WHAT IS A FREE ZONE

SET UP COMPANY LAW

Free Zone": is the most abused term in the corporate consulting industry in the UAE to the point that it is taken for granted when talking to a customer. Yet most foreign entrepreneurs and investors at best do not know clearly what a Free Zone is. What about to definitely clear it in the next lines ?

I warned you that I would start from the basics or not ? What we intend to do with the article of today and the ones that will follow in the next months is to embark on a path TOGETHER with companies, entrepreneurs or investors who already are my clients (or that one day would like to be), in addition to Italy, also on the route of establishment in the United Arab Emirates. And a path is always undertaken from the beginning without taking for granted notions (such as that of "Free Zone" in the UAE) that although elementary for those who already live in the Emirates, are not at all for foreign investors. ...and not even for many foreign professionals if it is true (and it is !) that a Colleague lawyer, recently appointed as Representative of the IICUAE, just a few weeks ago asked me about the Free Zones and what are really they.

The UAE Free Zones, are basically areas of the UAE territory, geographically defined at the political level (to understand us, you will not find nets or walls, although some like that of Jebel Ali - JAFZA or Maritime City-DMC present real physical gates regulated by passes and permits), which, although generally subject to local and federal rules, have their own autonomous regulation, mostly in corporate law, specifically designed for the needs of foreign investors.

1- FINANCIAL FREE ZONES AND ECONOMIC FREE ZONES

The power to create a Free Zone is of constitutional source (Art. 121 Cost UAE) at least as regards the "financial" Free Zones (the DIFC in Dubai and the ADGM in Abu Dhabi), responsible for the establishment and management of legal entities carrying out banking activities, financial and insurance companies. The power to create Free Zones for other commodity sectors ("Economic Free Zones") is instead up to each individual Emirate as well as specific regulatory and management authorities established for this purpose; such as the Dubai Integrated Economic Zones Authority (DIEZA) or the Dubai Investment Corporation (ICD) or even the Dubai Development Authority (DDA), whose legal boundary between private entities (with regulatory powers and regulatory powers) and public is indeed rather blurred.

2- SECTORAL FREE ZONES AND GENERALIST FREE ZONES

There are therefore "sectoral" Free Zones that incorporate legal entities that carry out their activities in a specific (one or more) product category or sector (just think of the above mentioned financial Free Zones, which, among other things, constitute, in civil and commercial matters, an autonomous - and very efficient - jurisdiction of Common Law or the Dubai Design District, the Dubai Silicon Oasis or Dubai Healthcare City, just to name few some) and other "generalist" Free Zones open to the set up of companies belonging to different product categories and carrying out different types of business. The IFZA of Dubai and its strong rise in the panorama of the Free Zones of the Emirate is the most striking example of community destined to host the most diverse types of business. If setting up a company in a sctora Free Zone, allows you to take advantage of infrastructure specifically designed for entrepreneurs in a given sector, on the contrary, the advantages related to the establishment of a company in generalist Free Zone comes, not only from lower costs of setting up and maintaining the company, but also from the opportunity of intercepting and get into contact with companies belonging to different sectors, enabling the development of potential and valuable synergies.

We must not forget that the Free Zones, although originally conceived as mere geographical areas, have actually become real communities incorporating offices, residential areas, shops, shopping centers and recreational areas, as well as a full calendar of public events that allow very easily a socialization between entrepreneurs and encourage the creation of new and interesting synergies between companies. Just consider, as an example, the full calendar of lot of different business and recreational events, specifically designed by IFZA for those who decide to live or set up a company in the area, to understand how easy it is for companies based in the Free Zone, create business opportunities, even on site.

The first Free Zone to be established in the Emirates, back in 1985, was the one of Jebel Ali that includes the homonymous port which is, as today, one of the largest commercial hubs between the Middle East and Asia. Now in 2024, in all the Emirates, there are over 40 Free Zones.

3- FREE ZONES AND MAINLAND

The establishment of a company in the UAE does not necessarily have to be carried out in a Free Zone. Indeed, in some cases, for example (and with all the exceptions of the case), in a very general sense, where a company should be set up exclusively (or to a large extent) to carry out its activities on the UAE market (think of the sale of goods and/or services), it will be economically more efficient (if not in many cases mandatory) to set up a company in the cd. " Mainland". And here we are introducing a new concept: the "Mainland", which is nothing more than every part of the Emirate territory that does not belong to a "Free Zone".

