Three regimes, one country
The UAE does not have a single company law system. It has three, and they are not variations on a theme.
Mainland — sometimes called onshore — means an entity licensed by the economic department of the emirate in which it sits: Dubai, Abu Dhabi, Sharjah and so on. Federal commercial companies legislation supplies the corporate law, the emirate authority supplies the licence and permitted activities, and disputes go to the onshore courts.
Commercial free zones are geographically defined areas, each administered by its own authority under its own companies regulations. There are several dozen and they are not standardised: share transfer mechanics, director duties, filing obligations, permitted activity lists and lease requirements all differ from zone to zone. A structure that works in one may be impossible in another.
DIFC and ADGM are a different order of thing. They are financial free zones with legislative autonomy: their own companies, contract, insolvency, employment, data protection and security law, administered by their own registrars and financial regulators, with their own courts operating in English. ADGM applies English common law directly, subject to its own enactments; DIFC has a codified common-law-derived body of law. Neither applies onshore federal civil and commercial law to matters within its jurisdiction.
So "free zone" as a category tells you almost nothing. A company in a commodities free zone and a company in ADGM do not owe the same duties, do not litigate in the same forum, and cannot be advised from the same template.
| Mainland | Commercial free zone | DIFC / ADGM | |
|---|---|---|---|
| Licensing authority | Economic department of the relevant emirate | The individual free zone authority — each with its own rulebook | The zone's own registrar, plus the financial services regulator for regulated activity |
| Corporate law applied | Federal commercial companies legislation | The zone's own companies regulations within the federal framework | The jurisdiction's own companies law — common-law based, not onshore federal law |
| Onshore market access | Direct — this is the onshore market | Restricted; selling into the mainland generally needs an onshore route, branch or distributor | Restricted in the same way as other free zones; the common-law status does not confer onshore market access |
| Default dispute forum | Onshore courts, in Arabic, civil-law method | Onshore courts of the host emirate, unless the contract provides otherwise | The jurisdiction's own courts, in English, common-law method |
| Employment regime | Federal labour law and MOHRE | Federal labour law, with zone-specific administration in some zones | The jurisdiction's own employment law, administered by the zone |
| Typical fit | Domestic UAE customers, retail, contracting, government-adjacent work | Regional trading, re-export, logistics, holding and services sold outside the UAE | Financial services, funds, family offices, holding structures where common-law certainty is the point |
Where your customers sit decides the licence
The formation question that matters is not which zone is cheapest. It is: who pays your invoices, and where are they located?
A free-zone licence authorises the holder to conduct its licensed activity within that zone and, typically, to trade outside the UAE. It does not carry a general right to do business in the onshore market. Where revenue comes from mainland customers, some onshore route is usually required — a mainland licence held by an affiliate, a branch registered onshore, or a distributor or commercial agent standing between the free-zone entity and the market.
The position is sharpest with goods. Product moving from a free zone into the onshore market is an import: it attracts customs treatment when it leaves the zone, and the distribution leg needs a party licensed to perform it. Free-zone warehousing is valuable for re-export and regional distribution; it is not a route into UAE domestic retail without an onshore counterparty.
Services are more permissive but not unconditional, and the answer varies with the activity and the emirate. Regulated activities — financial services, healthcare, education, legal services, contracting, recruitment — answer to their own sectoral regulators, and the licence has to satisfy that regulator, not merely the registrar. Onshore public-sector procurement is a further constraint: tender conditions frequently require a mainland-licensed bidder.
Where the customer base is genuinely split, the answer is usually two entities rather than one compromise entity — a free-zone company holding the regional business and a mainland company serving the domestic market, with a documented arrangement between them.
Foreign ownership onshore after 2020 — and what it did not change
Before the reform, a mainland limited liability company generally required a UAE national to hold a majority of the shares. Foreign investors managed the exposure through side agreements — nominee arrangements, share pledges, powers of attorney — of uneven and sometimes doubtful enforceability. The amendments to the Commercial Companies Law that took effect from 2020 removed that general requirement for most commercial and industrial activities.
Three things follow. First, the reform removed a structural reason to choose a free zone. A great many free-zone companies exist only because their founders could not own a mainland company outright. That reason has gone for most activities, and the free-zone choice now has to justify itself on its merits.
