Are free zones in a bind?

Dubai - 100% foreign ownership law in mainland approved by the UAE Cabinet

Following the UAE government's decision to authorise 100 per cent foreign ownership in the mainland, free zones in the UAE will have to come up with novel ideas, reasons and incentives to convince existing firms to continue their operations in the free zones as well as attract more firms, officials and analysts said.
In May, the UAE Cabinet approved 100 per cent ownership of UAE-based businesses by foreign investors by year-end. Currently, foreigners generally are not allowed more than 49 per cent of any UAE firm unless it is incorporate in a free zone.
"We know the cabinet resolution didn't say that it is going to be across the board exemption of foreign ownership. It will be for certain categories for global names. Eventually, I think, the door will open and we will have more companies enrolled in this scheme. Once that happens, the whole reason for having a company established in a free zone will not exist. Main reason people going to free zone was their ability to 100 per cent ownership. But this new rule will eventually have an impact on free zones. And some free zones - like Jebel Ali Free Zone is dedicated for logistics - will not have much impact," said Dr Habib Al Mulla, chairman, Baker McKenzie Habib Al Mulla.
He said the free zones providing services will suffer and they have to find another identity and reasonable incentives for companies to continue to exist in those free zones.
"It is not going to happen immediately and this whole process will take two to three years," Dr Al Mulla said, adding that free zone rents continue to be higher than mainland, hence, companies will be moving to mainland than free zones.
"Free zones have to be competitive in their rents and costs and also have to find some other efficiencies. For example, procedures for registration need to be more efficient and accessible so that companies continue to be in the free zones. With the lapse of time, people will consider moving out of free zones," Dr Al Mulla told Khaleej Times in an interview.
He pointed out that certain free zones have more flexible employment regulations and better company laws.
He advised that free zones could have an advantage in the form of having one-stop shop for visas, medical check and immigration etc.
The UAE, which has one of the highest free zones in the world, is currently home to 47 free zones with 10 under construction. Among them, more than 30 are in Dubai, six in Abu Dhabi, three in Sharjah, two in Fujairah, four in Ras Al Khaimah and one each in Ajman and Umm Al Quwain. Of the 45, the Federal Tax Authority have declared 23 as designated zones where five per cent VAT will not be applicable.
According to the UAE Central Bank's annual report, exports from the UAE's free zones amounted to Dh225.5 billion in 2017, registering a growth of 6.6 per cent. These exports accounted for 19.5 per cent of the UAE's total export. The free zone exports hit 221.3 billion 2015 before declining to Dh211.4 billion in 2016.
Globally, there are more than 3,500 free zones spread across 130 countries handling Dh12.8 trillion worth of exports per annum, according to the latest report by the Organisation for Economic Cooperation and Development, OECD. With global exports reaching $15.46 trillion, the 22.63 per cent of all export cross through free zones.
Arif Amiri, chief executive officer, DIFC Authority, expects the new regulations will bring in increased transparency, quality of service and further flexibility to businesses in Dubai. In addition, there will be a boost to the UAE's competitiveness on the global stage.
Amiri ruled out that the companies will move out of free zones into the mainland due to the change in rules about foreign ownership in the mainland.
"No, they will not. DIFC brings together all the financial institutions and professional services in one cluster making it easier for companies to work together for the benefit of the clients. The centre offers a variety of advantages and initiatives that support established and new companies within our community, and facilitates industry collaboration through initiatives such as the Wealth Management Working Group, the DIFC Insurance Association and knowledge sharing events," DIFC authority head said.
He noted that many companies recognise that what free zones and DIFC in particular, offer to businesses go beyond just foreign ownership. DIFC provides Intermediate Special Purpose Vehicle and Special Purpose Company structures that support a broad spectrum of industry sectors including transport, education and energy reinforcing the Centre's position as a domicile of choice for innovative structured finance transactions, which is not available elsewhere.
Meanwhile, Jebel Ali Free Zone (Jafza) said it offers incentives to exempt customers from import and re-export duties on top of its package that has attracted more than 7,500 businesses from around the world, including over 100 Fortune 500 brands.
Jafza allows total duty exemption on imports and re-exports, a 50-year waiver on corporate tax with an option to renew, 100 per cent ownership and repatriation of capital. It also recently introduced an additional incentive to increase the capital of companies registered in the Free Zone through an IPO in collaboration with Nasdaq Dubai.
With no individual income tax in the UAE, Jafza allows companies to mortgage their property to banks or financial institutions to obtain finance for developing their businesses. In addition, there are no restrictions on currencies or the recruitment of foreign talent and manpower.
The moves follow a decision by the UAE Federal Cabinet to designate Jafza as one of 20 free zones exempt from Value Added Tax (TAX) introduced at the start of the year.
DP World's Jebel Ali Port and Free Zone have created an integrated business and logistics hub with companies representing more than 135 industries with more than 150,000 jobs.
Sultan Ahmed Bin Sulayem, Group chairman and CEO of DP World and Chairman of the Ports, Customs and Free Zone Corporation, said the decision of the Federal Cabinet is a far-reaching and will attract foreign direct investment and professional talent into the UAE.
- waheedabbas@khaleejtimes.com