International Company Formation - Dubai
By Global Incorporation Guide Editorial
24 January, 2013
With newly released figures showing that the Dubai International Financial Centre (DIFC) had another good year in 2012, this article looks at the advantages of establishing in the DIFC and other major free zones in Dubai, including the Jebel Ali Free Zone, and the Dubai Internet City, as well as some of the requirements that prospective free zone companies must meet to begin operating in them.
The DIFC was launched in 2004 and has a separate set of laws called the Commercial Code. This Code comprises a comprehensive set of regulations like company law, legislation on property rights, including laws on security and collateral, title to goods and securities, commercial transactions and contracts, and insolvency. The DIFCs legislative framework is designed to attract international companies to establish headquarters in the zone focusing on the following six sectors: Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments, Derivatives & Commodity Trading); Asset Management & Fund Registration (Fund Registration, Fund Administration & Fund Management); Reinsurance; Islamic Finance and Back Office Operations.
One of the main advantages of establishing operations in the DIFC is that it represents a bridge between Western and Eastern time zones, and while companies incorporated there are not allowed to do business in Dubais retail investment and banking market, they are permitted to sell services to local high net worth individuals in a region which has an increasing population of wealthy individuals.
Aside from its locational advantages, the other obvious lure of the DIFC is tax, or, more accurately, the lack of it. Under Dubais free zone laws, 0% income tax is guaranteed for a period of 50 years, and other benefits include 100% foreign ownership, no restrictions on foreign exchange or capital/profit repatriation, operational support and business continuity facilities.
This extremely favourable tax regime has allowed the DIFC to flourish, even through the difficult global economic conditions post-2008. At the end of 2012, 19 of the worlds top 25 banks, 11 of the worlds top 20 money managers, eight of the top 10 insurance companies, and six of the top 10 legal firms were established in the DIFC. The number of active registered companies within DIFC increased to 912 during 2012, with the addition of 38 regulated firms, including Bank of China Middle East (Dubai) Limited, Guy Carpenter (Middle East) Limited, Royal & Sun Alliance Insurance PLC, Abu Dhabi Capital Management Limited, Neuberger Berman Europe Limited, Standard Life International Limited and Dechert LLP. The combined workforce of DIFC-registered companies currently stands at over 14,000, a 16% growth rate in comparison with the previous year.
In 2012, many of DIFCs current clients opted to grow their physical presence within the Centre by expanding their current office space by up to 10,000 square feet, a trend that was most apparent during the second half of the year. The occupancy within third party owned office space managed by DIFC under the Property Lease Management Agreement (PLMA) stands at 90% (total PLMA area: 535,000 square feet). This space includes Currency House, Currency Tower and part of Liberty House. New companies registered with DIFC in 2012 accounted for the leasing of approximately 260,000 square feet of space, in addition to the physical growth of existing companies resulting in the lease of almost 35,000 additional square feet.
To meet the growing demand in DIFC, around 877,553 square feet of GFA (Gross Floor Area) of space was made available in the Centre during the second half of 2012, in the form of the recently opened Daman offices. Office space is also available in other third party owned and managed properties including the Index Tower, Park Towers and Emirates Financial Towers.
The DIFCs increasingly diverse geographical mix of clients is reinforcing its growing reputation as the gateway between East and West, with the Centre currently facilitating regulated firms from across the globe, including 37% from Europe, 26% from the Middle East, 18% from North America, 11% from Asia, and 8% from the rest of the world.
According to the DIFC Authority Dubai is now ranked as the top financial centre in the Middle East, Africa and South Asia region, and one of the top five globally, alongside Singapore, Hong Kong, London and Shanghai.
As Jeffrey Singer, CEO of DIFC Authority, observed: Dubais unique proposition and geographical positioning provide unrivalled opportunities in terms of connectivity and accessibility to the thriving Middle East, Asian and African markets. The growth we have witnessed within DIFC reflects the ongoing demand among international businesses for a presence in the region.