However, a foreign investor in the UAE can freely set up a company both in the Mainland and/or in a Free Zone.

And here we come to the most legitimate doubts that a client could address to his lawyer:

Well, now that you’ve explained to me briefly what is a Free Zone and what is the Mainland, I have to believe that opening a company in one rather than in the other place is maybe the same thing ? Or are there differences also in terms of advantages and disadvantages in establishing a legal entity in Free Zone rather than Mainland ?

As a matter of facts of there are some relevant differences, even if they have been reduced over the time. Prior to the entry into force of the Fed. Law No. 26/2020, opening in the Mainland necessarily meant "putting yourself at home" a member of Emirati nationality who held 51% of the share capital, as well as a Local Service Agent to open the company and maintain relations with the authorities. Today, except for seven sectors defined by the Emirate law of "strategic impact" and in which this limit still applies ( among the various we mention the security and defence, banking and insurance - except for structures established in DIFC and ADGM - telecommunications, issuance and printing of money) It is possible to set up companies in Mainland with 100% of the share capital of foreign ownership and without the help of a local agent. There has therefore been a sort of "equalization" on the point, between Free Zone companies to Mainland companies.

Even relating to the profile of taxation, as of summer 2023, there have been significant legislative amendments. If, in fact, before the entry into force of the cd. Corporate Tax in the UAE (...and yes, beware of those who still tell you that in the UAE you do not pay taxes !) introduced by 1 June 2023, the companies established in Free Zone, contrary to those established in the Mainland, were exempt from any tax on profits for 50 years. Now it is no longer so.

With the aim to returning about the subject in much greater depth, for now it's enough to know that, even if a company is established in the Free Zone, in most cases and generally, the 9% tax will apply only to net profits above AED 375,000 (just over 94,000.00 € at the exchange rate of January 2024); the same is for companies formed in the Mainland.

In view of the recent differences between the two types of territorial area, it is now necessary to briefly highlight these differences.

In principle very generally (remember that with this article we are just introducing the topic), companies in the Mainland can carry out their activities anywhere in the territory of the UAE and abroad, while the legal entities established in the Free Zones, could only carry out their business within the Free zones, or abroad. We will return shortly on this "principle", for now take it so... AS a basic notion that is usually "transferred" in the hyper-light training provided by many professional associations so that you are not able to articulate (or to do in practice) much more for your customers if not "hand them over" to their trusted consultants in the UAE... ! BUT... to state the above, clearly is a serious inaccuracy.

So, from what you're telling to me, for a foreign investor, you might as well set up your own company directly on the mainland!

I wouldn’t, to be honest, so simple. It’s true that in more recent times there has been a progressive fading of some distinguishing features between Mainland and Free Zones to the point that one eminent and talented colleague (in a broad sense of meaning, since he is an accountant) has, in a provocative way, stated that with the latest interventions of the Cabinet in the field of Corporate Tax (which I remember, immediately after the entry into force of the relevant law, it was not planned for companies in Free Zones) we would witness the "end of Free Zones".

However, I would not be so drastic since the Free Zones, unless they should be discarded from the beginning for the alleged territorial limits of exercise of the business as we wrote above (and we’ll return soon), continue (and in my opinion will continue anyway in the future) to exert, on foreign investors, a very strong appeal, compared to the Mainland, as the most appropriate location for the establishment of a company in the UAE. Also because there are still some decisive differences that, to parity of business (that is, if for the economic activity that I must carry out, it's indifferent to set up a company in the two above-mentioned areas), seem to prefer for a Free Zone establishment. More specifically, in 2024, the elements that still play to the advantage of setting up a company in a Free Zone, rather than in the Mainland, may be the following:

