EXPANDING YOUR BUSINESS FROM MAINLAND TO FREE ZONE (OR VICE VERSA) IN THE UAE

This article has been researched and written by the Business Development Team at Creation Business Consultants. AI has not been used in generating this article.

Are you planning to expand your business operations in the UAE? Transitioning between mainland and free zones can offer significant benefits and potential growth opportunities. In this post, we will discuss how to successfully transition your business between the mainland to a free zone (and vice versa) in the UAE.

WHAT ARE THE ADVANTAGES OF EXPANDING YOUR BUSINESS FROM A FREE ZONE TO MAINLAND (OR VICE VERSA)?

Companies moving from a free zone to the mainland, access a broader customer base, may be able to enter government contracts, or simply have the ability to establish a local presence and build credibility and trust with customers and partners. Alternatively, businesses exiting the mainland to the free zone may enjoy cost-saving benefits, relaxed regulations, and operational freedom. There are many examples of businesses that have successfully transitioned and benefited from the transition. We will also refer to several large multinational corporations being based in UAE free zones, including Amazon, DP World, Adidas, Google and Microsoft.

WHAT ARE THE LEGAL AND REGULATORY CONSIDERATIONS FOR BUSINESSES EXPANDING FROM A FREE ZONE TO MAINLAND (OR VICE VERSA)?

When growing or expanding your business outside of your current jurisdiction (i.e. mainland and free zones in the UAE), some of the legal and regulatory considerations should include:

• LEGAL FRAMEWORK:

First, it is important to understand the legal framework for business setup in both mainland and free zones. Each will have specific regulations and requirements you must follow for business operations.  The key elements for businesses to be aware of the legal framework include:

• • Commercial Companies Law.
  • Federal Tax Authority (FTA) Laws.
  • Labor Law.
  • Commercial Agencies Law.
  • Free Zone Regulations.
  • Intellectual Property Laws.
  • Competition Law.

• LICENSING REQUIREMENTS:

There are different licensing requirements for businesses operating in mainland areas in comparison to businesses operating in free zones. It is important that a business knows and understands its licensing requirements and its obligations for compliance when it expands. Below are the major pointers, such as:

• • Mainland licensing overview:

• • • Commercial license allows a business to operate within the mainland.
    • A professional license is designed for businesses providing services or some professions.
    • Industrial license required for companies operating in industrial or manufacturing activities.
    • DED approval is required from the Department of Economic Development for all mainland businesses.
    • Some business activities will also require additional external approvals, for example, a restaurant will require further external approvals, such as the municipality, civil defence and so forth.

• • Free zone licensing overview:

• • • A free zone business license is specific to the activities permitted within that free zone jurisdiction.
    • A free zone may offer some flexible workspaces for a business, i.e. flexi desk, office, warehouse, etc.
    • With free zones, businesses must lease office space, and this office space is based on the number of visa eligibility, that is, the more visas your company will seek then the larger office space your business will need to lease within a free zone area only.
    • The company Memorandum and Articles of Association (MOA AOA) stipulate the business activities and business structure in the free zone.

Understanding these differences and complying with the related requirements is crucial to ensure compliance and a productive business operation in the UAE.

• TAXATION LAWS:

Taxation laws are distinctly different when comparing mainland areas to free zones, which can affect the way businesses treat their costs and earn profits. It is important for businesses, when considering expansion, to review the tax necessary and its associated financial exposure. Important tax aspects are:

• • • Value Added Tax (VAT).
    • Corporate Tax.
    • Withholding Tax.
    • Customs Duties.
    • Excise Tax.

• VISA REGULATIONS:

The UAE has specific regulations that apply to visas and employees within a free zone or mainland area. Businesses expanding their operations need to understand visa requirements for employees and ensure compliance with relevant regulations.

FINANCIAL IMPLICATIONS AND COST ANALYSIS

When contemplating expansion between mainland versus free zones in the UAE, it is essential to view the financial exposure and complete a full analysis. Here is what to consider:

• SETUP COSTS: The costs behind the establishment of a business may differ based on location, either the mainland or a free zone. Hence, businesses have to consider licensing costs, rental costs for office space, and other costs associated.
• TAX IMPLICATIONS: The taxation laws differ between mainland areas and free zones, significantly affecting business and tax obligations. They are the similarities or possible exemptions associated with these obligations, which are important to understand and plan for with a financial impact.
• FINANCIAL BENEFITS: Mainland and free zones both present various types of financial support to businesses in the form of tax incentives and exemptions to duty. Different forms of financial support have varying implications for expansion. Identifying these financial supports could influence future decisions regarding business growth and expansion.
• COST ANALYSIS: A cost analysis is vital when deciding to expand from, or to, the mainland and free zones. Such an analysis is vital to clarify the costs associated with establishing the business, the costs associated with ongoing operations, the tax implications, and the potential for financial gain. To evaluate the financial side of the investment, to confirm if the business expansion is viable, a cost analysis is required.

