Nov 08 2011 |
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"To be or not to be-inside the freezone?"
By Hera Qazi Over the past decade, Dubai has become an increasingly attractive location for investors from all around the world as the city of choice to establish businesses with hopes of becoming a successful part of the international economy. The reasoning behind this phenomenon has become apparent with the growing numbers of "freezones" that facilitate foreign investment into Dubai.Why establish a business in the Freezone?
A freezone is defined as a designated area with relaxed customs and distinct tax regimes. The freezone provides a wide range of benefits for an investor wishing to establish a business in Dubai. One of the most advantageous aspects of operating within a freezone is that a foreign investor is capable of 100% ownership of the company. Establishing a company outside of the freezone, for example a limited liability company which is a private company in which the shares cannot be offered to the public, requires that no less than 51% of the shares are owned by a UAE national, thereby making the foreign investor a minority shareholder.
However, establishing a company in the freezone would allow for 100% ownership of the business. Freezone business owners enjoy less stringent requirements as they are governed by an Independent Free Zone Authority and lay exempt from the UAE Commercial Company Law No. (8) of 1984 ("CCL").
FZE and FZCO are limited liability entities owned by an individual or corporate entity. An FZE only has one single shareholder, and the FZCO has 2-5 shareholders allowing for small or large businesses to operate inside the freezone. Furthermore, another advantage of setting up a business in the freezone is the obvious tax benefit that investors in the freezone enjoy. Companies in the freezone benefit from the tax exemption of both corporate and income tax for a guaranteed number of years with a renewable option. Apart from these two benefits that are sure to attract many to operate from inside a freezone, there are various other reasons that prove beneficial in operating the business itself. Each freezone in Dubai is equipped with a dedicated business centre which promises to provide an effective business climate and world class infrastructure. Jebel Ali Freezone("JAFZA") prides on being one of the world's largest and fastest growing free zones. JAFZA is home to over 6400 companies, including over 120 of the Fortune Global 500 Enterprises, from across the world.
Each freezone establishment enjoys a tailored market as the type of business that is to be set up dictates what freezone is to be used.
Jebel Ali Freezone (JAFZA), Dubai International Airport Freezone (DAFZA), Dubai Technology and Media Freezone (TECOM), Dubai Health Care City (DHC) are among the popular choices of freezones in Dubai. JAFZA accommodates various industry, service and trading activities and has proved to be home to many multi-national fast moving consumer goods (FMCG) companies such as Proctor and Gamble and Unilever. DAFZA houses businesses that import and export goods and TECOM is home to the industry of design, development, use and maintenance of everything relevant to Information Technology, E-commerce and Media.
Setting up a business in the freezone
To establish a business within a freezone, one must acquire a trade, industrial, or national industrial license depending on the type of activity one wishes to undertake. In JAFZA, a trade license is available to companies who wish to import, export, sell, distribute or store items identified on their license. It should be noted that a license holder cannot operate outside the freezone using its free zone license without appointing a distributor or agent, however potential customers from the UAE are free to enter the freezone and visit the premises of their preferred trader.
Setting up in the freezone is relatively straightforward as compared to setting up a business outside of the freezone. The initial step is to complete a questionnaire issued by the relevant FZA which will require such information on the individual and corporate shareholders such as a personal profile or a certificate of registration of good standing. Furthermore, corporate shareholders are required to provide articles of association, powers of attorney in favour of the FZE/FZC managers, board resolution authorizing the incorporation of the FZE/FZC and audited financial statements for the last two financial years.
Cost
The cost of setting up a business within a freezone is fairly economical as freezones facilitate and provide services such as pre-built offices and standard warehouses which are fully maintained to meet various needs of the customers at reasonable rates. JAFZA provides "Business Centers World" (BCW) which are ready to use fully furnished and equipped offices and meeting rooms for short term or long term use. On the other hand, in setting up a business outside of a freezone, it is not uncommon for investors to end up with outrageous costs to facilitate and maintain a business that they are 'starting from scratch'.
Conclusion
The advantages of setting up a business in the freezone are clearly evident from the rapid increase of freezones in the UAE over the last decade. It is reasonably safe to presume that in the future, there will be a further increase of free zones in UAE given their beneficial tax incentives, 100% foreign ownership, cost efficiency and administrative flexibility provided by the free zone authorities for foreign investors.
Ms. Hera Qazi is an associate in the corporate and commercial department at The Legal Group and can be contacted on +971 4 4477044.The views expressed in this article do not necessarily constitute the views of Zawya.
© The Legal Group 2011
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