Second, the reform is activity-dependent. Certain activities of strategic impact, and certain separately regulated sectors, remain subject to ownership conditions or approvals — a question to be checked with the relevant economic department, not assumed.
Third — and this is where the misunderstanding sits — full foreign ownership onshore does not convert a mainland company into a free-zone company for any other purpose. Market access, tax treatment, dispute forum and employment regime are unaffected by who holds the shares.
The reform also created an opportunity many existing holders have not taken. Nominee arrangements that were a necessity in 2018 are now, in many cases, an unnecessary liability on the cap table. Unwinding them needs the local partner's cooperation, which is easier to obtain before a commercial relationship deteriorates than after.
Entity types, and the branch versus subsidiary decision
Across the three regimes the recurring forms are the limited liability company and its free-zone equivalents in single- and multi-shareholder variants, the branch, the representative office, the holding company, and — in the financial free zones — partnerships, cell structures and foundations.
The choice between a branch and a subsidiary carries the most weight and receives the least analysis.
A branch is not a separate legal person. It is the foreign parent, registered to operate locally. Its liabilities are the parent's without limitation, and its activities are constrained by what the parent itself does. It has no share capital, no shareholders, and nothing separable to sell if the business is later divested. What it offers is contractual continuity: the counterparty contracts with the parent, which matters where the parent's balance sheet, track record or licences won the work.
A subsidiary is a distinct legal person. It ring-fences liability, holds its own licences and contracts, can take in local investors or management equity, and can be sold as a unit. It also needs its own governance and accounts, and where the parent guarantees its obligations it often carries the parent's credit anyway.
The pattern we see most often is a construction or engineering group that opened a branch because a tender required the parent's balance sheet, then discovers years later that a decade of project liability, employment exposure and tax history sits on the parent with no separating wall and cannot be carved out for sale.
Corporate tax and the qualifying free zone person
Federal corporate tax changed the terms of this decision, though not in the direction most formation advice suggests. A free-zone entity is not tax-exempt; it is a taxable person like any other. What the regime provides is that an entity meeting a defined set of conditions — a qualifying free zone person — may apply a zero rate to income that itself qualifies, with the remainder taxed at the standard rate. Everything turns on both limbs: the entity has to qualify, and the income has to qualify.
Qualification is conditional and ongoing. It depends on maintaining adequate substance in the zone, deriving income from activities within the qualifying categories, staying within the permitted allowance for non-qualifying revenue, meeting transfer-pricing obligations and preparing audited accounts. It is not a status conferred at incorporation and kept by inertia. It can be lost, and the consequences persist beyond the year of the breach.
Two practical points matter more than the headline. First, income from onshore mainland customers frequently falls outside the qualifying categories — the very market access the business wants is often what erodes the tax position. The tax analysis and the market-access analysis are the same analysis, and running them separately produces a structure that fails at least one.
Second, tax should not drive the choice of regime. A business whose customers, staff and contracts are all onshore does not become a free-zone business because a free-zone licence was purchased. Substance determines where profits are properly taxed, and a structure built to reach a rate rather than to reflect the business is the one that fails on audit. We coordinate the position with corporate tax counsel; we do not sell a tax result.
Substance, premises, visas and the economic substance regime
Three separate substance requirements operate, and they are routinely confused.
Licensing substance. Registrars and free-zone authorities impose their own premises conditions — a leased office, a flexi-desk, a warehouse — tied to the licence and to the number of residence visas the entity may sponsor. Visa allocation is generally a function of licensed premises area, so an entity that plans to employ people sizes its lease at formation rather than discovering the ceiling when it hires.
Economic substance regulations. A separate federal regime applies to entities carrying on defined relevant activities — including distribution and service centre business, headquarters, holding company, intellectual property, shipping, financing and leasing, fund management and insurance. Entities in scope file notifications and, where relevant income is earned, must show that core income-generating activity is directed and managed in the UAE with adequate people, premises and expenditure. The obligation follows the activity actually carried on, not the wording of the licence, and a holding structure that files nothing because it believes itself dormant is a common and penalised error.
Tax substance. The corporate tax regime imposes its own adequate-substance test for free-zone status, and satisfying the zone's lease requirement does not satisfy it.