In spite of global economic challenges, DIFC has delivered a robust performance across all areas of the business. Our strategy remains the same and by capitalising on our world-class infrastructure and internationally recognised legislative and regulatory framework, we are creating a platform for global and regional companies to build fruitful and sustainable business relationships within a comprehensive financial environment, Singer added.
Incorporation in the DIFC
The DIFC has its own Registrar of Companies, which was established under Article 7 of the DIFC Law No. 3 of 2006 (Companies Law). Its role is to advise on, receive, review and process all applications submitted by prospective DIFC registrants seeking to establish a presence in the DIFC in accordance with the Companies Law, the General Partnership Law, the Limited Liability Partnership Law, or the Limited Partnership Law.
Under the Companies Law, the following three types of corporate entity may be established in the DIFC: a Company Limited by Shares (LTD), a Limited Liability Company (LLC); and a branch office of a pre-existing foreign company (Recognised Company). It is also possible to transfer the incorporation of an existing company to the DIFC from another jurisdiction.
General Partnerships (GPs), Limited Liability Partnerships (LLPs) and Limited Partnerships (LPs) may also be established under the General Partnership Law, the Limited Liability Partnership Law, and the Limited Partnership Law, respectively. Braches of GPs, LLPs and LPs may also be incorporated under these laws. A party may also seek to transfer an existing limited partnership into the DIFC from another jurisdiction, and these entities are known as Continued Limited Partnerships or Foreign Limited Partnerships.
An LTD or LLC may be established in the DIFC by one or more natural persons or corporate entities; LLPs, GPs and LPs may be established by two or more persons provided in the case of an LLP that a natural person is the designated member of the LLP. The Recognized Company form may only be set up by another corporate entity, while Recognized Partnerships may only be set up by other existing partnerships.
While LTDs, LLCs, LLPs and LPs are "incorporated" entities, having separate and independent legal status from their incorporator(s), a Recognized Company or a Recognized Partnerships is a "registered" entity and is an extension of the foreign-incorporated company/partnership through whose head office it is registered in the DIFC.
A certificate of registration is issued by the Registrar of Companies upon the establishment of an LTD, LLC, LLP or LC. A Certificate of Registration is issued to the head office or partnership upon the establishment of a Recognized Company or Recognized Partnership/Recognized Limited Liability Partnership/Recognized Limited Partnership. A Certificate of Continuation is issued to an entity which has transferred incorporation or limited partnership to the DIFC.
In practice, there is very little difference between these three types of certificate, which bear the seal and signature of the ROC, the name and status of the incorporated, continued or registered entity, its registration number, and the date of issuance.
Simultaneously with the issuance of a certificate of incorporation, registration or continuation, the Registrar of Companies also issues a Commercial License. The purpose of a Commercial License is to expedite contracting for municipal and commercial services essential to the establishment and operation of the licensees premises and carrying out its on-going operations.
The Commercial License sets out the license number as well as the licensees name, operating name, legal status, address, permitted activities, authorized managers name, and the issuance and expiry dates of the license. The Commercial License is renewed annually, by payment of annual renewal fee to the ROC no later than thirty (30) days after the expiry date.
However, it must be stressed that the Commercial License does not authorize the licensee to undertake Financial Services requiring a DFSA license (see next section, below).
Before a company can begin business in the DIFC, it must obtain authorisation from the Centres financial regulator, the Dubai Financial Services Authority (DFSA).
It is recommended that the first port of call for prospective licensees is to contact the Business Development Department (BBD) at the DIFC Authority. The BBD employs teams of relationship managers who advise companies on the application and registration procedures and who are available to assist applicants throughout the application process. However, a brief summary of the DFSAs requirements follows below.
Before a firm can become Authorised, the DFSA must be satisfied that the applicant meets a fit and proper test, and that it will continue to do so on an ongoing basis.
