Published June 2015
Dubai is strategically located as a cross road connecting Africa, Asia and Europe. With the Emirate’s world class infrastructure, and widely diverse and multi-cultural population, Dubai has grown to become a global economic hub and the ideal location for global and regional businesses to establish a presence.
A foreign individual or corporate entity seeking to establish a business presence in Dubai broadly has 2 options: onshore Dubai, or one of the free trade zones (“free zones”) in Dubai. However, one of the requirements for setting up an onshore limited liability company in Dubai, is that an Emirati national must own at least 51% of the issued shares. By default therefore, the fact that a business entity can be established in a free zone with 100% foreign ownership, makes it an attractive option for foreign individuals and corporate entities.
The Dubai Free Zones
Of all the Emirates which constitute the United Arab Emirates (“UAE”), Dubai was the first to adopt the concept of the “free zone”; an economic zone offering tax incentives and customs duty benefits, set up with the objective of driving commerce, especially transhipment and processing, without entering into the country’s market. Dubai currently has as many as 14 free zones in operation (and is still counting!) The free zones are either attached to ports, or established for the purpose of catering to the development of specific sectors of the economy. For example, financial services (Dubai International Financial Centre ("DIFC”)); trading of precious commodities, base metals and soft agricultural commodities (Dubai Multi Commodities Centre (“DMCC”)); healthcare (Dubai Healthcare City); and the media and creative industry (Dubai Creative Clusters (“DCC”)), amongst several others. Dubai is also home to the Jebel Ali Free Zone (“JAFZA”) which has the distinction of being the world’s largest free zone.
Each free zone is regulated by its own free zone authority and governed by its own commercial laws rather than the laws which apply to onshore Dubai. Indeed, the DIFC has its own independent judiciary which is based on the English Common Law and the judges of the DIFC’s courts are drawn from various jurisdictions, giving the courts a truly international outlook. The DIFC also has a world acclaimed arbitration centre (the DIFC-LCIA) which has rules modelled on those of the London Court of International Arbitration. The free zones also boast of high standards of road, electricity and water infrastructure, security, office and residential solutions, making them readily accessible to foreign investors and investments.
Innovative Features of The Free Zones
Some of the key features and advantages of setting up a business entity in a free zone are detailed below:
1) 100% Foreign Ownership and ease of Repatriation of Investment:
As previously stated, a free zone entity (company, establishment or branch) is permitted to have 100% foreign ownership. Further, there are no exchange controls or restrictions on repatriation of capital or profits made by such free zone entities.
2) Tax Exemptions:
Most free zones guarantee 0% corporate and personal income tax for 50 years to the companies and establishments which set up in the free zone. Further, the free zones offer 0% import/customs or re-export duties to business entities operating in such free zones.
3) Flexible Corporate Structures:
The regulatory authority in each free zone determines the specific types of corporate or legal vehicles/entities which may be set up in it. Without delving into the specific corporate structures permissible in each free zone, we have set out below, examples of some of the legal structures which may be set up in the free zones in Dubai:
• Free Zone Establishment (“FZE”): a free zone entity which has only 1 shareholder. The liability of the free zone establishment is limited to the assets of the company and the personal assets of the shareholder/investor is protected.
• Free Zone Company (“FZCo”): a free zone entity which has 2 or more shareholders. The liability of the free zone company is limited to the assets of the company and the personal assets of the investors are protected. Both free zone establishments and free zone companies are considered tax resident in the UAE, a status which confers certain benefits on these entities. As an example, free zone companies and free zone establishments can benefit from a wide network of double taxation treaties (“DTTs”) which have been negotiated between the UAE and various countries.
• Branch of a Company: a company established outside a free zone may establish a “branch” in a free zone. Such branch is typically considered as a non-distinct legal entity of its parent company and therefore has no separate legal existence apart from the parent company.
• Limited Liability Company (“LLC”): one of the companies which may be incorporated in the DIFC. Unlike LLCs set up in other free zones, the DIFC LLC is a company in which the members’ interests are not represented by shares or securities. The obligation of a member of an LLC is limited to the amount of his/her/its subscribed “Membership Interest” in the LLC.
• Company Limited by Shares (“Ltd”): this is another legal structure offered by the DIFC. A company limited by shares may be incorporated by one or more shareholders and their obligation to the company is limited to the payment of the subscription price for their shares.
• Single Family Office: this is a structure offered by some free zones such as the DMCC. It is a limited liability company which is specifically created for the management of a family’s wealth, for succession planning and for holding of shares in family assets, businesses, trusts and foundations. The DIFC also provides for the Single Family Office structure.
• Offshore Company: not a “free zone” company per se but offered by certain free zones as an alternative corporate structure. It is not deemed to be resident in the UAE for tax purposes and as such, cannot benefit from the DTTs negotiated between UAE and any other country.
• Transfer of Incorporation: the DIFC has a process for allowing a foreign company to in effect “transfer” its incorporation from its country of incorporation to the DIFC. Accordingly, a foreign company may, if authorized by the laws of the jurisdiction in which it was incorporated, apply to “continue” to exist as a company in the DIFC. If this application is successful, the foreign company will be issued a “Certificate of Continuation”.
Notwithstanding the limitations of setting up a business presence onshore in Dubai, clearly, there are several alternatives available to foreign corporates and individuals seeking to establish in Dubai or the other Emirates. It is, therefore, critical to obtain expert advice on whether to set up one’s business onshore or in a free zone. Also, considering the numerous free zones which exist, each with its specific advantages and benefits, guidance should be sought for the purpose of identifying and selecting the most appropriate free zone based on an investor’s business and objectives.
We at AC&H are qualified and available to assist. If you are interested in discussing the content of this article in more detail or if you have any queries, please contact: Olabisi Omotunde, Senior Associate (firstname.lastname@example.org) or Darryl Paul Barretto, Associate (email@example.com) at +9714-4529091. You may also visit: www.ach-legal.com.