Thinking about setting up your business in Dubai? There are two main jurisdictions to consider for entrepreneurs looking to start or expand their businesses in the United Arab Emirates (UAE), either through an onshore jurisdiction (further divided into mainland or free zone) or an offshore jurisdiction (also known as International Business Company, IBC)

This article seeks to make a comparison between the two jurisdictions and also provides a general overview for a proposed business setup in Dubai.

Introduction to the UAE

The United Arab Emirates is a federation of seven emirates, consisting of Abu Dhabi (the capital), Dubai (the established commercial hub), Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah, and Fujairah.

Despite the fact that all seven city-emirates form one nation, friendly competition and tension exists between them, which ultimately results in a competitive and business friendly environment for investors and entrepreneurs to take advantage of, thanks to the local emirates each vying for investment into their respective emirates.

Dubai, the financial and business hub of the country and the Gulf region, is the location of choice for setting up and or expanding your business in the Middle East.

This can be evidenced through the existence of various free zones across the country, of which Dubai-based free zones number in the thirties and growing. Such special economic zones raison de vivre are to encourage foreign investors to setup businesses within the free zones (located within the emirates) and to operate from within, whilst circumventing the national-level regulations governing businesses licensed and operating in the onshore mainland jurisdiction.

Did you know there are almost 25- 30 free zones within Dubai alone?

Onshore Company Jurisdictions in the UAE

As noted above, free zones were created in response to the market-protection barriers governing all onshore mainland entities, which mandates participation of UAE nationals in most operating licences in the mainland, either through retaining/ holding 51% ownership of shares; or as an authorised service agent or representative for professional licences wherein foreign investors could hold full ownership of shares.

In contrast, companies incorporated in free zones could retain complete foreign ownership; hence leading to a division of the UAE’s onshore jurisdiction into two, mainland and free zone companies.

Mainland Company in the UAE

Mainland companies are licensed by the respective Department of Economic Development (DED) of the emirate they’re located in, and has a UAE national’s participation within the company structure, either as a majority shareholder and or an authorised representative. Such companies also have full unrestricted access to the local UAE market, as well as international customers.

Free Zone Company in the UAE

Conversely, free zone companies in the UAE allow for complete 100% foreign ownership, but its access to the local market is limited to an extent, and international markets are wholly unrestricted. Each free zone has its own registrar which acts as the immediate licensing and regulatory body for entities incorporated within free zones. Free zone companies also enjoy a 50-year renewable corporate tax holiday, unlike mainland companies.

Regulatory Bodies for Onshore Companies in the UAE

Apart from the aforementioned DEDs or free zone registrars,  certain licensed activities also require additional supervision and oversight by the applicable higher regulatory authority.

In addition to the DEDs or the free zone registrars for onshore companies, if the licensee conducts activities that fall under additional supervision, then the applicable, supplementary governing body’s approval and or oversight may also be required.Take for example, an authorised financial institution (such as bank providing lending and deposit services) based in Dubai, apart from being licensed by the local DED, will also be regulated by the Securities and Commodities Authority (SCA), and the Central Bank of the UAE (CBUAE).

For an onshore free zone example, an investment bank incorporated in Dubai’s financial free zone, Dubai International Financial Centre (DIFC), falls under the ambit of the DIFC Registrar, SCA, and likely the CBUAE and other bodies, where applicable.

Offshore Company Jurisdictions in the UAE and its Regulatory Bodies

Like most other financial centres, the UAE also offers offshore (or IBC) regimes, targeting clients who may have no immediate need to conduct business locally. There are three main offshore jurisdictions in the UAE, JAFZA Offshore (Jebel Ali Free Zone Authority Offshore), Ajman Offshore, and RAK ICC (Ras al-Khaimah International Corporate Centre).

Characterised by its restriction from conducting any business domestically, 100% foreign ownership, almost non-existent minimum physical requirements, and falling outside the scope of all domestic UAE taxation implications, UAE offshore companies pose a niche solution to a clients with specific needs.

Such regimes were also unveiled to take aim at the various established offshore island jurisdictions, offering stronger repute and being part of a financial system and domestic market that is of substance and substantial.

 

Still confused as to whether which entity best serves your needs? Fret no more, for we have prepared this simple questionnaire that seeks to understand your individual circumstances as a client.

1/ Do you, the client, intend to operate your business inside the UAE?
Is it a B2B or B2C business model? Or is it targeting international markets except the UAE?

2/ What would the proposed company carry out as its business activities?
Is it a commercial licence (trading), or professional licence (services) that you intend to procure? Or is it potentially a regulated activity such as the trading of precious stones?

3/ Do you, the client, require any form of physical presence within the UAE, such as an office facility, or a residence visa(s)?
Is a virtual office setup sufficient, or would a physical facility be required? For residence visa(s), how many would be required?

Our team of experts at INCORPORTAS would be able to provide a preliminary assessment of the type of entity best-suited for your needs, based on the revert to the above queries.