An Authorised firm must be a body corporate or a partnership (see incorporation procedures, above). If a branch of a foreign firm is established in the DIFC, the DFSA would expect the foreign jurisdiction to have internationally compliant regulatory and legal standards. Authorised firms must also carry on business from a place of business within the DIFC.
As part of the licensing application procedure, the DFSA seeks to establish that it will be able to effectively supervise the firm, and will examine any links with related entities, such as a parent or subsidiary company, which could hinder effective ongoing supervision.
A firm must also have adequate resources to carry out the proposed financial services, including financial resources and adequate systems and controls, and must have an internal audit function.
In addition, a Senior Executive Officer, a Compliance Officer, an Anti-Money Laundering Reporting Officer and a Finance Officer must also be appointed by an Authorised firm, the first three of which must be resident in the United Arab Emirates.
Upon payment of the appropriate fee, which ranges from USD15,000 to USD70,000 depending on the type of business the prospective licensee intends to carry out (there are 23 recognised activities in the DIFC), the DFSA aims to acknowledge the receipt of an application within two days; send an initial review letter within 10 days; and complete a final review and recommendation within four months.
If an application is successful, the DFSA issues an in-principle letter allowing incorporation procedures to be completed with the DIFC Registrar of Companies. A DFSA licence will be issued upon successful registration with the Registrar of Companies, and providing the firm can show that it is sufficiently capitalized.
Jebel Ali Free Zone (JAFZ)
The JAFZ, located in Dubai, was established in 1985 and spreads over an area of 48 square kilometres. Home to over 6,400 companies, including over 120 Fortune Global 500 enterprises, it is the largest free zone in Arabia and one of the worlds largest and fastest-growing free zones.
The option of setting up in Jebel Ali is most suitable for companies intending to use Dubai as a regional manufacturing or distribution base and where most or all of their turnover is going to be outside the UAE.
The JAFZ was set up with the specific purpose of facilitating investment, something it has been very successful in doing; it is said that over one-quarter of Dubai's GDP is generated by the Jebel Ali zone. Accordingly, the procedures for setting up in the zone are relatively simple. And, as with the DIFC, its legal status is quite distinct: companies operating there are treated as being "offshore", or outside the UAE for legal purposes.
Like all of Dubais free zones, companies established in the JAFZ are exempt from corporate income tax for a period of 50 years. 100% foreign ownership and 100% repatriation of capital and profits are also permitted. In addition, there are no import or re-export duties, no personal income taxes, no currency restrictions, and no restriction on hiring foreign employees.
Incorporation and Licensing Requirements
A Free Zone Establishment - or FZE - is an establishment formed and registered in Jebel Ali and regulated solely by the Free Zone Authority. Such establishments must have a capital of at least AED1m (USD270,000) and liability will be limited to the amount of paid-up capital. A FZE need only have a single shareholder and is an independent legal entity.
Any company, organisation or individual wishing to form a Free Zone Establishment must submit a completed application form to the FZE Department of the Free Zone Authority. A decision on whether permission has been granted will be given within 30 days of receipt of the application and any other information and documentation required.
If permission is granted, the Authority will record all relevant details in the FZE Register and issue a Certificate of Formation. This will specify the date of registration after which the FZE will be free to conduct any such business as is permitted in its Special Licence.
Companies approved for operation in Jebel Ali Free Zone are granted one of the following types of licence, renewable annually for as long as the company holds a valid lease from the Free Zone Authority (Jafza):
- A General Trading Licence allows the holder to import, distribute and store all items as per Jafza rules and regulations.
- A Trading Licence allows the holder to import, export, distribute and store items specified on the licence.
- An Industrial Licence allows the holder to import raw materials, carry out the manufacture of specified products and export the finished product to any country.
- A Service Licence allows the holder to carry out the services specified in the licence within the Free Zone. The type of service must conform to the parent company's licence, issued by the Economic Department or Municipality of the relevant Emirate in the UAE.
- A National Industrial Licence is designed for manufacturing companies with an ownership or shareholding of at least 51% in GCC hands.
