses targeting UAE local market | Trading, holding companies, e-commerce, expats |
Which is Better in 2025?
The decision depends on your business model and long-term strategy:
- Choose Mainland if:
- Your main customers are in the UAE
- You need full access to government tenders and contracts
- You want flexibility with unlimited local trade
- Choose Free Zone if:
- You focus on international trade or online business
- You want to take advantage of 0% corporate tax under QFZP rules
- You want simpler setup with lower initial costs
Practical Example
- Company A (Mainland): A logistics provider with AED 5m revenue from UAE customers. Subject to 9% CT on taxable profit. VAT-registered and audited as per CT law.
- Company B (Free Zone – DMCC): An e-commerce trader exporting goods outside UAE. If QFZP requirements are met, enjoys 0% CT on exports, only paying VAT where applicable.
Conclusion
In 2025, the choice between Free Zone and Mainland is no longer only about setup costs — it’s about tax efficiency, compliance, and market access.
- Mainland companies provide unrestricted UAE market access but are fully within the 9% CT regime.
- Free Zone companies can still benefit from 0% CT on qualifying income, but only with strict compliance.
Call to Action
At Advanced AnalytIQ, we guide businesses through the decision-making process of choosing between Free Zone and Mainland setup, while also ensuring VAT, Corporate Tax, and audit compliance
Contact us today for a consultation and let us help you structure your business the smart way in 2025.