Onshore companies may be the most applicable jurisdiction of choice if clients intend to operate and conduct business from within the UAE. We would then narrow the assessment based on Questions no. 2 and 3 to decide on the most relevant regime, whether it be a mainland setup or a free zone structure.

On the other hand, if a client preliminarily informs that they do not intend to operate from and in the UAE, we may recommend an offshore company whilst elaborating on the limitations of this proposed offshore company in relation to an onshore entity in the UAE.

Let us now walk you through a general overview of the process involved in your proposed business setup in Dubai and the UAE.

How to Setup Your Proposed Company in the UAE?

For a proposed Mainland Company Setup in the UAE,

1. Based on the intended business activities of the entity, we determine if the structure requires a UAE national’s participation either as the majority shareholder with 51% percentage of shares, or in the capacity of a local service agent (“local sponsor”).

2. We carry out name checks against the provided proposed names, obtain name reservation and apply for initial approval with Dubai DED.

3. We prepare the applicable documents related to an entity’s incorporation and business registration, such as the Board Resolution(s), applicable Power of Attorney(s) and drafting of Memorandum and Articles of Association.

4. We advise and assist throughout the whole process in the search for the most suitable office setup against the requirements, from the initial search to the finalising of deal, obtaining a Tenancy Contract and or Lease Agreement and applicable connections (Electricity, Internet Connectivity, Office Maintenance).

5. We incorporate the company.

6. The proposed company’s legal documents are issued, such as its Trade License and other applicable documents.

7. We commence preparations for a company’s sponsored residence visa(s) application.

 

For a proposed Free Zone Company Registration in the UAE,

1. Based on the client’s requirements (business activities, jurisdiction, locale, budget, visa quotas), we determine the right free zone of choice.

2. We carry out name checks against the provided proposed names, obtain name reservation and apply for initial approval with the free zone registrar.

3. We prepare the applicable documents related to the free zone company’s incorporation, including but not limited to its Company Licensing Application form(s), Memorandum and Articles of Association, Business Plan, Service Lease Agreement or Tenancy Contract.

4. We incorporate the company.

5. The proposed company’s legal documents are issued, such as its Trade License and other applicable documents.

6. We make arrangements to start the company’s sponsored residence visa(s) application.

 

For a proposed Offshore Company Incorporation in the UAE,

1. Depending on clients’ requirements, we determine the jurisdiction of choice. (WAME strongly recommends RAK ICC because of its strong reputation and compliant regulation in line with international practices).

2. We carry out name checks against proposed names, obtain name reservation and apply for initial approval with the registrar.

3. We prepare the applicable documents for the proposed company’s registration (application form(s), Appointment Letter, Board Resolution(s), Memorandum and Articles of Association, UBO Declaration Form, Sanctions Exposure Questionnaire).

4. We incorporate the company.

5. The proposed company’s legal documents are issued, such as its Certificate of Incorporation and other legal documents.

Let us now provide you a recap of the various differences between UAE onshore and offshore companiesfor the most relevant setup for your proposed business in Dubai and the UAE.

What are the Distinctive Characteristics of Onshore and Offshore Companies in the UAE?

To simplify, there are three (3) main criteria that distinguish an onshore company from an offshore company domiciled in the UAE.

• Access to Local Markets

• Involvement of UAE nationals (“Local Sponsor”)

• Taxation and Tax Residency

 
Access to Local Markets

1. A Mainland Company can partake in the domestic and international markets without limitations.

2. A Free Zone Company can, to a limited extent, participate directly in the domestic market; and fully engage with international markets.

3. An Offshore Company can only engage with international markets. The domestic market is limited from Offshore Companies.

 
Involvement of UAE nationals (“Local Sponsor”) 

1. A Mainland Company either has a UAE national as a majority shareholder, or as a designated company agent representative. “Local sponsor” is mandatory for mainland businesses.

2. A Free Zone Company does not require the involvement and or participation of a UAE national.

3. An Offshore Company does not require the involvement and or participation of a UAE national.

 
Taxation and Tax Residency 

1. A Mainland Company may be subject to Value Added Tax (VAT) requirements upon fulfilling the threshold and place of supply criteria.
   A Mainland Company is eligible to apply for a Tax Residency Certificate in the UAE upon fulfilling the requirements.

2. A Free Zone Company may be subject to Value Added Tax (VAT) requirements upon fulfilling the threshold and place of supply criteria.
   A Free Zone Company is eligible to apply for a Tax Residency Certificate in the UAE upon fulfilling the requirements.
   A Free Zone Company enjoys a 50-year renewable corporate tax holidays.

3. An Offshore Company is outside the scope of VAT regulations in the UAE.
   An Offshore Company is not eligible to apply for a Tax Residency Certificate in the UAE due to its non-resident status.

 

We hope the above article allows you to have a clearer understanding of the two main jurisdictions available in the UAE, and you have a general idea on whether a Mainland Company, or Free Zone Company, or Offshore Company is the most appropriate choice for your business setup in Dubai and the UAE.

For further information, please do not hesitate to contact us today for an initial consultation.