Nine reasons for entrepreneurs to set up in UAE free zones

January 26, 2017

Back in 1970, Harvard professor Howard Stevenson summed up entrepreneurship as ‘the pursuit of opportunity without regard to resources currently controlled.’ In other words, entrepreneurs have a clear vision and the determination to succeed – even if the environment they’re working in isn’t immediately conducive to success. 

Fortunately for entrepreneurs, though, the UAE has been offering a valuable head start for many years in the form of ‘free zones’ that positively welcome the entrepreneurial spirit. Each of these sector-specific business areas is governed by its own regulatory authorities and the zones were designed to diversify UAE economies, making the region more attractive to foreign investment and offering a wealth of benefits to those who choose to set up shop there.

In the first half of 2015, total UAE free zone trade was worth AED 297bn.

There are now almost 40 free zones across the UAE with the Jebel Ali Free Zone (JAFZA) and Sharjah Airport International Free Zone (SAIF Zone) the largest by number of companies – according to figures from the UAE embassy in the UK. Business owners in the free zones enjoy the right to 100% foreign ownership, 100% exemption from import and export tax, no corporate tax, and assistance with recruitment among other benefits.

For new businesses, there’s a lot to celebrate. So here’s a rundown of some of the key benefits on offer. 

1. You stay in control of your business: Foreign investors in the UAE who are outside the free zones are required to have a local partner if the business in question requires a commercial or industrial licence to operate – which is most of them. Crucially, that UAE-based partner must hold a minimum of 51% ownership of the business.

For the entrepreneurial mindset, and simply for the day-to-day control of the enterprise, that’s a bad thing as it means you can only have minority ownership of your own firm. Not so in the free zones – one of the key advantages is that as a foreign investor, you get to keep 100% of your operation and you don’t need a locally based partner. 

2. You enjoy some major tax breaks: As a business in one of the free zones, you won’t need to pay corporate tax or income tax, which are benefits that don’t require much of a hard sell. Outside the free zones in the UAE ‘mainland’ there’s still no personal income tax to pay, but depending on your industry there may be corporate tax.

As a business in one of the free zones, you won’t need to pay corporate tax or income tax, which are benefits that don’t require much of a hard sell.

The tax position is set to undergo some changes with the expected introduction of VAT on 1 January 2018 for the UAE, with other Gulf Cooperation Council (GCC) countries following by January 2019.

What that will mean for the free zones remains to be seen. As VAT is an indirect tax, companies won’t be shielded from its impact and will need to start thinking about putting in place tax administration systems. While they’re likely to remain exempt, suppliers outside the free zones won’t be, so VAT will still affect the business model of firms operating within them.

That said, the expected rate of 5% is very low when compared to 20% in the UK and as much as 27% elsewhere in Europe. Plus, the benefits of corporate and income tax exemption are still a major draw.

3. You can send 100% of your profits home: As a business operating in a free zone you will benefit from the right to repatriate 100% of capital and profits. If your business is founded in the free zone and only operates there, this may not be a key concern for you, but if you’ve established your presence there as a branch of a business that already operates in other countries, this flexibility may well be valuable.

4. You won’t have to worry about import or export duties: In general, there is no duty payable on imports or exports – free zone businesses enjoy 100% duty exemption on all exports to non-GCC countries, however, normal customs duties apply when you’re selling in the local and GCC market. In practice, if you want to move your goods from the free zones to the mainland you will generally incur a 5% tax.

This simplified approach to paperwork and red tape is indicative of the fact that in general, there’s less documentation when setting up and running a company from the free zones, and much of it is provided in English as well.

5. You will benefit from having relevant knowledge and expertise on hand: It’s easy to start building up a picture of the free zones as essentially tax havens, offering a spread of financial incentives to draw in foreign investment. That would be missing the point though, as one of the key drivers behind their creation was to foster knowledge and expertise in the region, helping to develop diversity and realise growth potential.

With that in mind, one of the key advantages of opening your business in a free zone is that you will have ready access to the knowledge, expertise and collaboration opportunities of other related operations in the area. The free zones cater to specific industries, whether it’s the Dubai Airport Free Zone for companies with complex international logistical needs; the Dubai International Financial Centre for finance and investment companies; or the Khalifa Industrial Zone (KIZAD) which is a hub for manufacturing, logistics and trade. Setting up in the right zone for your business will put you close to the necessary infrastructure, facilities and knowledge.

