Many innovators and stakeholders are asking us about establishing a business either in a free zone or in the mainland. Business setup in UAE free zones
What is a Free Zone Company?
A Free Zone Company (FZCO) is a firm located in a designated area,
The business period is limited to:
• Trading within the free zone
• Trading with local markets through a dealer in the mainland
• Importing & exporting
How is a Free Zone Company relevant to Distributors & Local Market VAT?
As it cannot be done directly, FZCOs are using brokers to trade goods with the local market.
When selling products to the local market, distributors are paying a 5 percent VAT charge, hence the amount is transferred to the FZCO. The price can be agreed to be less than 5 percent of the invoice on the local market.
When importing or re-exporting goods, FZCOs are exempt from customs duties / VAT charges at the distributor. Furthermore, the advantage of a free zone enterprise is tax optimization where the enterprise is exempt from tax under the Double Tax Avoidance Agreement (DTAA).
It is relatively easier for FZCOs to provide professional services to the local market, as it does not require a distributor. Nevertheless, business activities (e.g. face-to-face sales & promotion) outside the free zone still cannot be performed physically. Talk to one of our experts if you wish to learn more about the variety of professional practices undertaken outside of a free zone.
What is a Mainland Company?
In contrast to FZCOs, mainland companies can be located anywhere in the UAE and have a wide range of business activities as determined by their trade license. They are free to carry out business activities both within and outside the UAE, and therefore require licensing and approvals from a variety of government bodies such as:
• Dubai Municipality
• Ministry of Labor
• Directorate-General for Residence and Foreign Affairs Dubai
• Ministry of Interiors
Does a Mainland Company need ownership of UAE National?
When the company is under a commercial license (limited liability company (LLC), then yes, the ownership structure allocates 51 percent of the shareholding to a UAE National (local partner) and 49 percent to the ex-pat partner.
Professional licenses require 100 percent ownership of the ex-pat while appointing the UAE National as a local service agent. The representative manages regulatory approvals and licenses and is not forced to be a part of the operations of the organization unless he or she agrees to do so.