Setting up an E-business in the UAE - Why participate in the fastest-growing E-commerce market of the Middle East
Contributed by Loggerhead Partners
22 June, 2020
The E-commerce industry has experienced incredible growth in recent years and is expected to keep on growing. According to official statistics the number of digital buyers worldwide will grow to 2.14 billion in 2021 compared to 1.32 billion in 2014. This is 62% increase in just 4 years. In 2019, E-commerce alone was responsible for around USD 3.5 trillion in sales. This number is expected to hit USD 4.9 trillion by 2021.
The growth of E-commerce and the ever-evolving consumer behavior have altered the course of global retail. Purchasing goods electronically has become a major trend, forcing retailers to remodel their business to maintain competitiveness and efficiency.
More recently we have seen the COVID-19 Pandemic, amidst all the devastating effects it has brought about, being the catalyst of a new wave of Digital Transformation, giving yet another boost to this thriving industry. As a Forbes contributor puts it, "COVID-19 is a before-and-after moment in the Digital Transformation".
In this monthly insight we will explore how the UAE has been fertile ground for the E-commerce industry for years and how it is prepared to disrupt the E-commerce industry in the future. We will scan through the currently available options to setup an E-commerce business and the newly introduced innovative solutions of the future.
E-commerce Growth in the UAE
The Middle East is continuing to experience monumental growth in E-commerce. It has grown consistently by 25% per annum in the past years with an estimated market value of USD 8.3 billion and is expected to increase fourfold in the coming four years.
This extraordinary rate of growth can be attributed to a number of key factors:
- High GDP per capita and disposable income
- Young, tech savvy population with almost 100% smartphone penetration amongst GCC millennials
- High adoption rate of social media
- Market entrance and development of key industry players
- Government support to promote E-commerce and position Dubai to become the leading distribution hub within the GCC, Africa and beyond.
As a sign of good health Souq.com was acquired by Amazon in July 2017 for USD 580 million. In February 2019, Emaar Malls acquired the web-based fashion retailer Namshi for a total of USD 281 million. more recently Emaar Malls has partnered with noon.com to open, in record time, The Dubai Mall virtual store that will support its retailers and the community in general to address the challenges posed by the COVID-19 situation. The initiative was soon followed by Mall of the Emirates who have recently launched a new online shopping platform called "Trends At Your Doorstep".
Geography, Infrastructure and Services
The extraordinary success of E-commerce growth in the UAE was made possible due to the UAE's geographical location, incredible infrastructure and first-class service industry.
Situated within eight flying hours from two-thirds of the world's population, the UAE is located in the heart of the trade routes of East and West, Europe and Asia. Its perfect location offers a unique advantage as international trade flows can be organized with a minimal cost. In the country itself, there are modern sea and air transport companies, ports and airports, all of which are connected with the leading international transport hubs, making the delivery of goods from and into any part of the world fast and easy.
To E-commerce business, and trading business in general, infrastructure matters as much as location does, as they heavily rely on quality infrastructure to successfully operate their business. Transportation, Communication and Technology are the pillars without which the E-commerce business simply cannot thrive and the UAE is well aware of this. In fact, back in 2005, H. H. President Sheikh Khalifa bin Zayed Al Nahyan ordered the implementation of comprehensive infrastructure and service facilities throughout the country, for which AED16 billion has been allocated. The program aims to develop quality, reliable, sustainable and resilient infrastructure, including regional and transborder infrastructure, to support both economic development and human well-being.
15 years later the results are evident. Today, the UAE is the proud owner of countrywide state-of-the-art infrastructure and logistics with respect to transportation, communication and technology. The 2018 Global Competitiveness Report, issued by the World Economic Forum, puts the UAE at the 1st place regionally and 17th place globally out of 137 countries for its world-class transportation networks and infrastructure:
- 1st in 'road quality' index
- 3rd in 'airport infrastructure and means of air transport quality' index
- World's busiest airport for international flights: Dubai International Airport (DXB)
- Building of the world's largest airport: Al Maktoum International Airport (DWC)
- 4th in 'seaport infrastructure quality' index
- Home to the 8th busiest port in the world: Jebel Ali Port
- 4th in the 'quality of infrastructure' index
And it is not stopping there. The country is continually evolving and now optimally prepared for the introduction of new technology and artificial intelligence.
