Offshore vs. Onshore Companies: Which Structure is Right for Your Business in Dubai?

Introduction

Why would someone want to open a business or expand their existing business in a foreign country?

Well, the reasons can be as varied as the ambitions of the people establishing the business. However, the underlying motives are, for the most part, strategic.

International expansion can help a company tap into a broader customer base and diversify its revenue streams. This may also give them access to a larger pool of talent and other infrastructural resources necessary for business expansion. Opening a business in a foreign country can also help increase trade opportunities. In addition to its expansionary ambitions, a business may also establish overseas branches or subsidiaries to take advantage of favourable tax regimes. A reduced tax burden could help a company enhance its profits. Expanding internationally into countries with strong legal systems may also help a company protect its business assets.

Business structuring and choosing the proper jurisdiction are inextricably related to the purpose of the business. In this article, we will explore why foreign businesses choose Dubai as a favourite destination. We will delve into understanding the onshore and offshore companies in Dubai and explore the business structures available to them.

Dubai: A Destination for Foreign Businesses

Foreign Direct Investment (FDI) is a key indicator of a country’s attractiveness to foreign businesses. It represents the investments made by individuals, companies, or governments from one country into another. This often involves acquiring a stake in a foreign company or establishing new business operations. Although the global FDI market has not completely recovered from the COVID-19 lows to the trendline it has been following since 1990, global FDI still reached $1.3 trillion in 2023, according to UNCTAD’s World Investment Report .

Source: UNCTAD

The UAE has been a shining beacon when it comes to attracting foreign investments. It was the third-largest FDI market in the world in 2023. The country attracted 23 billion USD in 1277 projects, as reported in The National . In 2022, the UAE received 47.1% and 32.4% of the total FDI inflows into West Asian countries and MENA countries, respectively. The technological, infrastructural, and administrative support provided by the UAE government has made the country a preferred destination for international entities to establish businesses in the country.

Dubai is the crown jewel of the UAE when it comes to attracting foreign investments. The city has topped the Financial Times' FDI Markets list for global greenfield FDI projects for three consecutive years. DMCC , one of the free zones operating in Dubai, won the FDI Global Free Zone of the Year award for nine successive years in a row, including 2023. These foreign investments have also significantly contributed to Dubai's growth story, with the economy growing from a GDP of around 60 billion AED in 2000 to 429 billion AED in 2023—a 715% increase over the last 23 years.

As more and more foreign companies are established in Dubai every year, it becomes increasingly important for them to have a clear understanding of which jurisdiction is best suited to their specific business needs and target market. These companies must carefully evaluate whether an onshore or offshore business structure is the most strategic choice for them to align with their long-term goals.

Onshore companies are registered and operate within the jurisdiction where their business activities take place, and they are governed by local regulations. In contrast, offshore companies are registered in a different jurisdiction from where their business operations, assets, or investments are actually managed. Offshore structures often offer tax advantages and confidentiality, making them appealing for certain types of businesses. In Dubai, businesses have the option to establish an onshore company (mainland company, established in Dubai’s mainland), a free zone company in one of Dubai’s 20+ free zones, or an offshore company in the Jebel Ali Free Zone (JAFZA).

Onshore Companies in Dubai

For companies targeting the UAE local market, the best place to set up an onshore company is Dubai’s mainland . Onshore companies operating in mainland Dubai can conduct business within Dubai and the rest of the UAE, including the free zones, as well as engage in international business. For most activities, onshore companies in Dubai’s mainland are allowed to have 100% foreign ownership. These companies can choose from one of the five licence types available to them, including Industrial Licence, Commercial Licence, Professional Licence, E-trader Licence, and Dual Licence.

The Dual Licence is currently offered in five free zones and allows companies to expand their business to the mainland without the need to lease additional office space or partner with a local shareholder. Onshore companies operating in Dubai’s mainland can have multiple legal structures, including General Partnership, Limited Partnership, Limited Liability Company (LLC), Private Joint Stock Company, Public Joint Stock Company, Civil Company, and Sole Proprietorship.