One of the key advantages of opening your business in a free zone is that you will have ready access to the knowledge, expertise and collaboration opportunities of other related operations in the area.

6. Depending on where you set up, share capital requirements could be low: Depending on the free zone in question, the required share capital can vary a lot. If you’re setting up a new enterprise in the Dubai Multi Commodities Centre (DMCC) for example, the minimum share capital is AED 50,000 per company and AED 10,000 per shareholder. However, if you’re setting up a branch of an existing firm, there’s no share capital requirement at all. In other free zones the requirements are much higher, but even then, there are encouraging signs to make setting up here even more attractive. In January this year, JAFZA announced new guidelines giving even more freedom to new companies setting up in the free zones and revising their minimum shareholder and capital requirements.

7. Some free zones don’t require you to have physical office space: While free zones allow for 100% foreign ownership, most require you to be a resident of the UAE and there’s normally a requirement for a physical office presence in the region. It’s not always the case though. While some free zones such as JAFZA have a minimum office space size (in this case 26.88 metres), for others such as Ras Al Khaimah Free Zone (RAK FTZ) the requirement depending on your business activities could be as little as a ‘flexi-office’, or even a ‘flexi-desk’ – a shared, serviced workspace.

8. It’s easy to get visas for your family and employees: Once you’re up and running in the UAE – and as the business owner you’ve got your own visa in place – it’s relatively quick and easy to get further residence visas for your family and employees. As a sponsor, you will need to be a current UAE resident and you must be earning at least the minimum salary required by each emirate.

Once you’re up and running in the UAE – and as the business owner you’ve got your own visa in place – it’s relatively quick and easy to get further residence visas for your family and employees.

Visas are normally valid for between one and three years. While the process is straightforward, made up of four stages – entry permit, status adjustment, a medical fitness test, then Emirates ID registration and visa stamping – it’s a good idea to get advice from an expert in setting up UAE free zone businesses. That way you can make sure that before you start an application, both you (and those you’re hoping to sponsor) meet all of the entry criteria.

9. Finally, if annual audits make you panic, you may not need to do them: Again, this one depends on which free zone you’re operating in, but annual audit requirements vary between zones. For example, in JAFZA it’s mandatory, whereas in the Ajman Free Zone, no annual audit is required. It’s up to you how valuable this benefit is to your operation and you will still be required to keep a well-maintained set of accounts of course. However, it’s no secret that an annual audit can be a costly, time-consuming and in some cases, mildly panic-inducing undertaking.

While it’s not one of the key drivers for unleashing your entrepreneurial spirit in the UAE free zones, come year-end, it may be something you will be glad of and it’s one less thing to worry about while you’re busy building your empire.

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10 things to think about when you’re looking at UAE free trade zones:

  1. How much share capital can you really afford?
  2. What’s your budget? How can you set things up to start small but allow for expansion?
  3. What’s your industry or business area and who do you need to trade with? Is a free zone the best option for you?
  4. How quickly do you need to move? Some free zones issue licences on the same day, but others can take two months or more.
  5. Do you need visas? Even if you don’t need them immediately, think about expansion and sponsorship.
  6. Premises – do you just need ‘flexi-desks’, shared office space, or something more substantial like warehouses or shop fronts? Think about location too.
  7. Do you have a degree related to your field?
  8. What’s your nationality? How can this benefit your application?
  9. Will you outsource services like distribution, manufacturing, import and export? It could save you money.
  10. How much do overheads and audited reports matter to you?
About the author: Neil Petch, Chairman at Virtugroup
About the author: Neil Petch, Chairman at Virtugroup

With a history of business successes, Neil Petch is well known in the UAE and beyond as a visionary entrepreneur with a passion for helping others establish and grow their own businesses. Neil founded Virtuzone in 2009 and quickly established it as the region’s leading company formation expert, before launching Virtugroup, a holding company that has a wider mandate of supporting startups from establishment; to successful market entry; and all the way through to exit.