It is possible for businesses to make informed decisions regarding pending expansion to, or from, the mainland and a free zone through legal and regulatory decisions, as well as detailed cost analysis of existing financial support or costs.

STRATEGIC CONSIDERATIONS FOR SUCCESSFUL BUSINESS EXPANSION

Transitioning from either a mainland or free zone, which in some cases may include jurisdictional challenges, will involve operational challenges due to cultural, administrative or logistical differences. A successful transition will require negotiating with governments to overcome bureaucratic challenges, as well as using operational processes to make the transition as smooth as possible. Building local partnerships and using all possible experience and networking opportunities, prioritises operational challenges, ensuring decisions have sustainable measures for future growth.

Ultimately, market analysis, targeting aimed at understanding the audiences that will support the business, and developing a planning template for successful expansion are critical. Using local insights, forming strategic partnerships and developing timelines can help establish successful transitions from either a mainland to a free zone (or vice-versa), in ways that will help maximise growth potential in the UAE market.

CASE STUDY

TechSolutions LLC was started as a technology services company based in a UAE Free Zone, where they have been able to grow and expand within their niche. Although TechSolutions was initially attracted to the 100% foreign ownership, tax-free environment and restrictions on UAE local sponsors/partners, the company progressed from its teenage years, and its market expanded as it continued to service customers throughout the UAE. It became apparent when TechSolutions expanded its customer base to the entire UAE that it was ready to move on to the mainland for greater potential market and brand presence.

CHALLENGES FACED:

• Regulatory Constraints: Free Zone registration excluded TechSolutions from certain government contracts or sectors, limiting its potential growth.
• Customer Reach: TechSolutions experienced success in its niche market. However, reaching customers or offering services outside of the geographical limits of the free zone posed challenges to its market penetration strategy.
• Credibility and Trust: The free zone structure offered some advantages; however, for trust and credibility, newer clients perceived mainland UAE companies as better candidates to provide services.

TRANSITION PROCESS:

The transition process was intended to allow TechSolutions to move from the free zone to mainland Dubai, using its existing expertise and networks to ensure a fluid process. The transition plan involved:

• Legal and Regulatory Compliance: TechSolutions was compliant with the legal and regulatory parameters of establishing a mainland entity and continues to adjust to comply with all aspects of licensing, tax and visa requirements.
• Market Analysis: Similar to its customers and competitors, TechSolutions undertook thorough market research to narrow down a defined demographic of select target customers and competition, while at the same time adjusting its services to suit the requirements of the wider UAE market.
• Operational Optimisation: TechSolutions analysed and changed operational procedures, and all internal processes, while also preparing all staff for going “mainland”, and emphasised the importance of changes to workflow processes.
• Branding and Marketing: To increase its visibility and credibility with the mainland market, TechSolutions modified its branding, and marketing, to portray itself as a reputable agency in the technology service space.

THE TRANSITION RESULTS:

• Expanded Market Reach: TechSolutions was able to establish itself in the mainland market and reach broader customers – government, corporations and SMES – new revenues diversified from niche in the technology services market.
• Enhanced Credibility: As a mainland entity, TechSolutions established a higher level of credibility and trust with clients and partners, which increased opportunities for collaboration as well as increased client acquisition and sales.
• Access to Government Contracts: Moving to the mainland allowed TechSolutions access to government contracts and procurement opportunities, which opened more revenue possibilities and strengthened their footprint in the market.
• Improved Operational Flexibility: The move allowed for enhanced operational flexibility for TechSolutions to change their operational plan at a fast pace, given the dynamic changes to the market and also allows for new opportunities.

TAKEAWAY

Ultimately, moving between the mainland and the free zone in the UAE requires planning and flexibility. Understanding the legal, financial, and operational components is valuable and critical. By leveraging all the benefits associated with both types of setups, businesses will be able to increase and find success in the UAE. If you are interested in exploring options in the UAE, reach out to our team, and we can start the process of growing your business in the UAE!

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