Those fast to debunk the UAE's supremacy in areas such as infrastructure usually argue that the UAE is and will forever be an oil-based economy. We couldn't disagree more. To the contrary, the UAE is the very model of a modern Middle East Economy. While other countries in the region are still aspiring to grow beyond fossil fuel, the UAE has already done it in a superb fashion.
Oil production, which once accounted for 50% of Dubai's gross domestic product, contributes less than 1% to GDP today.
With its transparent legal framework, free-market and real trade economy, and a social model based on opportunities and cross-culturalism, the UAE has spread the seeds to a flourishing world-class service-based economy.
UAE based E-commerce companies benefit locally from all the vital corporate solutions they need in order to not only operate properly but thrive:
- Modern warehousing and storage facilities
- Digitalized and efficient Import/Export services
- First-class Website design services, Data Centers, and Cloud services
- International Digital and Marketing services (Catalog Management, Google product listings, Promotion management, etc.)
- Banks and payment gateways
We often hear that potential investors hold back setting up E-commerce businesses in the UAE due to the alleged cultural and language barriers. Whilst there are cultural specificities to the Middle East, the UAE is an English spoken nation and a business orientated economy where our professional staff can guarantee a smooth company formation process.
The setup you choose will depend on your size and objectives, and since the E-commerce industry is constantly growing and reshaping itself, we will provide you with professional advice.
The UAE offers solutions for big and small players alike. We will cover hereafter the traditional solutions (Onshore and Free Zone) and towards the end of this article we will introduce you to the more recent innovative solutions praised by the UAE Government.
Limited Liability Company (Onshore)
Onshore business setups are a very favorable option for E-commerce businesses because they allow E-commerce businesses to sell their merchandise to anyone in the UAE without relying on a local distributor (see Free Zone company below). On the other hand, they do require a UAE national to own 51% of the company shares even though the vast majority is willing to relinquish their voting right for a flat yearly fee against their services. For added peace of mind and a faster administration, a Management Services company can be assigned to hold the 51% ownership. This can be achieved relatively quickly but comes at a higher cost.
Loggerhead Partners will guide you through the entire process from A to Z. It will only take a few days to obtain the relevant Trading license from the Department of Economic Development (DED). With the company license obtained, the business is only a few steps away from becoming fully operational.
The UAE offers a wide range of service and non-service offices as well as warehouses to select from. Here you will find all the vital services to grow your business (Banks, payment gateways, logistics, website design, etc.). The zero tax is a factor that should not be overlooked. The UAE is a tax-free jurisdiction and as such there are no income tax and no corporate tax. The local standard VAT rate is 5% and customs duty is also 5% on imported goods.
Free Zone Company or Free Zone Establishment
This solution is particularly popular amongst two types of E-commerce companies: the newcomers and the international companies.
The Free Zone company solution is a more cost-effective solution for E-commerce businesses but requires appointing a local distributor which will reduce the retailer's margins.
The biggest advantages are: 100% foreign ownership, 100% profit repatriation, 0% personal and corporate tax, import and export tax exemption and no restrictions on currency. Loggerhead Partners will assist you in setting up in your choice of Free Zone and obtain the relevant trade license in under 2 weeks. All it takes is your passport copy and a short business plan.
Similar to the UAE mainland, most Free Zones offer a wide range of warehousing and storage facilities to choose from, ranging from serviced storage facilities to traditional warehouses which can be completely remodeled to the business owner's needs.
