Free Zones

The Roadmap to Successful Ventures in the Middle East Series

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 free zones not always straightforward and some heavy strings may be attached which you should be aware of.   

Before looking at free zones, business should consider:

  • Carefully pre-checking 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 here
  • Get the full picture at the outset on the full process including documentation and costs. This should 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. 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 free zone “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 zone entity 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.
  • In addition, be aware of overseas issues: free zone entities 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 free zone 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.