The Roadmap to Successful Ventures in the Middle East Series – No 2

Free Zones

By Hugh Fraser, managing partner

Welcome to my weekly note with some personal views on what does/does not work when structuring business ventures in the Middle East region. 

My second theme is “Free Zones”. Free zones are often marketed by their sponsors as a panacea to the challenges of “onshore” establishments: fast track licensing and registration, 100% ownership with no local involvement and taxation advantages being the main selling points. But it is not always straightforward and some heavy strings may be attached. Here are my

Top 5 golden rules on this theme:-  

  • Carefully pre-check what business activities can be licensed and what special regulatory approvals are required: the Jebel Ali Free Zone may be optimum for “operational” businesses but “oilfield rentals” are officially not capable of receiving a licence;
  • Get the full picture at the outset on the full process, documentation and costs. This will include legalisation costs both in the home country and the UAE, licensing and registration fees, the licence type, visa costs, compulsory general and medical expenses insurances and perhaps virtual office/flexi-desk charges; and the number of shareholders may also impact on the level of minimum share capital which must be injected;
  • Be aware of the limitations: Free zone entities may not be able to conduct business in the relevant territory outside the freezone “onshore” without appointing a local partner and/or may not be able to apply for vendor registrations/approval with the state-owned entities including national oil companies; indeed ; a free zoneentity from Dubai is not generally accepted for the registration of a branch in Abu Dhabi or to hold the 49% foreign shareholding in a limited liability company in Abu Dhabi;
  • Be aware also of overseas issues: free zoneentities such as DMCC may be fine for establishing a regional bridgehead sales and marketing presence and hosting visas for personnel but they may not be accepted for approval to do business in all jurisdictions outside the territory for example as an authorised vendor or as a branch registration or a shareholder of a local subsidiary;
  • Be alive to the proper management of taxation matters: the inter-group relationship and business activities between the free zone entity and other group entities should be properly set out and documented given the freezone entity may be in a zero or lower tax environment relative to its group entities: the financial and commercial basis for the supply of equipment and personnel, management charges, interest on loans and royalty fees should also be auditable to avoid transfer pricing problem down the line.