Free zone or onshore? What is best?

When establishing a business in the UAE, there are a number of factors to take into consideration when deciding on the company structure you will use. Many individuals are unsure of which type of license they will need to conduct business in the UAE. There are many different options and when it comes to obtaining the right type of license for your business, it is very important that you select the appropriate one. Being licensed incorrectly can lead to limitations for your business and in some situations can lead to fines for those who operate outside of the confines of their license type.

With many different license options available, one of the most commonly asked questions is whether you should apply for a free zone or onshore license? To answer that question, we first need to understand the key differences between the two options, as well as the benefits and drawbacks of each type.

Let’s start with free zones…

Free zones are designated economic zones which enable expatriate business owners to hold 100% foreign ownership of their companies. For this reason, free zones are often the go-to licensing option for foreign investors. Key benefits of setting a free zone include the following:

  • 100% foreign ownership
  • Availability of low cost license options
  • There is no requirement for physical office space, in select free zone, which can have cost savings
  • There are no customs duties when trading between free zones.

There are over 40 free zones in the UAE each catering to different requirements and business activities, making them very appealing to small business and start-ups. However, it is important to remember that setting up in a free zone has limitations. These include an inability to transact with onshore companies, or trade into the local market unless this is done through a local distributor. This can potentially add an additional step into the supply chain, meaning that free zone trading companies will only be able to trade at wholesale prices, not retail. As a result of this, free zone trading companies predominantly carry out international and wholesale trade.

For companies that wish to trade directly in the local market, and particularly with public sector organisations, an onshore license may be the preferred option. These licenses are issued by the relevant authority in the Emirate the license is being issued in, i.e. the Department of Economic Development (DED) in Dubai. Key benefits of this type of license include:

  • Ability to carry out business directly in the local market, including with public sector companies
  • Greater flexibility as to where the company can rent office space, leading to more competitive rent options
  • Ease of opening a bank account.

In addition to these factors, foreign investors often raise concerns about the ownership structure of an onshore company and the need to have a local partner. The reality is that there are many activities in the service and consultancy sectors that can be 100% foreign owned. In place of an Emirati shareholder, they will have a Local Service Agent (LSA). The LSA serves the same function as the Local Partner, without holding any shares in the company.

Trading activities, as well as a handful of service based activities, still require a Local Partner to hold 51% of the company. It is common practice for foreign investors to appoint a corporate entity to be the Local Partner, rather than an individual. This leads to greater protection for the foreign shareholders, as a suite of supporting documents can be issued in order to protect their investment.

There are many factors to consider but with over 15 years’ experience in the region Links Group is able to provide you with a number of solutions to suit your business needs. We pride ourselves on being a secure and reliable provider and we are always available to guide and support you along your journey.

Should you be interested in learning more and understanding which option is most appropriate for your business needs, please get in touch with Oliver Brinsley on consultants@linksgroup.com or +971 (0) 4 446 3900.