Dubai Internet City
In February 2000, Dubai's then ruler Sheikh Maktoum bin Rashid al-Maktoum issued a decree setting up a free-trade zone for electronic commerce and technology.
The decree established an independent body, the free zone authority headed by Crown Prince Sheikh Mohammed bin Rashid al-Maktoum, which would operate under the Dubai government to spearhead the emirate's drive to become a regional centre for electronic commerce, technology and information.
The free zone authority oversees the establishment of the necessary infrastructure at the zone, licenses companies wishing to set up shop there and leases land and property to them for up to 50 years. The authority also runs the zone, and levies fees for its services.
Companies are allowed 100% foreign ownership in the zone. Goods imported to the zone and products for export are exempt from custom duties and companies are exempt from taxes, including income tax.
There are also a number of other significant advantages to setting up in the Dubai Internet City free zone, including:
- World class technical infrastructure: high bandwidth, low cost telecom infrastructure and secure, high speed support infrastructure;
- State-of-the-art urban infrastructure: cost competitive, flexible office space and world class housing, medical and education facilities;
- Access to talent pool: large pool of high skill, low cost knowledge workers;
- Straight-forward laws and regulations: easy and fast company registration laws, hassle-free immigration process and straight forward legal procedures;
- Supportive environment: Government backed e-business initiatives, business incubators, venture capital funds and e-education programs;
- Gateway to markets: access to regional markets in Middle East, North Africa, Indian Subcontinent and CIS.
Reports in 2012 suggested that Dubai Internet City was attracting around 14 new investors per month, and in a recent interview, Malek Sultan Al Malek, Managing Director of Dubai Internet City and Dubai Outsource Zone, commented: "[In 2011], 169 new companies registered with us despite the economic downturn. This reflects the resilience in the information and communication technology (ICT) sector. Throughout the last decade we have managed to create a vibrant ICT cluster that is growing."
Dubai accounts for almost 60% of e-Commerce spend in the GCC according to a review brought out in 2011 by Visa and Interactive Media in Retail Group International, an industry body for global e-Retail. The report shows that total business to consumer e-Commerce sales in the UAE are estimated to have grown to almost USD2 billion in 2010, equivalent to approximately 55-60% of total GCC e-Commerce sales estimated to be between USD3 and USD3.5 billion. They are expected to reach USD5 billion by the end of 2011.
Incorporation and Licensing Requirements
Companies can choose to incorporate in one of three ways:
- Branch of Foreign Company:
- Branch of UAE-based Company (including other UAE Free Zone licensees);
- Free Zone Limited Liability Company (FZ LLC).
Submission of the License application form can be done electronically through the Dubai Internet City site.
FZ-LLCs incorporated in Dubai Internet City are required to have minimum paid up capital of AED50,000. Branch establishments have no minimum capital requirements.
Commercial licenses and freelance permits issued by Dubai Technology and Media Free Zone Authority are subject to leasing a facility within the free zone and the license is valid only for operating a business inside the free zone territory. Licenses and permits are for a period of one year and are renewable on an annual basis.
Commercial licenses and permits are issued to all businesses registered within Dubai Internet City, to allow specific approved business activities in compliance with the Dubai Technology and Media Free Zone Licensing Regulations.
Businesses from the following sectors may apply to become part of the Dubai Internet City business community:
- Software - Activities related to developing, installing, and/or modifying software products of their own or of a third party.
- Internet and Multimedia - Activities related to developing and/or distributing Internet or multimedia content. Other activities may include distributing goods or services via the Internet, such as by providing an online platform and acting as an intermediary between multiple companies or multiple individuals. Additional activities may include providing different applications through a network.
- Telecommunication and Network - Activities related to developing, installing, modifying, and/or operating networks or providing relevant services designed for operating network-based applications or services. The manufacture of physical components within the zone and direct trading of physical components and products into UAE markets is not allowed.
- IT Service - Activities related to developing, providing standardized, repeatable IT-based services, which may also include security solutions, localization, training and corporate learning.
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