Looking to launch a venture of your own? Then pack your bags. Dubai’s waiting for you.
Despite being a fledgling startup economy, Dubai has been recognized as an innovation hub. Its diverse community of expats, an ever-growing population, and corporate tax incentives make it an attractive destination for budding entrepreneurs.
And according to NestPick’s Best Startup Cities Index, Dubai ranked as the “29th most dynamic startup city in the world.” This ranks Dubai leagues above other, more established startup economies like London, New York, and Tokyo.
When it comes to the City of Gold, the sky really is the limit.
Dubai’s startup advantage
In its bid to remain a key global player long after the country’s booming oil economy, Dubai has its eyes set on building a 21st-century tech ecosystem. Indeed, this bid for economic longevity post-oil can be seen with the city-state’s plan to host the World Expo in 2020.
Dubai’s 2020 World Expo will become the first world exposition to be held in the MENA (Middle East & North Africa) region. The city-state’s rulers hope that by hosting a World Expo, the city cements its legacy, becoming a future smart city.
But the 2020 World Expo is just one segment of Dubai’s holistic approach to economic revival. Becoming an entrepreneurial hub is another.
As highlighted by the city’s accelerator program, the Dubai Future Foundation, Dubai’s main vehicle to encourage entrepreneurship, there’s a $300 million fund set aside to entice the world’s best startups to invest in Dubai’s future.
Besides such extensive funding, other advantages of fostering business growth include:
- Generous tax incentives
- No trade quotas or foreign exchange controls
- Stable exchange rate
- Low customs duties with 100% repatriation of capital permitted
- Government and regulatory support
- Liberal visa policies
- Diverse business landscape
- Modern infrastructure and logistics
All of these accumulate to create a desirable entrepreneurial environment, increasing its attractiveness to venture capitalists.
Dubai’s business types and activities
Expatriates enticed to move to Dubai due to its increased venture capital activity will do well to be informed of the UAE’s laws regarding business setups. Under UAE law, there are three types of business setups available to expats.
The three major jurisdictions of business available to expats are:
- Mainland Company
- Free Trade Zone Company
- Offshore Company
Your business’s activity will also determine the type of trade license(s) you require in order to operate in and out of the UAE. The UAE’s Department of Economic Development has streamlined business trade licenses into four categories. These include:
If you’re looking to commence activities in Dubai, below we explain in-depth each business model, noting their respective advantages and disadvantages.
1. Mainland Company
Foreign investors looking to conduct business activities in Dubai and outside the UAE should consider the mainland company formation.
Also considered an “onshore” company, mainland companies are awarded the opportunity to conduct business activities in any part of the UAE, as well as outside the UAE with no restrictions.
Mainland companies’ licenses are issued by each emirate’s respective Department of Economic Development (DED).
If the nature of your business requires unrestricted access in and out of the UAE, then a mainland company becomes advantageous. Certain factors will determine when it is beneficial to set up a mainland company formation.
Benefits of a mainland company
Outside of its ability to conduct business in the UAE’s local markets, the formation of a mainland company affords foreign investors numerous benefits. These include:
- No minimum capital requirement
- Stronger market presence
- A wider scope of business
- Work opportunities with government bodies
- Target to trade with other mainland companies
- Flexible office availability
- No limitations on the number of visas
- Exempt from corporate tax
Disadvantages of a mainland company
While the advantages of a mainland company seem to present favorable conditions for foreign investors, certain caveats exist within the formation of a mainland company.
The main disadvantage of a mainland company for foreign investors is the shareholding pattern.
Mainland companies require a UAE national to hold majority ownership. As a DED-appointed legal entity, UAE law dictates that the local sponsor must hold the majority equity share in the business or a minimum of 51% of the shares.
But a foreign investor will have the sole control over the ownership of the business and the banking power is limited only to the expat by the virtue of MOA. The local partner/sponsor is only limited to having his name on the license against the Annual Remuneration agreed and paid.