The tax regime for onshore companies in mainland Dubai is also one of the most favourable in the world. The UAE does not levy any personal income tax. It has a standard 5% VAT on the consumption of goods and services and a 9% corporate tax on annual taxable income above AED 375,000 for mainland companies. For taxable income below AED 375,000, the corporate tax is 0%. This corporate tax, applicable to onshore companies operating in Dubai’s mainland as well as to other companies across the UAE, is substantially lower compared to the combined corporate tax rates in other major economies around the world.

A company may also structure its business in one of the free zones in Dubai. These are particularly attractive for businesses that primarily focus on international markets. These free zones provide dedicated support and infrastructure tailored to different sectors. However, companies established in free zones cannot trade within the UAE without a mainland licence. The companies established in free zones also benefit from 100% foreign ownership and 100% repatriation of capital and profits. Additionally, they are exempt from paying customs duty. One of the significant advantages for companies operating in Dubai’s free zones is that for the Qualifying Income of a Qualifying Free Zone Person, there is a 0% corporate tax. For more details on free zone companies availing of the 0% corporate tax rate, our earlier blog on this topic can be referred to.

Offshore Companies

Offshore companies are often confused with free zone companies, but they are entirely different legal entities. Unlike mainland and free zone companies, offshore companies are not issued business licences; instead, they receive a certificate of incorporation, and they can perform only a certain set of business activities which we cover further on in this blog. In Dubai, offshore companies can be established in the Jebel Ali Free Zone (JAFZA) under the Jebel Ali Free Zone Offshore Companies Regulations 2023 .

According to one of the older publications of JAFZA, “Offshore companies are tax-exempted. There will be no corporate, capital gains, capital repatriation, or any other tax levied on the offshore company.” However, given that an offshore company has the capacity, rights, and privileges of a natural person, according to Article 13 of the referred regulations, more clarification from UAE’s FTA on the corporate tax requirements for offshore companies is awaited. Offshore companies can engage in international trade, establish holding companies, own and manage real estate, register copyrights and patents, and provide international consulting services.

An offshore company in JAFZA is a limited liability company that can be formed by one or more persons, and its name must include the word "Limited." Offshore companies must also adhere to permitted business activities. Engaging in unauthorised business activities may result in a fine of AED 50,000.

The following activities are permitted for offshore companies operating in JAFZA:

(a) Engaging with legal consultants, accountants, management companies, or other similar persons conducting business within the United Arab Emirates;

(b) Preparing and maintaining books and records within the UAE;

(c) Holding meetings of its directors or members within the UAE;

(d) Holding a lease for property to be used as a registered office in any designated freehold area in the UAE approved by the Authority;

(e) Owning property in one of the designated freehold areas in the UAE;

(f) Owning a stake in another operating company within the UAE; or

(g) Holding an account in a bank in the UAE.

Offshore companies operating in JAFZA in Dubai must maintain a registered office either in a designated freehold area in the UAE or at the office of the company's registered agent in Dubai, where all communications and notices can be addressed. The business and affairs of the offshore company must be managed by at least one director. Offshore companies that own property in designated freehold areas in the UAE may apply for residence visas for their members. Offshore companies must always appoint an approved registered agent and retain accounting records for 10 years from the date they are created. They are also required to appoint auditors. According to the provisions of the regulations, an offshore company may apply to be converted into a free zone company.

Conclusion

Deciding whether to establish an onshore or offshore company in Dubai depends on specific business goals and operational needs. Onshore companies are ideal for businesses engaging directly with the UAE market, offering benefits such as access to local customers, 100% foreign ownership, and favourable tax conditions. Offshore companies, on the other hand, are suited for businesses focused on international trade, asset protection, and tax optimisation, particularly for holding companies or those requiring confidentiality. However, it is important to note that the permitted activities available to offshore companies are limited, and they do not receive a business licence, only a certificate of incorporation in JAFZA, the free zone in Dubai where they are allowed to be established. Choosing the right business structure may also require guidance from legal and financial experts who can provide the necessary insights for tax optimisation and aligning the business structure of a company with long-term objectives while ensuring compliance with local laws.

Discover how AKW Consultants can assist you in selecting the right business structure and navigating the regulatory requirements to successfully establish and expand your business.