Basic guide to Free Zones
If you are not familiar with Free Zone companies, then this guide is made for you!
What is a Free Zone Company?
To make it simple, a Free Zone company is:
- A company– meaning it is a legal entity separate from its owners. This point is important concerning liability protection. A company provides limited liability for its owner(s), as opposed to a freelance license or a sole proprietorship which leaves their owners open to unlimited liability. If your company was ever sued or went into liquidation, you could potentially lose whatever you have invested in your business. However, you would not lose your personal assets, i.e. your car, your home, your savings, etc.
- Located in a Free Zone area– A Free Zone is designated physical area where you are allowed to operate your business. You can rent offices, hire employees, store items, etc. But under no circumstances can a Free Zone company operate outside the space of the Free Zone, unless it also has a branch license with a Mainland registry such as Dubai Economy (Dept. of Economic Development – DED.
A Free Zone company does not require a local sponsor or a local service agent. That means a foreigner, who does not have an Emirati passport, can hold 100% of the company shares.
A Free Zone company is incorporated within a Registry, a governing body that is authorized to issue a business license.
There are around 40 Free Zone Registries within the UAE. You can find a list of all of these Registries on our website here.
Owners and Managers
Owners of a Free Zone company are called shareholders. They can be individuals or companies.
A manager oversees the day-to-day operation of the company and is elected by the shareholders. The manager can be either a shareholder or a third party. In the case of several managers, it is called a Board of Directors.
Share Capital is the amount of money a company has received from shareholders in exchange for shares.
Note that some Free Zones do not require share capital to be “paid up”, or transferred to the company bank account at the time of its incorporation.
Accounting & Auditing
Accounting is mandatory for all Free Zone companies.
Accounting is the process of recording financial transactions pertaining to a business. It is one of the key functions for almost any company. The international financial reporting standards (IFRS) system—the most common international accounting standard— states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.
All companies must receive a yearly audit of their financial statements, such as the Profit & Loss Statement and Balance Sheet. A financial audit is a 3rd party examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent.
As a shareholder of a Free Zone company, you are entitled to apply for a residence visa for a minimum length of 3 years, renewable.
You can then apply for a residence visa for your family (spouse and children under 18).
Offices: Shared and Private
When you set up a Free Zone company it is mandatory to rent an office within the Free Zone area. As explained above, it is not allowed to rent an office/warehouse outside the Free Zone area.
Some Free Zone offers include a shared office (also called a “flex office” or “smart office”). In this case, electricity, A/C, etc. are included in the rent. It should be noted that these shared offices are only available for use by a manager, not employees.
The company can hire employees and apply for their work visas.
It is important to note that the number of employees a company can hire is related to the size of its office. A general rule of thumb is that an office needs 10sqm per employee, so a 100sqm office would allow you to hire 10 employees.
A Free Zone company can open a business account in any bank regulated in the UAE.
Usually banks offer internet banking, debit card, and a check book.
Some banks or types of banks accounts can require a minimum deposit to open an account and/or a minimum monthly balance to avoid a service charge.
By law, a company must purchase health insurance for all UAE residents connected to the company: shareholders, employees, and family members.
Some Free Zones will also require liability insurance.
Free Zone companies are exempt from profits tax and withholding tax on dividends paid. There is also no tax on salary.
Value Added Tax (VAT) was introduced in the UAE on 1 January 2018 with a rate of VAT 5%. UAE imposes VAT on a taxable supply of goods or services at each step of the supply chain.
So you now know all the basics about Free Zone companies in the UAE. The next step is to select the right Free Zone for your business!
OK, but what do I have to do now?
Please visit all our Free Zone pages to identify the right Free Zone for you.
Well, it is still not clear to me.
Do not hesitate to contact us if you have any questions!