Office requirements must also be considered.
A mainland license requires a minimum of 200 sq. ft. to be leased on an annual basis. This can effectively cut into working capital. Not meeting this requirement prohibits your business from obtaining a DED license.
2. Free Trade Zone Company
A free trade zone company’s ownership structure differs in that it enables foreign investors 100% ownership. While technically an onshore company, free trade zone companies are restricted to a designated jurisdiction of Dubai.
Free trade zones are designed to cater to specific economic activities. In Dubai alone, there are over 20 free zones all geared toward a specific business category.
Like a mainland company, trade licenses are required for the formation of a free zone company. The trade licenses required will be determined by the nature of the business.
As one of the most commonly used company formations for foreign investors, free trade zone companies provide foreign investors certain advantages. But alongside those come certain restrictions.
Benefits of a free trade zone company
Incorporating a Free Trade Zone company affords foreign investors several advantages. Key advantages of an onshore company are:
- 100% ownership
- Free repatriation of capital and profits
- 0% tax rate (exempt from VAT, income and corporate taxes)
- Exemption from import and export duties
- Free transfer of funds
- Low operating income
- Access to a residency permit
Incorporating a free trade zone company is also fast and easy. Foreign investors can register to operate a free zone company within seven to 14 days.
Disadvantages of a Free Trade Zone Company
There are peculiarities that must be met by a free trade zone company. The activities of the company are forbidden outside of the selected free trade zone. Business activities can only be operated within the designated jurisdiction or outside the UAE.
Its activities are also regulated by the type of licenses obtained.
Failing to abide by these restrictions can result in penalties and possible dissolution. If your company seeks to operate outside of the Free Trade Zone, you must appoint a local intermediary or locally appointed distributors.
It is also important that new investors closely examine the schemes and facilities provided according to their desired free trade zone. Each zone differs from the next.
It will be in the new investors’ best interest to consider the schemes and facilities offered by the free trade zones.
3. Offshore company
While it is a longstanding practice in other countries such as Panama, Hong Kong, and Monaco, the registration of offshore companies only came to the UAE’s shores in 2003.
The introduction of this legislation in 2003 has enabled foreign investors to incorporate offshore companies in the UAE. This allows investors to hold intellectual property and real estate, as well as open local bank accounts.
Similar to a free trade zone company formation, expats are given 100% ownership of the business. However, an offshore company cannot conduct business within the UAE.
Benefits of an offshore company
The rise of globalization means an offshore company can be a lucrative opportunity for foreign investors. Offshore companies offer foreign investors many benefits, including:
- Asset protection
- Low taxation laws
- VAT savings for services
- Investment diversification
- Lower levels of regulation
- Lower setup and maintenance costs
Disadvantages of an offshore company
The negative portrayal of offshore companies stems predominantly from investors incorporating offshore companies to avoid taxation and conduct illegal activities. Indeed, the main arguments against offshore companies would be the lack of transparency and credibility.
Even as a completely legal entity, offshore companies cannot be provided visas (not even for the owner of the company), nor can business operations be conducted throughout the UAE. Offshore companies can only invoice services where possible.
Making your mark
With the UAE’s government making it easy for expats to incorporate and conduct business in the UAE, Dubai has become a startup haven for foreign investors looking for their land of opportunity.
The phenomenal growth within Dubai showcases that the region is a strategic location for some of the world’s top venture capitalists. For foreign investors, Dubai is the ideal environment to successfully prosper and grow.
Despite being in a fledgling state, the startup scene in Dubai and the rest of the UAE is vibrant, solidifying its presence on the world stage.
Raj Herry is the Founder and Chairman of Flying Colour Business Setup Services. His extensive experience comes from more than 15 years in the field of company incorporation for Dubai Mainland, all Free Zones across the UAE and offshore companies worldwide. He also owns several business centres offering furnished and ready-to-move offices in Dubai.