There are two jurisdictions for doing business in UAE: inside the Free Zone and outside the Free Zone or mainland. Both the jurisdictions has its own advantages and disadvantages depending on the activities and business type.
A business entity established outside free zones is treated as a fully Emirati entity and can operate within the jurisdiction of the emirate. They must comply with the regulations of the Federal and local licensing authorities.
In contrast, Free Zone are the special economic zones established under the Decree of respective Ruler, as a Government establishment, having office a designated places, with the objective of offering tax free, and free customs duty benefits to expatriate investors. Free zones are managed and operated by free zone authority. A Business entity established in a free zone must comply with the regulations and follow the procedures of the free zone.
And most of the Free zone offers the following benefits:
- 100% ownership
- 100% tax free
- 0% corporate tax
- 0% income tax
- 0% custom duty
- Confidentiality of Business
- Low Operating Costs
- Free Capital Transfer
- 100% repatriation of capital and profits
- Can wind up at discretion
There are more than 20 Free Zones operating in Dubai. In Dubai the business entities outside the free zone are regulated by Dubai Department of Economic Development (“DED”).
Whilst Mainland Company registered with DED are permitted to carry on business anywhere in United Arab Emirates (UAE), the Free Zone business entity operation has been restricted in respective free Zone. Thus, the restriction of carrying on business in mainland is the main drawback of Free Zone Company, as most of the free zone do not allow a Company registered under them to carry on business outside the Free Zone.
Further, in case a Free Zone Company intends to sell products outside free zones in mainland, the business entity must appoint a UAE official agent. Otherwise, a 5 percent customs duty is applied on most goods.
EXPANSION OF BUSINESS OUTSIDE FREEZONE:
As the business grows, management of the Free Zone Company would like to expand its business operation in mainland. A Free Zone Company could consider the option of either wholly restructuring to mainland or have a branch in mainland.
Further, as per Law No. 13 of 2011 requires the Free Zone Company to obtain necessary approval from Department of Economic Development (DED) to expand its business operation to mainland by applying for setting up suitable business structure.
Law No. 13 of 2011 states that the DED is the body responsible for the regulation of economic activity for all businesses outside the free zones. DED’s responsible for issuing licenses to business in Mainland, classification of economic activity permitted within Dubai, issuing trade permits for marketing activities and setting business work hours.
In case any free zone company carries on business in violation of law in mainland without having appropriate approval is subject to penalty of AED 100 000 (Hundred Thousand Dirhams).
Structures of Expansion for Free Zone Company in Mainland:
1. Limited Liability Company:
A LLC is the most common form of business entity currently used by Foreign Investor to set up business in mainland Dubai. It is blends elements of partnership and corporate structures. An LLC must have between 2-50 shareholders, each of whom is liable only to the extent of his or her share in the capital of the company. ???At least 51% of LLCs must be owned by UAE Nationals, and can be owed by GCC nationals by up to 100%.
Thus, in the given scenario, the Free Zone Company would be one of the partners of the mainland LLC Company along with a UAE National holding 51% of shares.
2. Branch of the Company:
The Free Zone Company can also obtain a branch license from DED to expand its operations to mainland Dubai. And a Branch of foreign Company operating in free zone cannot establish branch in mainland.
A branch of a free zone company can carry out commercial, industrial and professional business as long as the activity of the main company is authorized in mainland Dubai. However, Ministry of Economy restricts Branch from carrying on the following business activity:
- Trading and all branches of activities represented in sales and purchase of products and commodities.
- Restaurants, cafes and food stuff supplies and catering.
- Haj and Omra services.
- Labor supply
- Commercial Agencies.
In case the activity of the Company is Professional then approval of Ministry of Economy is not required for establishing branch.
Further, if there is no local shareholder in the main Free Zone Company, or the local shareholder in the main Free Zone Company owns less than 51% of the shares, then an approval from Ministry of Economy is also required in addition to appointment of a Local service agent. Companies owned 100% by GCC nationals do not need a local service agent (LSA).
Thus, for setting up Branch Company prior approval from both DED and Ministry of Economy is required.
3. Civil Work Company
A Civil Work Company, is a business partnership for professionals in recognized fields such as doctors, lawyers, engineers and accountants. A Civil Company can only practice professional business and is 100% owned by professional partners, whatever their nationalities.
Thus, civil companies can be formed for any object or activity that is not considered to be “commercial” by the concerned licensing authorities. Most civil companies require a Local Service Agent if there is no UAE-National partner in the business.
Bottom line:
Expansion of business outside the free zone requires considerable amount of attention as each of the structure has its own advantages and disadvantages. Necessary decision needs to be made considering the business activity in light of the company overall expansion plan.
Disclaimer: Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. Intuit Management Consultancy does not accept any responsibility, legal or otherwise, for any errors or omission.
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