What is a freezone? A comprehensive guide for beginners

The United Arab Emirates (UAE) is one of the most attractive locations in the world for companies and investors. A key reason for this are the so-called "free zones" or free trade zones, which have played a key role in the economic development of the country in recent decades. But what exactly is a free zone and why are they so popular? In this article, we explain in detail what free zones are, how they work and why they are so interesting for entrepreneurs.

Definition: What is a free zone?

A free zone (also known as a free trade zone) is a specially designated geographical area within a country that offers special economic and legal conditions to attract foreign investors and companies. In the UAE, free zones were introduced to promote economic diversification and attract foreign capital into the country.

Essentially, free zones are independent economic zones with special regulations that are often independent of the rest of the national legal system. They offer many advantages specifically aimed at international companies, including tax exemption, 100 % foreign ownership and simplified incorporation processes.

How do freezones work?

Free zones in the UAE are organized according to specific sectors or industries. Each free zone is administered by its own authority, which controls the licensing, registration and regulation of companies within its zone. Examples of known freezones are:

- Jebel Ali Free Zone (JAFZA): One of the oldest and largest free zones in Dubai, specializing in logistics and trade.

- Dubai Multi Commodities Center (DMCC): Focuses on commodities such as gold, diamonds and tea trading.

- Masdar City Freezone: Especially for companies in the renewable energy and environmental technologies sector.

Each free zone has its own regulations, fee structures and requirements. Companies can only operate within the respective zone, unless they receive additional authorization for business outside the free zone.

Advantages of a free zone

1. 100 % foreign ownership

Most other business forms in the UAE require a local partner or sponsor to own at least 51 % of the company shares. In a free zone, however, foreign entrepreneurs and investors can fully own their company without a local partner.

2. tax exemption

Companies in free zones are generally exempt from corporation tax and income tax. This often applies for a period of 15 to 50 years, depending on the zone in question. Import and export duties are also waived in many cases.

3. simple company formation

The incorporation process in a freezone is significantly faster and less complicated than in other areas of the UAE. The freezone authorities often offer "one-stop stores" where all the necessary formalities such as company registration, visa application and bank account opening can be completed.

4. flexibility with visas and labor law

Companies in a free zone can apply for work visas for their employees relatively easily and quickly. There are also less stringent regulations compared to other business models in the UAE.

5. modern infrastructure

Freezones offer state-of-the-art office buildings, warehouses and logistics centers that are specially tailored to the needs of international companies.

Disadvantages and restrictions

1. restrictions for the local market

A company registered in a free zone is generally not allowed to do business directly in the local UAE market (i.e. outside the free zone) unless a local dealer or distributor is involved.

2. specialization can be limiting

Some free zones are specialized in certain industries or activities. This means that you may only be able to operate in a certain zone if your business activity fits this specialization.

3. cost advantages are relativized

While the tax exemption and other benefits are tempting, the fees for registration and annual license renewals can be quite high in some freezones.

Who is a free zone suitable for?

Freezones are ideal for:

- International companies wishing to do business in other countries from the UAE.

- Start-ups and small businesses that want to benefit from tax exemption and lower entry barriers.

- Sector-specific companies that can operate in a specialized free zone (e.g. technology, logistics, media).

- Entrepreneurs who wish to own 100 % of their company shares.

The process of setting up a company in a free zone

Setting up a company in a free zone usually involves the following steps:

1. choice of free zone: Decide on a zone that suits your industry.

2. application for a license: Apply for the appropriate business license (e.g. trading, service or production license).

3. submission of documents: Submit the necessary documents, e.g. passport copies, business plan and application forms.

4. registration: Register your company with the Freezone Authority.

5. applying for visas: Apply for your own visa as well as work visas for your employees.

6. open a bank account: Open a business bank account in the UAE.

Examples of known free zones in the UAE

- Dubai Airport Freezone (DAFZA): Perfect for companies that rely on international logistics.

- Dubai Internet City: home to many technology companies and start-ups.

- Ajman Free Zone: A cost-effective option for smaller companies.

- Ras Al Khaimah Economic Zone (RAKEZ): Popular for its low fees and flexible regulations.

Why a free zone is a great option

Freezones offer foreign entrepreneurs and companies a unique opportunity to gain a foothold in the UAE. With benefits such as tax exemption, easy company formation and state-of-the-art infrastructure, they are an ideal solution for anyone looking to establish an international presence.

However, the specific requirements and restrictions of each zone should be carefully considered before deciding on one. With the right planning and support, a free zone can be the first step to your business success in the UAE.

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