There are few similarities between Free Zone and Offshore companies in the UAE, however, each of them are set up for completely different purposes. Before choosing a company type or your business in UAE, it is very important to understand what are the differences, advantages and disadvantages of a Free Zone company and an Offshore company.

To name some of the similarities, both type of companies can be owned fully (100%) by an expatriate without associating with a local partner (sponsor), the companies are entitled to have a bank account in the UAE banks, and most importantly, both companies are registered and licensed by Free Zone Authorities. Nevertheless, the are some crucial differences between these two types companies.

A Free Zone company refers to a company registered in one of the Free Zones in the UAE to operate business activities within the UAE or within the region. Free Zone means a designated tax free area where 100% foreign ownership is allowed, there is no customs duty for import and export of goods, there is no requirements to have a local partner or agent  to establish a business etc.However, unlike a Free Zone company, an Offshore company cannot operate business activities in the UAE directly, even though it is registered as a legal entity with relevant Free Zone authorities in the UAE.

UAE Free Zone Companies

Initially, Free Zones in the UAE were formed based on sea ports or airports and their purpose was to attract investors to operate mainly import-(re)export, manufacturing and trading businesses “through offering them various attractive business privileges such as:

• No taxation;
• No customs duty for import/export;
• No requirement to associate with a local partner to setup a company;
• 100% foreign ownership;
• Shareholders and the employees are eligible for getting UAE residency visas;
• and etc.

For instance, the oldest and largest Free Zone of the UAE is Jebel Ali Free Zone (JAFZA), located in Dubai, has been functioning since 1985 and attractive for operating trading, import/export and industrial activities. However, nowadays Free Zones in the UAE have taken different nature as they are not only seaport or airport based and offer not only trading and manufacturing licenses.

Currently, there are around more than 20 different free zones in Dubai itself offering business activities in almost all sectors of economy. For example, there is a Free Zone for healthcare providers (Dubai Healthcare City or DHCC); there is a Free Zone for educational and training institutions (Knowledge Village); there is a Free Zone for media companies (Dubai Media City), there is a Free Zone for providing financial services (Dubai International Financial Center or DIFC) and many others. Each free zone has its own rules and regulations ; however basic incentives as mentioned above are the same in all Free Zones.

UAE Offshore Companies

Though the registration of offshore companies is long existing practice in countries such as Monaco, Liechtenstein, Panama, and Hong Kong, the UAE started registering such companies only in 2003 with the issuance of the Regulation 2003 “On Offshore Companies” of Dubai.  As per the Regulation 2003, the Jebel Ali Free Zone Authority was authorized to register offshore companies in Dubai. Later, in 2007 two other Free Zones in Ras Al-Khaimah such as Ras Al-Khaimah Free Trade Zone (RAKFTZ) and Ras Al-Khaimah Investment Authority(RAKIA) were authorized to register offshore companies.

As it was mentioned earlier, UAE offshore companies are not entitled to operate any business activity in the UAE directly. However, an Offshore company can be a shareholder of any UAE Mainland and/or Free Zone companies, which enables it to enter into the UAE market and carry out allowed business activities through such subsidiary companies. Moreover, by law an Offshore company shall not be considered as doing business in the UAE, if it:

• uses legal, accounting, auditing, management consultancy and similar services of those who are based in the UAE;
• prepares and maintains books and records within the UAE;
• holds meetings of its directors or members within the UAE;
• leases a property to use as a registered office or owns real property on any free hold areas, where foreigners are allowed to own a property;
• holds a bank account in UAE banks for the purpose of conducting its routine operational transactions.

In general, Dubai (JAFZA) Offshore and RAK Offshore have comparatively similar rules and regulations. However, there is some variation the investors should consider. For example, RAK Offshore companies are not allowed to own real property in Dubai since January 1, 2011.

Conclusion

Thus, even though Free Zone and Offshore companies share some similarities, they have different roles and purposes. Free Zone companies are used for operating business in the UAE while having a physical presence, while Offshore companies have only office address and registration in the UAE without being entitled to operate business activities directly in the UAE. Moreover, shareholders and employees of Free Zone companies are entitled to get UAE residency visa(s), while this is not the case with Offshore companies.

However, Offshore companies have its own advantages as well such as eligibility to own real estate,  less setting up costs and no requirement to lease an office. Therefore, before choosing a type of company for your business, it is very important to correctly understand what are the differences, advantages, disadvantages and purpose of each of them.