Free Zones might seem like the obvious and easy choice, for setting up a business in the UAE. However, savvy business start-ups know that an in-depth understanding of the pros and cons of each is invaluable for decision-making.
Pros and cons of Free Zone
First of all, let’s look at what Free Zone and Onshore are. With around 40 Free Zones in the UAE, this is a popular route to market. A UAE Free Zone is a special economic zone usually attached to a port or linked to an industry sector.
- 100% foreign ownership, repatriation of capital and profits and corporate and personal income tax exemptions
- Exemption from all import and export duties
The main disadvantage is:
- Companies are limited to operating within it and may be unable to trade freely with onshore or government entities without using an agent or setting up an onshore branch
- Customers can travel to a free zone to use a company’s services.
An independent authority governs each Free Zone, applying their own rules and regulation, is responsible for regulations and policies and issues operating licenses to business within the zone. Free Zones throughout the Emirates cater for all types of businesses, from renewables and logistics to healthcare, education and training.
Pros and cons of Onshore
An Onshore entity is established if you want to trade on the mainland (or outside the restrictions of the Free Zone) and usually takes the form of a Limited Liability Company (LLC) or Branch Office.
- In an Onshore LLC the foreign shareholder usually controls day-to-day management of the company
- Profits do not necessarily have to be split at the same percentage of ownership and it is possible to stipulate a different ratio in the Memorandum of Association
- In a Branch Office Onshore the foreign company retains 100% ownership and full financial liability
- In an Onshore LLC, ownership of 51% must remain in the hands of a UAE national or a 100% UAE owned company
- In a Branch Office Onshore there’s no limited liability as is the case for a LLC, the foreign parent company retains full liability
- A Branch Office must appoint a Local Service Agent to help obtain licenses, work permits and visas – this Local Service Agent (LSA) or National Service Agent (NSA) can be a UAE national or a 100% UAE owned Company
How do I choose?
Think about who your customers are and where they are located? For example, you may wish to open a company that provides training. If your business model is to set up a training institute where you provide instruction in a classroom, then the geographical limitations of a Free Zone may not be an issue. Your customers can come to you. However, if you want to provide on the job training in a client’s place of work, a Free Zone may limit you to a smaller market. It could be better to set up Onshore.
Be informed and seek local expert advice so that you make the right decision.
A specialist such as PRO Partner Group will be able to guide you through each route to market and design a plan that will save you time, money and give you a set up most suited to your business model.
James Swallow is Director of Middle East based PRO Partner Group, which specialises in Free Zone and Onshore company formation in Abu Dhabi, Dubai, the wider UAE and Oman.