Starting a Business

The Pros And Cons Of Setting Up An Enterprise In A UAE Free Zone

The Pros And Cons Of Setting Up An Enterprise In A UAE Free Zone
Image credit: Naufal MQ /

Entrepreneurs are almost spoilt for choice when it comes to ways to set up a company in the UAE. The traditional routes are still open –a non-Emirati shareholder setting up with a UAE national partner or ‘sponsor’ who owns a majority share in the business– and taken by a number of organizations. However, there are also a growing number of free zones across the Emirates, allowing budding entrepreneurs to retain 100% ownership of their companies, so long as they operate within the confines and regulations of the free zone.

These days, the free zone route is an increasingly popular option. But that does not mean that your organization should simply dismiss the more traditional ways of setting up here. It entirely depends on the nature of your business, so it is important to look at all options carefully before setting up. Indeed, it should be noted that your commercial licence will be based both on the type of business you wish to create, as well as where you want to operate.

If you wish to operate outside one of the mandated free zones throughout the UAE, the traditional route is your only option, whereby a UAE national holds a majority share of the business- referred to as ‘onshore’ companies. For example, you may wish to open a premium fashion boutique in Jumeirah –as operating within a free zone may be seen as too ‘downmarket’ for such a venture– meaning that a local partnership would suit your business better. An onshore company may involve an inactive UAE national partner, or else two active partners.

Despite the popularity of UAE free zones, it would be a mistake to think that the onshore route is somehow less desirable. Although it is not possible to retain 100% ownership of the company, there may be benefits in other areas. For example, companies operating with a UAE national partner/shareholder enjoy the protection of a sound legal structure. The Commercial Companies Law and the Trade Agencies Law makes up the basic framework for the UAE, though regulations differ from Emirate to Emirate. The point is, though, that these rules are reasonably well-defined wherever you operate. What’s more, this route gives you the freedom to operate within the relevant Emirate and outside of a free zone.

Inside the free zones things work a little differently– each zone will have its own rules and regulations that must be adhered to. Moreover, the rules will differ depending on the type of business you run, and the free zone will not look kindly on a business that is acting outside of the remit of the company’s commercial licence. When setting up in a free zone, it is extremely important to acquaint yourself with the rules of the free zone you wish to operate in, particularly if you have large-scale ambitions that might stretch across various verticals. We can provide professional advice in this regard, and we help many clients do their due diligence on the rules that will eventually come to govern their organizations. Of course, many small enterprises in the Middle East accept the regulations set out by their free zones, as evidenced by the large number of organizations that are set up here every year. One of the main attractions is that there are a variety of ways in which entrepreneurs can set up their businesses within these zones. For example, it is possible to register a business either as a free zone establishment (FZE) or free zone company (FZC), or as a branch of a company based locally or overseas.

Both FZEs and FZCs are considered limited liability companies, with the former having a single shareholder and the latter two to five shareholders. Naturally, to operate outside the free zone, they need a local agent to distribute their products in the country where the free zone is located, though it should be noted that they are allowed to do business abroad while registered in the free zone. FZEs and FZCs are also allowed to import merchandise, equipment and goods from any foreign country without paying customs taxes, though some goods are prohibited in free zones.

It may sound simple enough, but with the different laws governing various free zones, I would still advise entrepreneurs to approach qualified legal professionals for guidance and advice before diving into the process. Not only do the rules vary from one free zone to another, but so too does the paperwork involved in setting up. There are other things to consider, too. For example, if a businessperson wants to perpetuate his or her assets indefinitely, it is worth looking at preparing a succession plan. This would involve appointing a family member, partner or shareholder should anything happen to the main business owner.

Setting up a company within the UAE can be straightforward, so long as the processes are understood and the right steps are taken. Whether your company is best-suited for operation within a free zone or not is entirely dependent on its business model. As ever, the first port of call should be to seek legal advice and to be honest with your advisor about what you hope to achieve through the business. A good lawyer well versed in the laws of the UAE will be able to help you make the decision on whether to open within a free zone or not.