‘Grey areas’ that periodically crop up when conducting business in Dubai Free Zones are understood by some companies and completely ignored by others. Regardless of the company’s take on the matter, engaging in business within the jurisdiction of the Dubai mainland (onshore) when a company holds a Dubai Free Zone trade license is illegal.
Law no. 13 of 2011 states that no one is permitted to conduct economic activities outside of Dubai’s Free Zones except through a corporate entity licensed by the Department of Economic Development (DED). Anyone who violates the provisions of this law can be fined up to AED 100,000 – if a company is licensed in a Free Zone and enters the mainland to conduct business or conducts business with a company based in the mainland then it is breaking this law.
The implications are significantly more severe for Free Zone companies that are directly retailing goods to the local market and not just providing a service. This not only breaks Law no. 13 of 2011 but also constitutes customs evasion, as all companies operating in Free Zones must comply with procedures provided by the Common Customs Law of the Gulf Cooperation Council (GCC).
Goods imported into a Free Zone are exempt from import duty, whereas goods imported into the mainland are subject to tax. In 2012 the Gulf News reported the arrest and prosecution of a Jebel Ali Free Zone company’s Chief Executive Officer who had been illegally importing high quality cigarettes through the Free Zone for a period of two years. This type of tax evasion is taken incredibly seriously by Dubai Customs and can result in a 200% fine and a possible jail sentence for the accused.
In a bid to tackle this ‘grey area’ and assist in Dubai’s economic growth, the DED has introduced the ability for Free Zone companies to establish a separate onshore entity. For companies offering a professional service, a branch of the Free Zone entity without the need for office space is sufficient. However, companies looking to trade goods require to register as a full Limited Liability Company.
The progress taken by the DED to further facilitate business proceedings is a step in the right direction to ensure that all companies are adhering to the country’s laws whilst taking into consideration the growth of international companies that use Dubai as their Middle East headquarters.