Free Zones - Drivers of the Hub

 

The institution of Free Trade Zone still exists since over 2,000 years, developed from the idea of Free Ports as Duty-Free or Special Economic Zones.
In the ports of Carthage and Tyro, the Phoenicians granted traders tax benefits on goods they could not sell and had to move back into the harbor. In medieval times then, the Free Ports of Livorno, Marseilles, Hamburg and Trieste have been established.
Hamburg was in the 13. to 16. Century also essential part of the German Hanseatic League, which represented the development of the Free Port idea in an economically, politically and culturally weighty merchant network.

 

| Free Zones in UAE

In the UAE, the first Free Trade Zone (FZ) has been established already 26 years ago: In 1985, the Jebel Ali Free Zone (JAFZA), together with its associated autonomous authority, has been founded in connection with the construction and expansion of the Jebel Ali Seaport by an Emiri Decree. JAFZA, with a total area of 48 sq km and nearly 6,500 settled companies, counts amongst the largest and fastest growing FZ worldwide.

While the other Emirates formed in the subsequent years also industry-wide FZ, the Emirate of Dubai started in 2000 a Cluster Strategy - the definition of industry-specific FZ: Dubai Internet City was the second largest FZ in Dubai, specifically aligned to the information & communication technology (ICT). Currently, DIC is home to 850 IT companies. The TECOM administration created around DIC also two other FZ: Dubai Media City (DMC) and Dubai Knowledge Village (DKV).

The UAE counts currently about 56 (!!!) Free Trade Zones in ongoing operation or under construction, i.e. shortly before opening. These are, due to their own sovereign rights, established Special Economic Zones (SEZ), with the following, usually common features:

  • 100% Foreign Ownership, no national shareholder required
  • 100% Tax Exemption for companies and their employees, granted 15 to 50 years
  • 100% Repatriation of capital and profits
  • No import and export customs duties (except for deliveries in the UAE domestic)
  • No capital transfer restrictions
  • No currency restrictions
  • No trade barriers or trade quotas
  • Legal form (and usually also labor rights) ruled by individual FZ framework
  • In-House company registration and licensing (One-Stop-Shop)
  • In-House Handling of visas and work / residence permits with immigration-relevant sponsorship by the FZ itself (Fast-Track)

Very important feature is, therefore, that for FZ companies the UAE Company Law does not apply - and thus also not the regulation that 51% of the shares must be held by a UAE citizen. Non-payment of import or export duties makes the FZ the ideal location as a Transshipment Center or Refining and Assembly Establishment.

As Legal Form there are usually selectable:

  • Branch or Representative Office: Analogous to key values for domestic companies
  • FZE: A single-shareholder limited liability corporation, both - individuals
    and corporate shareholder - can subscribe for shares
  • FZC / FZCO / FZ-LLC (depending on the FZ): Limited liability corporations with
    at least two and usually a maximum of 5 shareholders (individual or corporate)

The FZ administration provides either only one annually renewable License or a Certificate of Incorporation cum License. The issue of Share Certificates will normally left to the respective company or the directorship of the company.

 

| Foreign Tax issues

All physical premise & establishment features, required by respective foreign tax law in many OECD member countries (especially EU member states) can be easily met in the FZ: Primary through flexible renting of exclusively-used office, retail and warehouse space - starting from relatively small space unit sizes (15 to 25 sq m). Depending on the FZA also virtual office space models with secretarial service, etc. are available.

However, in terms of foreign taxation relevance, caution should be exercised: Not every Shared Desk, offered due to more formal reasons, is also physically present in the FZ (yes, sometimes they lease "air"!). Furthermore, various national tax administrations change regularly the minimum requirements such as size, availability, etc. for the recognition of foreign tax issues.

Stress-free is, who ultimately rents a not too large executive office, hires an office manager or branch manager and supplies those with sufficient delegated or generated work.

 

| Different Formation Procedures

The conditions for registration and licensing of a company vary from FZ to FZ in some cases considerably - as do the requirements for specific industry affiliations.

Significant differences exist in

  • the required share capital (proof of capital to grant the license)
  • Minimum office space rental
  • Number of issued visas / work permits
  • Registration, service and renewal fees

Basically, a FZ company can be incorporated by an individual as well as by a (foreign) corporate shareholder. But the paperwork for start-ups with foreign corporate shareholder is time consuming and should not be underestimated: a comprehensive documentation with numerous legalizations and super legalizations is required.

However, individual shareholders have to present a more than manageable collection of documents: copy of passport, bank reference letter or personal statement, proof of residence by utilities and telephone bills, sometimes even a short CV - that's all.

In many FZ of the Emirate of Dubai - e.g. Jebel Ali, Internet City, DMCC, etc. - the inclusion of a company must be decided and confirmed from a so-called decision or approval committee. This means nothing else than the submission of a meaningful project description or sometimes even a business plan! As a result, then a so-called initial approval is granted, which allows then to start the actual registration and licensing process. The result is an incorporation period of 4 to 8 weeks or more, which should be considered in advance.

The FZ of the Northern Emirates - Sharjah, Ajman, Umm Al Quwain, Fujairah and Ras Al Khaimah - usually require only the trade name of the desired company name and the business objects.
On the same or very next day, the consent will already be granted and the application forms can be submitted. The incorporation period is thus 2 to 10 days, depending on the attestation volume.

The actual incorporation in a FZ - except branch setups - is always a 2-level process: First, there is an initial approval, issued mostly in form of a bank opening letter. With this, a corporate account uF (under formation) can be opened with an arbitrary - but often on recommendation only - UAE Bank, and then the minimum share capital can be paid up. The bank provides hereafter a balance confirmation.

On presentation of the balance confirmation to the FZ administration, immediately the company documents - certificate of incorporation and/or license - will be issued and transferred.

Several FZ have relaxed and repealed the rules for the capital proof since mid-2010. However, we advise to keep compliance with the former regulations to avoid operational, debt and immigration legal bottlenecks.

 

|  Services by MCI CLT

In many FZ of the UAE, MCI CLT is accredited as Corporate Service Provider, means as an incorporation companion and PRO handling agent. Unlike in offshore incorporations, in the FZ there is explicitly no agent-constraint. Any entrepreneur can do the formalities in the FZ himself.

It seems always appropriate to mandate a Setup Agent, when the following points apply:

  • It is still not clear, which FZ suits best for the project
  • There is no or little overview of the legal,
    licensing and labor regulation of the FZ
  • There are rapid changes in the FZ regulations to be
    determined, which can be traced in a limited way only
  • The FZ incorporation has to be integrated into a
    complex context right from the beginning:
    Group network, license rights, endogenous
    or exogenous trade restrictions, foreign tax law, etc.
  • There are setup obstacles, e.g. "critical" nationalities or business
    objects (such as financial services, high-tech trade, etc.)
  • There is only a limited time budget for an on-site presence
    of approx. 2 weeks - necessary if self-formation - available
  • The incorporation is in a hurry

MCI CLT operates primarily as a full-service advisor and incorporation companion.

 

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E-Mail or use our Contact Form.

 

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