Republished from Law A La Mode 

By: Katie Montazeri

The UAE is comprised of seven emirates, and its laws are promulgated at both the federal and emirate level. Federal laws override the laws passed by the individual emirates. There are also various free zones within the UAE with laws which are passed by the relevant emirate, but limited to the area within the free zone. To date, the UAE’s free zones have been successful in attracting a large number of overseas companies and foreign direct investment to the UAE. 

Outside of the UAE’s free zone, UAE nationals or companies wholly owned by UAE nationals must own at least 51 percent of a limited liability company’s shares. Within the free zones, foreign nationals can own 100 percent of the share capital of the free zone entity. In total, there are over 25 free zones, some specifically for certain industry sectors, such as Dubai Media City and Dubai Biotechnology and Research Park. Imports into Dubai’s various free zones do not attract import duty.

Generally speaking, free zone companies may not do business outside the free zone in onshore UAE, and anyone who violates the provisions of this law can be fined up to AED100,000 (approximately US$27,000). This means that free zones have typically been of little interest to retailers (and their non-UAE distributors), who wish to trade in onshore UAE. Specifically, the restrictions on onshore trading mean that a free zone company is effectively treated in the same way as a business established outside the UAE for the purposes of the foreign investment rules and may only own 49 percent of an LLC. However, companies in certain free zones may be licensed by the free zone authorities to carry out online trading, which cannot easily be restricted to onshore activities. This is not necessarily consistent with the restriction on free zone companies from onshore trading, and this seems likely to be an area for future reform.

For parties seeking to do business in offshore UAE, factors which are likely to influence the choice of free zone include their location, the infrastructure available and the likely set-up and capital costs.