This solution is usually preferred by newcomers because it allows 100% foreign ownership and therefore avoids having to appoint a local sponsor. That is a relief for many small businesses who prefer to 'test the waters' before making the jump. The second reason is that Free Zone Companies are not allowed to trade outside their respective free zone. If they intend to, they must appoint a local distributor to sell products or services onshore. This can be a serious limitation for larger businesses or an opportunity for smaller businesses who do not yet wish to invest in the logistical distribution aspects of the business just yet. The local distributor will supply storage, customs clearance and distribution.
In addition to benefiting smaller companies, the Free Zone solution can also be beneficial for larger international E-commerce platforms. As we have already ascertained, companies established within a Free Zone are exempt from import and export taxes which allows them to import and store merchandise from various sources at 0% import tax before shipping them out of the UAE again. These companies will benefit from the convenient geographical location of the UAE, and from the modern transportation network as well as the large storage facilities available in dedicated Free Zones.
The UAE is constantly re-inventing itself through innovation and E-commerce is not exempted from this. The UAE Government recently announced the launch of major innovative solutions for the E-commerce industry that combine the benefits of a Free Zone company (0% Corporate Tax, 0% Income Tax, 0% Import and Export tax, 100% Foreign Ownership) and the benefits of an Onshore company through its dual licensing option (access to the onshore market without a local distributor).
Two new Free Zones have been entirely designed around the specific requirements of the E-commerce industry offering entire plug & play eco-systems dedicated to small to medium E-commerce companies. A perfect opportunity for smaller players to penetrate the market at low costs and high flexibility. Any business entrepreneur will only have to apply for the license and rent an office within the Free Zone to benefit from all other services available.
EZDubai, the 920,000 square-meter purpose-built E-commerce zone, is an AED 2.1 billion project located within Dubai South's Logistics District is designed to provide a range of logistics facilities and business solutions through structured regulatory framework, complete ecosystem, and the dual warehouse concept. It is home to the Al Maktoum International Airport (DWC), which will become the world's largest airport. Supported by a network of leading international supply chain providers, the free zone offers the distinct advantage of being able to efficiently cater to the continuously increasing and fast paced environment of today's E-commerce markets.
In October 2017, Dubai CommerCity launched as the first Free Zone to be completely dedicated to E-commerce. The AED2.7 billion. project has been developed as a joint venture between Dubai Airport Free Zone Authority (DAFZA) and Wasl Asset Management Group and is well-connected to major local and national highways. Its benefits include cargo and logistics services and an integrated infrastructure with easy access to land and seaports, which will help minimize supply chain costs.
The 2 projects will be structured around poles or clusters.
1. Logistic cluster
The logistic cluster will provide world class last mile providers supported by leading carriers saving hours and minutes enables efficient supply chain networks and important cost savings throughout the supply chain
- Supply centers for up to 60,000 square meters, E-fulfilment centers up to 100,000 sqm and last mile centers with facilities up to 5,000 sqm
- Return and repair centers: Return & Repair Centers enable cost-efficient return processes by providing shared services related to warranty, repair and recalibration of goods.
2. Business Cluster
The Business Blocks will provide the day to day solutions catering to the full range within the E-commerce industry. Offering smart desks, Shell & Core, and fully fitted offices
- Fitted-out offices available from 28 to 300 sqm
- Shell and Core offices available from 300 to 12,000 sqm
- Data Centers: Several Data Centers plots from 5,000 sqm
3. Social Cluster
The social cluster is the heart of the Free Zone, with its art galleries, a range of luxury restaurants and cafes, and vibrant facilities that meet the expectations of E-commerce companies looking to establish regional headquarters in Dubai. EZ Dubai will also offer residential solutions and social activities within the Free Zone.
We are certainly at a crossroads for retailers right now. The question is... to go online or not?
Luckily, it has never been simpler to setup an E-business in the UAE and the global demand for online marketplaces has never been so high. Whilst traditionally, the E-commerce industry was a market defined by high entry barriers and dominated by big players, it is now within the easy reach of small and medium retailers as well.
If you are interested in knowing more about E-commerce and how to set up your E-business in the UAE, reach out to us for a free consultation. At Loggerhead Partners, we will advise you on and execute the solution that suits you best.
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