Entrepreneurs, start-ups and larger multinationals looking for a presence in the region are offered a head start with myriad benefits in the UAE, particularly when it comes to Free Zones. Each Free Zone is a business area specific to a different sector, and is regulated by its own specific authorities. The zones were initiated in order to diversify the economy in the UAE, and to attract more foreign investment.
Why set up a business in a Free Zone?
There now over 40 free zones across the region. The approximate total trade across the UAE’s Free Zones was worth around AED 411bn in 2016 the largest zones in terms of number of businesses are the Jebel Ali Free Zone (JAFZA) and Sharjah Airport International Free Zone (SAIF Zone).
Why set up a business as an Onshore entity?
If a business needs to trade outside of the Free Zone, for example to deliver services and products into the UAE (i.e. Onshore) then an Onshore entity should be established. This is usually a Limited Liability Company, Branch Office or Representative Office.
Whether a business is best suited to a Free Zone or Onshore set up depends on the customer base, sector and local regulatory requirements dependant on the sector the business operates within (e.g. Health Authority, Oil and Gas (ADNOC), Food Authority). To help you decide whether the UAE is right for your company take a look at some of the benefits you could expect to take advantage off, particularly within Free Zones. For further detailed information about whether a Free Zone or an Onshore company or branch is most suitable please get in touch.
If you operate outside the Free Zones (i.e. Onshore/within the UAE) under UAE law you must partner with a Local Emirati Company or Individual in order to obtain the industrial or commercial licence to operate. The partner company/individual has to have a minimum 51% share in the business. Although the P&L does not have to be structured in the same way and there are a number of ways to mitigate some of the risks inherent in this onshore requirement.
If you’re an entrepreneur or start-up then setting up within a Free Zone can be more straight forward and you retain 100% ownership of your business if you do not need to be onshore.
Benefit from tax breaks
Businesses within the Free Zones and Local Companies Onshore in the UAE don’t have to pay income or corporate tax.
On 1 January 2018, the tax system will go through some changes. It’s expected that VAT will be introduced, which will have implications for the Free Zones and onshore companies in UAE. VAT is an indirect tax so businesses will have to implement tax administrative systems. It is still unclear if businesses within the Free Zone will be VAT exempt, VAT will clearly alter the business models of both Free Zone and Onshore companies in UAE
The likely VAT rate of 5% that is expected to be implemented is very low when compared with the 20% in the UK (and 27% elsewhere in Europe). Companies, investors and entrepreneurs can benefit from income and corporate tax exemption when setting up in the UAE. Note that a branch of a foreign company set up in the UAE will still be liable for tax in the mother country of that company.
Send profits home
Local companies operating within a Free Zone or within the UAE can freely send profits and capital to other countries, subject to the capital restrictions of those countries.
No import or export duties within Free Zones
Free Zone companies have 100% duty exemption on all exports outside of the Gulf Cooperation Council, but the usual customs duties do apply when selling locally. In practical terms, goods that are moved from Free Zones to the within the UAE will incur a tax of around 5%.
A Free Zone company cannot, strictly speaking, sell goods or services within the UAE itself. In the case of physical goods this is obviously more difficult to undertake from within the Free Zone and the Free Zone company will have to either use the services of an onshore ‘agent’ or set up a branch of that Free Zone company (or a new local UAE Company/LLC) onshore within the UAE to allow sale and distribution (retail or wholesale) of those goods within the UAE itself.
Access to local knowledge and expertise
Free Zones are much more than simply tax havens, with many financial benefits to foreign investors. One of the main reasons for their creation was to help share best practice and expertise across the region. This idea is that this will help to develop diversity and realise growth.
As each Free Zone caters to a specific industry (for example the Dubai International Financial Centre caters for finance and investment businesses and the Khalifa Industrial Zone is a centre for manufacturing, trade and logistics) there are already many service providers, counterparties, potential employees and potential end clients nearby in the new companies chosen field. The opportunities to network, cross-sell and develop synergies within your specific sector are therefore significantly enhanced within the relevant Zone.
Obtaining UAE resident visas
It is relatively straight forward to obtain UAE resident visas for company shareholders/owners, employees and family, although the process will need to be prepared correctly to ensure a smooth entry for owners and staff into the UAE.
As part of the company set up process the owners of the business will obtain ‘investor visas’ in the early stage. Following that resident visas can be obtained for family and then employees and their family members. Visas are usually valid for between 24 months and three years, and although the process is just four steps (entry permit, status adjustment, medical fitness test, Emirates ID registration and ID and Visa stamping) it’s a good idea to get expert advice when setting up a business in the UAE to make sure you meet all the criteria. It is particularly important to get advice regarding visas and sponsoring family members as job titles and level of qualification are crucial in ensuring you can properly sponsor family members.
Pro Partner Group can help with all aspects of setting up a business in the UAE, whether it’s within a Free Zone or Onshore as well as assisting with labour quotas for companies and staff and family visas, ensuring a smooth entrance into the UAE.
James Swallow is Director of Middle East based PRO Partner Group, which specialises in company formation and support services in Abu Dhabi, Dubai, the wider UAE and Oman.