Free Zones Article – Part 2: Advantages of Free Zone Companies
June 17, 2020
By: Paula Villegas and Rachel Dixon
There are numerous benefits to incorporating a company in a Free Zone as opposed to incorporating a mainland UAE company, and in this article, we will summarise the most relevant ones.
Unrestricted foreign ownership
Perhaps the most important distinguishing factor between a Free Zone company and a company incorporated in mainland UAE relates to foreign ownership. This is the most significant benefit to an overseas investor and, therefore, often the primary driver in using Free Zone companies. Companies that are set up on mainland UAE require a local (i.e. a UAE national or a company fully owned by UAE nationals) shareholder to own at least 51% of the shares in the company. Although there are mechanisms in terms of which non-UAE nationals’ contract for effective control over that 51%, the fact remains that there is still an element of risk in this structure for a foreign investor.
Free Zone companies, by contrast, permit 100% ownership by foreign investors and therefore sole ownership of the company is possible. This instils a sense of security to a foreign investor and is a prime driver for investors wishing to enter the UAE market to use, where they are able to do so, Free Zone companies as the launching platform for their activities. This, and the general lower cost compared with setting up a mainland company as set out below, is almost certainly the main reason why foreign investors opt to set up their businesses within one of the Free Zones.
Generally, the actual company incorporation costs in a Free Zone, i.e. the cost of the licence, tend to be lower than in mainland UAE, and especially when a business is being launched, this can be a factor.
Further, depending on the Free Zone in question, the share capital requirements are typically lower than for non-Free Zone companies. The minimum share capital for a Free Zone company is typically AED 50,000, compared with a typical minimum amount of AED 300,000 for mainland Limited Liability Companies (LLCs), and in certain cases:
- the share capital, once evidenced as deposited in the bank, may be freely used by the company to cover operating expenses (which is currently the same treatment applied to companies registered in mainland UAE); and
- there may even be no actual requirement to deposit the share capital in the bank.
Another cost consideration pertains to the cost of physical space for the business. Mainland UAE companies have certain requirements in respect of physical premises (and minimum sizes and other requirements) for the business whereas Free Zones usually offer flexible office/space solutions. While some Free Zones have a minimum physical office space size requirement, for others the requirement depends on the business activities, and could be as nominal as a “flexi-desk” (i.e. a shared serviced workspace). Certain Free Zones offer the possibility of “virtual desks” with no physical workspace requirement or provision, only a P.O. Box address.
This is certainly attractive to overseas investors wishing to enter the market who, rather than having to incur reasonably substantial costs of having to purchase or lease physical space in order to be able to carry out business activities, can make use of these flexible Free Zone offerings.
Tax exemption and repatriation of capital
Free Zones generally offer corporate tax exemptions for a period between 15 and 50 years, depending on the Free Zone, which period is typically renewable, however, they are not exempted from federally imposed taxes, such as VAT.
Businesses and persons in Free Zones (and in fact mainland UAE) are, at present, exempted from income taxes. However, there is no general tax exemption in the law, therefore, anyone investing in the UAE (including in Free Zones) should be aware of the possibility that a federal law may be introduced in the future, and personal or corporate taxes may be imposed.
A business operating in a Free Zone benefits from the right to repatriate 100% of capital and profits (the same as with entities set up in the mainland UAE).
Different share classes
There are certain Free Zones whose regulations provide for different types and/or classes of shares. This can be extremely useful in structuring and for management and executive purposes. For example, certain shares could have no voting rights attached to them, enabling a differentiation between the rights attaching to the shares. Companies set up in mainland UAE do not cater for this flexibility and currently only permit ordinary shares.
Exclusion from import and export duties
Free Zone businesses are 100% exempted from duties on all exports to non-GCC countries. If the businesses are selling in the mainland and GCC market, then customs duties apply. Likewise, businesses will generally incur the applicable customs rate (of 5% of value) if the goods are moved from the Free Zones to the mainland.
Free Zones generally aspire to a more simplified and efficient approach to documentation, paperwork and red tape, and in general there is less formal documentation required when establishing and operating a company from the Free Zones. For international investors most Free Zone forms and regulations, etc., are provided in English as well as in Arabic. Moreover, certain Free Zones offer knowledge, expertise and collaboration opportunities with synergetic businesses within the Free Zone.
There are, however, certain restrictions and limitations on Free Zone companies, particularly in relation to undertaking business in mainland UAE, and qualified expert advice and opinion should be sought before establishing any company or undertaking any business activity accordingly.