The three overlap but are not co-extensive. An entity can hold a compliant lease, file its economic substance notification, and still fail the substance condition for free-zone tax status, because the people taking the decisions that generate the income are somewhere else. Investor and specialist residence categories sit alongside company sponsorship and are dealt with under residency.
Shareholder terms and minority protection
The constitutional documents a registrar accepts are a floor, not a bargain. Standard-form articles are thin on the questions that actually cause shareholder disputes: deadlock, transfer restrictions, funding obligations, information rights, reserved matters, and what happens when a founder leaves.
The protections that repay drafting attention are unglamorous. Reserved matters — decisions requiring more than a simple majority — stop a majority holder from issuing shares, changing the business, granting security or approving related-party transactions unilaterally. Pre-emption on issue and transfer prevents dilution and controls who arrives on the register. Tag and drag rights settle the exit dynamic in advance. Deadlock mechanics matter most in fifty-fifty ventures, which are otherwise structurally incapable of resolving a real disagreement.
Enforcement determines whether any of it is worth having. In DIFC and ADGM, shareholder agreements are enforced by common-law courts with familiar remedies and the drafting can assume it. Onshore and in the commercial free zones, the interaction between the agreement and the registered constitutional documents needs deliberate handling: where the two conflict, the registered documents are what the authority acts on, and a transfer restriction living only in a side agreement may not stop a transfer being registered. Where terms matter, they belong in the constitutional documents so far as the regime allows, with disputes resolved in a forum that can deliver the remedy.
Joint ventures with a local operating partner deserve particular care. The failure mode is a partner who contributed access at the outset, owes nothing continuing, and holds a blocking position over a business built entirely by the other side.
Migration, restructuring and exit
Structures age badly. A business licensed in 2018 for what it then did is frequently mismatched to what it does now. Moving between regimes is possible but is not one procedure. Some commercial free zones permit an entity to transfer out to another zone or onshore by continuation, preserving legal identity, contracts and history. Others do not, and the route is to incorporate afresh, transfer the business and assets across, and liquidate the original. DIFC and ADGM both provide for companies to be continued in or out of their registers on their own terms, and foreign companies can in some cases redomicile into UAE registers.
Whichever route applies, the constraints are rarely corporate. Contracts may not novate freely. Bank accounts do not follow the entity, and a replacement banking relationship can take longer than the restructuring itself. Employees must be transferred with end-of-service entitlements dealt with and visas re-issued under the new sponsor. Sectoral licences generally have to be applied for again. Any one of these can dictate the timetable, and a migration planned around the registrar's requirements alone will stall on one of them.
Exit deserves the same discipline. An entity that stops trading does not quietly disappear: licences accrue renewal obligations, filing and tax obligations run until deregistration, and abandoning an entity rather than liquidating it can leave directors and shareholders exposed and complicate later applications by the same people. Proper liquidation — appointing a liquidator where required, settling creditors and employees, cancelling visas and establishment cards, clearing tax and closing accounts — is unexciting and considerably cheaper than the alternative. Where the entity is closing because it cannot pay, that is an insolvency question and the sequence matters.
Where this goes wrong
The failures we are asked to repair are consistent enough to list.
The licence bought before the business model was settled. A package purchased on price and speed, a generic activity list, and it does not cover what the business actually does. Adding an activity is sometimes routine and sometimes impossible in that zone.
The free-zone entity selling onshore with no onshore route. The commonest and most expensive error. It surfaces when a customer's procurement team asks for the trade licence, when an invoice is rejected, or on a tax review.
Advice for one free zone applied to another. Transfer procedures, director requirements and filing obligations are zone-specific; a transaction structured on the wrong zone's rules stalls at the registrar.
DIFC or ADGM treated as an ordinary free zone. Employment terms drafted to onshore law for a DIFC entity, security taken without registering under the applicable regime, a dispute clause naming the wrong court.
Nominee structures left in place. Built to work around the pre-2020 ownership rules, still on the register long after the reason for them disappeared, and now a lever in the local partner's hands.
Substance assumed rather than built. A licence and a lease treated as enough for free-zone tax status while every decision is taken abroad.
