Dubai's freezone law to boost FDI

A recent Dubai law which paves the way for freezone-registered firms to operate in the emirate’s mainland could be instrumental in attracting further foreign direct investment, a Dubai-based lawyer has said. Law number 13 of 2011, issued in September, said the Dubai Economic Department (DED) could authorise freezone companies to set up branches in the wider emirate, after advising and gaining the approval of the executive council. It also said the employees of freezone firms may be given permission by the DED to work outside of the freezone, dependent on executive council conditions and coordination with the Ministry of Labour and immigration authorities. The regulation, which aims to lessen the red tape around Dubai business dealings, will boost the number of incentives for foreign firms to start up in the emirate, Samer Qudah of Al Tamimi law firm said. “It is certainly a positive move, absolutely,” he told Arabian Business. “It will help existing businesses and also attract more foreign investment. “Right now there are big players based in the freezones [with] big businesses onshore. They are bidding for government tenders, but unless they have onshore registration they are limited in their ability to deliver their services to government entities or companies on the mainland. The law gives them some flexibility to service those entities.” It was still unclear how the law would work in practice, Qudah said, but if successful it would also provide a legal basis for a practice which already occurs. At the moment, exceptions are regularly made by authorities regarding mainland operations, to better accommodate foreign firms. Where a freezone employee is found working outside of the zone without government approval, both parties remain subject to penalties in the range of AED50,000, with the employee also liable to potential deportation. The UAE has introduced a flurry of business-friendly regulation in recent years in a bid to step up foreign investment, aid corporate dealings and enhance competition in the emirate. Earlier this month, the UAE’s cabinet approved a draft of the long-awaited companies’ law, expected to lift curbs on foreign ownership in some sectors, and layout bankruptcy laws to overhaul the way financially challenged firms are treated. There is currently a maximum 49 percent ownership limit for listed companies, compelling foreigners to a UAE national partner to conduct business, although full foreign ownership is permitted in free zones. Similar to the companies law, article 23 of Dubai law number 13 2011 will facilitate the growth of businesses which can operate outside freezones without a foreign partner. In addition to this provision, the Dubai law will also allow firms to retain the benefits of being registered in a freezone, and will apply to all sectors and industries. “The major benefit [of being registered in a freezone] is that foreign companies can own their business 100 percent, which at the moment is not available in the main land,” said Qudah. “But there are other advantages. Companies are close to their peers, and the freezone guarantees tax exemption for a number of years, in most [cases] 50 years. “In the mainland, whilst there is currently no taxation, there is a chance of new UAE tax laws further down the line, so these companies may be subject to taxation.” Qudah added it was still too early to know whether the companies law would allow foreigners 100 percent ownership of firms. They may still be subject to some restrictions where freezone firms are not, he said. Economists agree that the new Dubai law could be a good way of enhancing investment from other countries, by catering for businesses not covered by the companies law. “The incentive for [foreign] companies [to come to Dubai] is that they can have a 100 percent owned company and operate locally or onshore,” said Citibank’s FaroukSoussa. “For those sectors where 100 percent ownership is not going to be possible under the new companies law, clearly allowing freezone companies to do onshore business is going to attract further investment.” But the law was unlikely to spark significant changes within the Dubai economy, he added. “I think the massive pull for companies coming to Dubai and particularly those in freezones is that they use Dubai as a hub for servicing the region - I don’t think there is a super amount of pent up demand for companies to service the local market.” he said. “So it may not have a huge impact [on the overall economy].”