Live the Dream – Dubai Start-Up Advice Series by Alpha Pro Partners
You have found the perfect idea, you have tested it and now you want to get started with your new venture. Now is the time to start the process of setting up a legal entity and we will discuss the various options available.
Before deciding on the type of legal entity you want to set up, you would need to consider the business structure of your business. Not all businesses would need to be set up as a traditional company as this can affect how you are treated by the government and law depending on your business activity. Your plans for the business may also be affected by this decision. For example, if you wanted to raise finance and grow the business, it may be more appropriate to set up as a company rather than as a sole trader or partnership. Also, if there are more than one partner and the success of the business depended on these key individuals then it may be more appropriate to set up a partnership rather than a sole trader or company. Also, seek professional expert advice on your circumstances before setting up a legal entity as cancellation costs can be as much as setting up! The three main structures are as follows:
A sole trader is effectively a one-person business and many freelancers are set up as one. This type of structure would ideally suit the individuals who have a side business or would like to set up a lifestyle/freelancer business. In most cases the business is linked to the owner, therefore if the business gets into debt, it is the owner who is personally liable. Similarly, any profits would be fully attributable to the owner and therefore any tax possible obligation would be their responsibility.
A traditional partnership structure is similar to the sole trader structure in the above example but in this case, you would typically have more than one person in this structure. A partnership agreement would govern the rights and responsibilities of all partners and like above, all would be jointly liable for any liabilities. A further consideration is that ownership and management are usually the same individuals and therefore the pros and cons of not separating ownership and management apply to this structure. One example is that if there are disagreements between partners, this can severely affect business operations as they would be involved in the day-to-day activities.
A corporation or a company is usually treated as its legal entity and therefore is legally separated from individuals. It would typically contract under its name and would be liable for its liabilities. In this situation, the owners (shareholders) of the company can be separate from the directors (individuals operating the business) although it is usually possible to have the same person being the shareholder and director. A governing document such as articles and/or memorandum would govern the rights and responsibilities of the shareholders and directors. In many Free Zones, this is a standard document with little room for amendment as the Free Zone and/or UAE Company Law ultimately regulates the company. A company is ideal for businesses looking to scale as adding/removing directors and shareholders usually follows a standard process, however, there is more of an administrative burden for companies as it is required to file taxes and company information regularly. Furthermore, in many cases, certain company information is publicly available which also needs to be taken into consideration.
Business Structure types in Dubai
When setting up a business in Dubai there are many opens available from Free Zones to the Mainland. Here we will list the common and popular options:
Dubai Mainland LLC
Setting up a business in mainland Dubai is carried out through the DED (Dubai Economic Department) and it is also required to have a local sponsor. The individual must be a UAE national and will own 51% of the company as per Article 10 (1) of the Federal Law No.2 of 2015. However, in many cases, businesses do not necessarily share the income, profits, and losses that are incurred by the company, and an Investors Right Protection Contract can be drawn up to agree on specific issues such as profit split and loss liability.
Some advantages of a Mainland LLC are that license fees and office rents are usually more affordable than most Free Zones and setup is also faster. However, sponsors can usually demand a yearly fixed fee which can be negotiated and in cases of issues businesses face, the sponsor would be required to help solve these issues. Another advantage of having a Mainland Licence is that there is no limit to the number of visas issued and there are no business or personal taxes.
A final point to consider is that in 2018, it was announced that the UAE government would be allowing 100% foreign ownership of businesses on the Mainland however much detail is yet to be passed. So far, a list of sectors such as Banking, Oil and Gas, Insurance, Post, Road, and Air Transport, and Water and Electricity have been put on a restrictive activity list. An unrestrictive list is yet to be published along with processes, regulations, and set-up costs.
Dubai Free Zones
Setting up Free Zones for most businesses in Dubai is the most popular option. Free Zones started to become more popular in the UAE during the 2000s and their main function was to enable the foreign-owned business to set up in the UAE with full ownership and no duties or taxes levied on businesses. The UAE has the highest number of Free Zones globally and in Dubai, the non-oil GDP contribution from Free Zones such as the DMCC (Dubai Multi Commodities Center) is 10% while DAFZA (Dubai Airport Free Zone Authority) is 7%.
Advantages of setting up in a Free Zone include full foreign ownership without the need of a local partner, 0% corporation or personal income tax, unrestricted repatriation of capital and profits and no duties levied on imports or exports. Another advantage of setting up in a Free Zone is that many are designed to be sector-specific which means that entrepreneurs can access a hub of knowledge, expertise, and contacts within their field more easily.
The drawback of Free Zones is usually the restriction of only operating out of that particular Free Zone which means that trading on the mainland can initially be restrictive. Recently, however, this can be solved by trading through a locally appointed distributor who would also have a License with the DED. Another drawback is that Free Zones fees are usually more expensive to set up than a Mainland License and also office/warehouse rent can be higher as Free Zones have space restrictions.
