The decision to set up a company in Dubai can be an extremely lucrative and promising investment. Dubai is known for its business-friendly environment, world-class infrastructure and attractive tax environment. But before you enter Dubai's dynamic business world, you need to decide on the right legal form. Choosing the right corporate structure is one of the first and most important decisions you need to make, as it will have a direct impact on your liability, tax burden and operational requirements of your company.

In this article, we'll take a detailed look at the different legal forms available to you in Dubai and help you choose the one that's best for you. We will explain the benefits and challenges of each legal form and what factors you should consider when making your decision.

1. Free Zone Company

One of the most popular legal forms in Dubai is to set up a company in one of the many free zones. Free Zones are specially designated areas that aim to attract international investment. Companies established in these zones benefit from special regulations and advantages.

Advantages:

• 100 % foreign ownership: Unlike onshore companies, free zones do not require a local partner or sponsor. This means that as a foreign investor you have full control over your company.
• Tax exemption: Companies in free zones are exempt from corporate tax as long as they do not conduct business within the UAE. This is particularly attractive for international companies operating in global markets.
• Simple company formation: The processes for setting up a company in a free zone are generally simple and quick, and there are numerous administrative supports to facilitate the process.
• Easy visa procurement: Free trade zones facilitate the acquisition of work and residence visas for employees and their families.

Challenges:

• Limited business activities within the UAE: A major disadvantage is that companies in free zones are not allowed to operate directly in the local UAE market unless they work with a local distributor or agent.
• Office requirements: Depending on the free zone, you may need to rent a physical office or minimum equipment such as virtual offices to obtain your license.

Suitable for:

• Companies that conduct international business and do not plan extensive domestic operations in the UAE, such as trading companies, consulting firms, technology companies and service providers.

2. Onshore company (Mainland Company)

Onshore companies, also known as mainland companies, offer entrepreneurs the opportunity to do business both inside and outside the UAE. However, this type of company formation is subject to certain regulations, particularly with regard to foreign ownership.

Advantages:

• business activities in the UAE: Mainland companies can do unrestricted business in the UAE and with government clients, which is not possible in the free zones.
• Full control (in certain sectors): More recently, the UAE has passed legislation allowing foreign investors in certain sectors to hold 100 % ownership in their companies. However, for many sectors, a local partnership is still required.
• Flexible office rent: Mainland companies are not tied to specific zones and can operate anywhere in Dubai. This offers flexibility in the choice of location.

Challenges:

• Local sponsor: Traditionally, onshore companies have in many cases been required to have a local sponsor holding 51 % of the shares. In many industries this may still be the case, although in certain industries (such as technology, retail or manufacturing) full foreign ownership is now permitted.
• Corporate income tax: While free zones are often exempt from taxes, onshore companies have had to pay a corporate tax of 9 % on their profits since 2023.

Suitable for:

• Companies looking to operate in the UAE both domestically and internationally, such as retail, construction, infrastructure and local service companies.

3. Branch or subsidiary of a foreign company

If you already have an international business and want to expand it into the UAE market, you can either set up a branch office or a subsidiary. This allows you to establish your brand in Dubai without having to set up an entirely new legal entity.

Advantages:

• Market access: A branch or subsidiary allows your company to do business in the UAE and enter into contracts with local companies or the government.
• Full control: A branch of a foreign company can remain 100 % in the possession of the parent company.
• Corporate income tax: Depending on the activity and location, the corporation tax for branches may vary. Branches operating in free trade zones may be exempt from corporation tax.

Challenges:

• Local agent: While the company remains 100 % owned by the parent company, in many cases the appointment of a local service agent is required to operate the branch.
• Responsibility for parent company: A branch is not legally separate from the parent company, which means that the parent company is liable for all debts and obligations of the branch.

Suitable for:

• International companies that want to enter the UAE market but are not willing to set up a completely new company or want to maintain their existing structure.

4. Civil Companies

Civil companies are a legal form often used by freelancers or service providers. This type of company can be 100 % owned by foreign investors as long as it is a service company. However, it is important to note that civil companies cannot be involved in production or trade-related activities.

Advantages:

• Full ownership: Foreign investors can own civil companies up to 100 % without the need for a local partner as long as the company operates in a service industry.
• Easy foundation: The incorporation process is generally simpler than for Mainland or Free Zone companies.

Challenges:

• Limited business areas: Civil societies cannot be active in areas such as trade or production, which restricts their scope for action.
• Liability: The owners of a civil society are personally liable for the company's debts, which makes this legal form riskier than other options.

Suitable for:

• Freelancers, service providers and consultants who want to work in the UAE without entering the trade or manufacturing sector.

5. Sole proprietorship (Sole Establishment)

A sole proprietorship is another popular legal form for individuals who want to start a business in Dubai. This form is particularly popular with freelancers, consultants and service providers.

Advantages:

• 100 % foreign ownership: Sole proprietors can own their company outright.
• Easy to set up: Setting up a sole proprietorship is quick and uncomplicated.

Challenges:

• Unlimited liability: The owner is personally liable for all debts and liabilities of the company, which entails a high level of risk.
• Limited growth opportunities: Sole proprietorships may have fewer opportunities for expansion or financing because they do not enjoy the benefits of a corporation.

Suitable for:

• Individuals who work as freelancers, consultants or service providers and have no plans to set up a larger company in the near future.

Conclusion: Which legal form is right for you?

Choosing the right legal form for your company in Dubai depends on various factors. Here are some considerations that can help you decide:

• Business purpose: If you mainly operate internationally and plan to do little to no business in the UAE, a free zone company might be the best choice. On the other hand, if you want to operate in the local UAE market, a mainland company makes more sense.
• Ownership structure: If you want to retain full control over your company, free trade zones and civil societies offer the greatest flexibility.
• Liability: If you want to limit your liability, corporations or free zone companies are often safer than civil companies or sole proprietorships.

Individual advice from experts such as SetupCo under the direction of Andreas Schmidt is