The branch opened for one tender. Years of unsegregated liability on the parent, discovered during a sale process.
Shareholder terms deferred until "once we are trading". They are never agreed, and the first real disagreement is decided by whoever holds the majority.
Banking left to the end. Account opening is the longest and least predictable step in a UAE formation, and it is sensitive to the ownership chain, the source of funds and the activity. A structure no bank will onboard is not a structure. It is designed alongside the entity, not after it.
Frequently asked questions
Mainland or free zone — which should I choose?
Answer the market-access question first and the rest follows. If your revenue will come from customers located in the onshore UAE market, you need an onshore route, and a mainland licence is usually the direct one. If your revenue comes from outside the UAE, or from within the free zone, a commercial free zone is often the better fit. Cost and speed are the least important inputs to this decision and the ones most formation providers lead with. Since the 2020 ownership reform, the historic reason for choosing a free zone — that a foreigner could not own a mainland company outright — no longer applies to most activities.
Can a free zone company sell to customers in mainland UAE?
Not as a general right. A free-zone licence authorises activity within that zone and, typically, trade outside the UAE. Selling goods into the onshore market is an import and needs a party licensed onshore to perform the distribution leg. Services are more permissive in practice but depend on the activity, the emirate and any sectoral regulator. Onshore government and quasi-government procurement frequently requires a mainland-licensed bidder. Where the business genuinely serves both markets, two entities with a documented arrangement between them is usually cleaner than one compromised entity.
Are DIFC and ADGM just expensive free zones?
No, and the confusion is costly. They are separate legal jurisdictions with their own companies, contract, employment, insolvency, security and data protection law, their own registrars and financial regulators, and their own English-language courts applying common-law method. A commercial free zone is a licensing regime sitting within the wider UAE legal framework; DIFC and ADGM substitute their own body of law for it. Employment contracts, security documents and dispute clauses drafted for one will not work in the other.
Does 100% foreign ownership onshore change anything else?
Only ownership. The amendments effective from 2020 removed the general majority-national requirement for most mainland commercial and industrial activities. They did not change market access, tax treatment, the applicable dispute forum or the employment regime, and they did not make a mainland company equivalent to a free-zone company for any other purpose. Certain strategic and separately regulated activities remain subject to ownership conditions or approvals, so the position must be confirmed for the specific activity rather than assumed.
Is a free zone company exempt from UAE corporate tax?
No. A free-zone entity is a taxable person like any other. What the regime allows is that an entity meeting the conditions to be a qualifying free zone person may apply a zero rate to income that itself qualifies, with other income taxed at the standard rate. Both limbs have to be satisfied, the conditions are ongoing rather than granted at incorporation, and income from onshore mainland customers frequently falls outside the qualifying categories. The tax position should follow the structure the business actually needs, not the other way round.
Branch or subsidiary?
A branch is the foreign parent registered locally — not a separate legal person, so its liabilities are the parent's without limitation, its activities are limited to what the parent itself does, and there is nothing separable to sell later. A subsidiary is a distinct legal person that ring-fences liability, holds its own contracts and licences, can take in investors or management equity, and can be divested. Branches make sense where the counterparty is contracting for the parent's balance sheet or track record. Where the local business will accumulate liability over years, a subsidiary is almost always the better answer.
What are the economic substance obligations?
A federal regime applies to entities carrying on defined relevant activities — including distribution and service centre business, headquarters, holding company, intellectual property, shipping, financing and leasing, fund management and insurance. Entities within scope file notifications and, where relevant income is earned, must show that the core income-generating activity is directed and managed in the UAE with adequate people, premises and expenditure. The obligation follows what the entity actually does, not what the licence says. Holding structures that assume they are out of scope because they are dormant are a frequent source of penalties. This is separate from the free-zone authority's premises requirements and separate again from the substance condition for free-zone tax status.
Can I move a company from one free zone to another, or onshore?
Sometimes by continuation, preserving legal identity and history; sometimes only by incorporating a new entity, transferring the business and liquidating the old one. Which applies depends on the rules of both the origin and destination regimes. The corporate mechanics are usually not the constraint — the contracts, the bank accounts, the employee transfers and visas, and the sectoral licences are. Banking in particular can take longer than the restructuring itself, so it is planned first, not last.