Another consideration to make when choosing a license is the activity, certain activities can only be carried out in specific Free Zones / Mainland. For example, if you open a restaurant on the Mainland, you will only be able to get a Mainland license for setup. Also, certain services carried out by the government may require a Mainland license.
List and Type of Free Zones
The following is a list of some of the bigger and more popular Free Zones in Dubai that you may want to consider:
- Dubai Multi Commodities Centre (DMCC)
The DMCC is the world's number one Free Zone with 15,000 companies registered. It has been awarded ‘Global Free Zone of the Year’ four times by the Financial Times and is home to a vibrant community, innovative infrastructure, world-class services, and a wide choice of offices.
The DMCC is located in Jumeriah Lake Towers (JLT) and the three main types of Licenses available are Service, Trading, and General Trading. The entities available are Limited Company or Branch of a Local/Foreign Company.
The cost of a License starts from approximately AED 20,000 and there are annual audit requirements to be submitted.
- Dubai Internet City (DIC)
Dubai Internet City is a specialized Free Zone built to attract enterprises operating in the information and communication technology sectors. In addition to attracting Fortune 500 companies such as Facebook, Google, Microsoft, and Oracle, DIC has also been responsible for the growth of tech entrepreneurs and SMEs in the region.
Businesses can register as a Limited company or a Branch office of a local/foreign company. License fees start from AED 15,000.
- Dubai Healthcare City
Dubai Healthcare City is a Free Zone focused on developing the health and wellness infrastructure of the UAE. It was built to attract and promote quality healthcare and clinical and wellness services and encourage more integrated and innovative medical education and research.
Types of available entities include Free Zone Establishment (FZE) for a single shareholder, Free Zone Company (FZCO), and Branch Office of Local/Foreign Company.
- Dubai International Financial Centre (DIFC)
The DIFC is recognized as the leading financial center in the Middle East, Africa, and South Asia region and was established in 2004. The DIFC is also an independent jurisdiction under the UAE Constitution, with its own civil and commercial laws distinct from those of the wider UAE. DIFC laws and regulations are written in English and default to English law in the event of an ambiguity. This structure is designed to attract global financial services companies along with international investors.
The DIFC offers many entities including Limited companies, SPVs (Special Purpose Vehicles), and Branch entities. Licenses start from AED 12,000.
- Dubai Media City (DMC)
The Dubai Media City Free Zone offers high-quality infrastructure for media agencies and enterprises. It has become a regional hub for the media industry in the GCC and the Middle East. It also provides Licenses for Freelancers as well as Limited companies and Branches. Licenses start from AED 15,000.
- Jebel Ali Free Zone (JAFZA)
Jebel Ali Free Zone is home to 7,000 global companies, of which 100 are in the Fortune Global 500. JAZFA contributes to almost 32% of FDI into the UAE, 21% of Dubai’s GDP, and employs 144,000 people. JAZFA is also home to the 9th busiest port in the world and is ideal for logistics businesses.
Other non-Dubai Free Zones to consider
Many businesses register in Free Zones outside Dubai mainly because it is more cost-effective. However, you may need to consider that as visas are issued from an Emirate outside Dubai, you may be considered a resident of that Emirate, and therefore driving licenses for example may be issued from that Emirate.
- Ras Al Khaimah (RAK) Free Zone
RAK is the northernmost part of the UAE and is quite popular for small businesses to set up. It is also 45 minutes drive from Dubai and licenses for Freelancers start from AED 15,000.
- Sharjah Media City (SHAMS) Free Zone
Shams Free Zone is the Media hub based in Sharjah. However, it also provides almost all other activities to be licensed which are available in other Free Zones such as Services, Import and Export, and Industrial permits. License start from AED 8,000.
- Other Free Zones
Other popular Free Zones to consider are:
- Fujairah Creative City Free Zone
- Fujairah Free Zone
- Ajman Free Zone
Prohibited Business Activities
- In the UAE, certain activities are prohibited for businesses as per the local laws and customs. These are as follows:
- The selling and production of alcoholic products and semi-finished products made of pork
- Gambling – organization of various betting shops, sweepstakes, lotteries, and casinos, including online gambling
- Goods and services - creation and distribution of magazines and videos with pornographic content and media with questionable content;
- Illegal trade and activities – illegal circulation of narcotic and psychotropic drugs
Other possible required Licenses
Once you have set up your business license, you may require additional licenses and registrations for your particular activity. For example, if you intend to import or export you will need to register with Dubai Customs, similarly, if you are in the media industry you may require a Media license issued by the National Media Council.
Additional Legal Structures to Consider
You may have a business based in Dubai but maybe want a foreign entity based in your home country to be the owner of your Dubai business – this is completely possible as foreign ownership can be a legal person or a corporation. If you don’t have a corporation in your home country other alternatives could be to set up a company or trust offshore such as in the BVI, Cayman Islands, or Seychelles. The advantages of these would be that no tax would be due on profits, there is more privacy for the owners of that company, the legal framework for corporations is similar to UK company law and company formation in many cases can be completed within 24 hours.
This article is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.