• Shorter and more simplified set up process, also in the granting of licenses (yes, you should also get those; we will deal with them later): where for the establishment in the Mainland it is necessary to interact with different authorities (think about the can in which you need to obtain any NOC - Non Objection Certificates - for some regulated activities whose claims must be submitted to the competent regulatory authorities), in the most business friendly Free Zones for the entrepreneur you interact directly, for the through the Professional who assists you in the establishment, with the management of the Free Zone. One consultant and one Free Zone authorithy Vs. several different authorities and, sometimes, consultants.
• Set up costs and maintenance of the corporate structure lower than in the Mainland where, you need a physical registered office with a minimum square footage of 200 sq.f. which it affects the issuance of VISA permits that are issued in proportion to the size of the office.
• The option, in many Free Zones (such as IFZA ) to set up a company without having to rent an office, being enough to have a virtual office (actually there are very few Free Zones that allow the set up of a company with only virtual office) or just a flexidesk (office in a shared area), where a physical office is mandatory on the mainland.
• 100% exemption from any import and export duties (unlike the Mainland) on the same basis as the benefit of 100% repatriation of capital and profits from the UAE, without tax, to their home state. Obviously from the UAE... certainly not of Vs. State of residence in which capital and profits are repatriated !
• A strict privacy about the names of the shareholder and directors of companies in Free Zone. Remember, however, that this privacy is also not found against the holders of a c/ c bank in the UAE, whose data could be communicated to the authorities of Vs. country of tax residence.
• Greater flexibility in the issuance of VISA residence permits that, if in Mainland are proportional to the extension in square meters of the physical rented office, in most Free Zones are freely and rather easily granted to members and employees up to 6.
• Implementation of a different corporate regulation than in the Mainland. To companies in Free Zones does not apply the Commercial Company Law pro tempore in force, but the autonomous regulation in force in the individual Free Zone of belonging, generally more flexible and business friendly.
• Ability to carry out the business in a privileged territorial context, equipped with facilities and infrastructures at the forefront in terms of offices, warehouses, links to communication routes, if compared to the Mainland, inserted in a business community that privileges contacts between enterprises and synergies.
• It's generally easier to open a bank account in a Free Zone that in the Mainland. Whereas in Mainland opening a c/c bank for a newco, sometimes, could be really tricky, in Free Zone, thanks to transversal agreements between the single Free Zone and a set of reference banks, the opening of the company account is rather easy and almost automatic to the establishment of the company itself.
• Exemption from the Corporate Tax only about the "Qualifying Income" as long as and only in case the company integrates all seven parameters to be considered "Qualifying Free Zone Person"; event indeed difficult to achieve.

All right, you’ve convinced me. Then, all in all it is convenient to set up a company in a Free Zone but just above you told me about the existence of an important limit. If, for example, my business is selling clothing, with a company in Free Zone I won't never sell these goods in the Mainland. And if I want to open a fashion store or a selling point in Dubai Marina how I should do ? By the way, I also intended to start a parallel business of marketing consultancy in the field of Fashion. Here again, I guess I’ll never be able to advise clients like companies located on the Mainland and I’ll have to resign myself to consulting only at the international level. Is that not so?

No, it’s not. Except that I don’t have to convince anyone about the opportunity to open in the Free Zone rather than the Mainland. It is an investigation that must be conducted case by case, obviously through a paid professional consultation, in relation to the specific case and the needs of the individual, to the good or service sold, the reference market and the sales channel. As I have already mentioned above, the general rule that companies in Free Zone are forbidden to conduct their business in the Mainland is, in fact, only a general rule subject to many exceptions. In principle it is never allowed to sell goods from the Free Zone to the Mainland, also (but not only) because companies in Free Zone are exempt from customs duties. The above general rule is not applied to the "sale" of some services such as, for example, consulting in different sectors (business, marketing, accounting, media, events, etc.) that, always in principle and without prejudice to the applicability of limits related to any regulated professions, may be exercised by the single Free Zone throughout the UAE by applying for a permit from the Department of Economic Development (DED). In case, on the other side, of sales activity it might be convenient to "split" the activity in two entities by opening a branch in the Mainland for physical sales in the Emirate and using the Free Zone company for the physical international channel and e-commerce (always outside the UAE).

Well, then how can I organize myself in concrete ? What should I do in my individual case, considering that....

ALT, please! We have already too much treated publicly of your individual needs. Everything that follows will be the subject of personalized professional advice for a fee. If you expect a free consultation, turn to "low cost" lawyers who give advice in defiance of the Code of Ethics or local companies Emirates "specialized" in the company set up in the Emirates and... cross your finger about the final result ! You will surely come back to me, when you'll realize that they make you opened your business in the wrong place or when you will notice that your "low cost consultants" have given to you a pre-filled standard Articles of Association, that does not include the specific instructions that you had given regarding the distribution of profits with your members... !!! And then, of course, you’ll be required to pay a much higher fee than you would pay today...