Success in business is often a result of being in the right place at the right time. With many entrepreneurs flocking to the UAE to start businesses and innovate at existing ones, the question for most remains this: Where is the right place to set up shop?
The choice of city is a fundamental one — different cities and emirates offer different kinds of opportunities both long term and short term. But there is another choice that is equally fundamental: should you start in a free zone or onshore?
There are now 37 free zones established to encourage foreign investment into the country. They operate under international regulations, free of taxes and often under a wholly different regulatory scheme than onshore businesses do.
Free zones have become so successful that the UAE is now the leading country in the Arab world for foreign direct investment, drawing in $11.85 billion in 2014. The Jebel Ali Free Zone alone accounts for around 40 per cent of the UAE’s total direct foreign investment.
With business-accommodating laws and tax structures, free zones have become a primary attraction for entrepreneurs. Despite the many benefits, the cost of operating in a free zone can prove considerably higher, with limitations on how and where you can do business. Business owners must look closely at how regulations differ across not only emirates and cities, but zones as well.
Beehive, for example, resides within the Dubai Multi Commodities Center (DMCC), which was founded in 2002 and won the FDI award for Global Free Zone of the Year in the SME category. With an impressive tenant list nearing 8,000, the DMCC adds nearly 200 companies a month, with the majority new to Dubai.
Free zones often cater to specific industries, and generally make it much easier to navigate the legality of starting a business. Yet, for all the thousands that have chosen a free zone to base their operations, many more have chosen to eschew them.
Initial share capital requirements vary by zone, but are nearly always higher than those onshore. The minimum paid-up capital required for a free zone establishment (FZE) or free zone company (FZC) can vary from Dh50,000 to Dh1 million, whereas many onshore operations require no share capital at all.
Real estate costs in free zones are usually higher than at their onshore counterparts — though this is not universally true. For example, office space in Silicon Oasis can be rented for only Dh30,000 a year, while the lowest cost option in an onshore space in downtown Dubai runs closer to Dh50,000-Dh60,000 a year.
Proximity to the main Shaikh Zayed Highway and business centers can be a more accurate predictor of cost than legal jurisdiction. What free zones do offer, however, is the opportunity to establish a virtual office; a perfect solution for SMEs that do not yet require a physical space, but want to move forward with applying for the proper licenses.
What sets free zones furthest apart from their onshore counterparts are ownership laws. Starting a company in the UAE requires that 51 per cent of ownership be given to an Emirati national, whereas free zones allow 100 per cent foreign ownership and 100 per cent repatriation of capital and profits with no currency restrictions.
Residency visas for employees are also processed according to unique free zone laws. For example, the law allowing UAE firms to place a six-month ban on employees who depart their companies before completing two years is not enforced inside free zones. Companies are also provided relief from corporate, personal income and capital gains taxes.
Despite these benefits, companies can have more difficulty in trading with companies outside their free zone, with most finding it necessary to hire a commercial agent or distributor onshore to do business. The law technically prohibits free zone trade with the rest of the country, particularly for service providers.
International trades do not fall under this category, however, and are allowed and encouraged, largely tax-free.
The UAE’s free zones, from Ras Al Khaimah to Abu Dhabi, offer regulatory environments that create diverse centers of learning, collaboration and expertise. Free zones have aided in the diversification of the UAE’s economy since the laws were first passed to allow them, and now accounting for nearly a third of the UAE’s non-oil economy as of this year, as per the Ministry of Economy reports.
But SMEs need to work out individually the pros and cons of operating in a free zone and decide whether the benefits outweigh the costs. While the arrangement can have a huge positive impact for those operating in import/export and knowledge industries, the costs and trading restrictions could have negative consequences for others.
The writer is Managing Director of Beehive, a peer-to-peer services platform.