Most people are confused about the free zone and the offshore company when they seek for information about where to invest in Dubai. This is because of the primary similarities between the two: 100 percent foreign ownership without any local sponsor required. Both types of companies also have to be registered and licensed by free zone authorities.
In terms of taxes, both companies also have the same advantages. They are as follows:
- 100 percent corporate and personal income tax exemption
- 100 percent foreign company ownership
- 100 percent repatriation of profits and capital
- 100 percent import and export tax exemption
It is necessary for you to know the differences between the two companies to make sure that you will have smooth business operations. Both of these companies possess distinct features. They also vary in terms of limitations and the benefits they offer to investors, depending on the kind of business activities done.
Free Zone Company
The free zone company setup is intended to attract businesses that deal with trade and export. A company is allowed to put up branches in a free zone which will be considered as extensions and not as separate companies. If a company has to set up a branch in the free zone, it has to show that it is a solvent-free zone entity. For a business to be registered in a free zone, it is necessary to follow an initial share capital. The requirements vary in every free zone and also according to the purpose of the company. Companies can set up physical offices in the free zone or they may opt to have a virtual office when a full-size physical office is not needed. There are also several restrictions to follow when conducting business in a free zone.
The following are some of the best benefits of a free zone:
- 100 percent foreign ownership
- No requirement of 51 percent company ownership of a local sponsor
- Shareholders and employees can obtain UAE residency visas
- No taxation
- No customs duty for both import and export
- Affordable workforce and easy recruitment process
- 25 years of lease options, warehousing, and availability of locations for production and assembly.
An offshore company setup, on the other hand, has a variety of features. Even if an offshore company is registered under the structure of a free zone and it offers the same ownership benefits as that of the free zone company, it cannot be considered as a free zone company substitute. The biggest difference between an offshore and free zone company is anonymity. The details of an offshore company are kept anonymous while free zone company information is available when requested.
An offshore company will be able to open an account in a bank based in the UAE. It is also allowed to invest in the UAE and outside of it. The company can purchase land, but it must be within a pre-demarcated area in Dubai. All the profits of the company can be kept in its own bank account. There is no requirement of a minimum capital threshold. Offshore companies are often used as holding companies or asset companies that are used for organizations that operate within and outside the UAE.
There are certain advantages to setting up an offshore company. It has reduced setting up costs, no requirement to lease physical office space, and eligibility to own real estate property. These companies have office addresses. They are registered in the UAE, but they are not eligible to directly conduct business activities in the UAE. The company shareholders are also not allowed to acquire residency visas.
Based on the UAE laws, an offshore company is not considered as doing business in the UAE when it does the following:
- Maintains business records around the UAE
- Conducts business meetings with company members within the UAE
- Leases a real estate property which is used as a registered office or owns a property in a free zone area
- Has a bank account in the UAE for its routine operational transactions.
Limitations of the Free Zone and Offshore Companies
Free Zone Company
- Direct trade is prohibited within the UAE local market.
- Operates the local business through locally appointed distributors
- Custom duty of 5 percent is applied on imports to the local market
- Is not allowed to rent any office space within the UAE
- Employment visas and permits will not be granted
- No letter of credit or any other facility is allowed.
These are the most common differences between the Free Zone and Offshore companies. It helps a lot to be familiar with them before you decide on the company to set up in Dubai.