A lot of people mistake a Free Zone company for an Offshore Company and vice versa.This is because of some major similarities like the fact that they can both be owned fully (100%) by an expat without having to associate with a local sponsor and the fact that both companies are registered and licensed by Free Zone Authorities. Apart from these two facts, they are both setup for completely different purposes.
If you are planning on doing business in the United Arab Emirates, it would be beneficial for you to know the differences between Offshore and Free Zones to ensure the smooth running of your business. Both of these have their own distinct features and they vary in terms of the limitations they impose on the business and the benefits they offer, depending on the type of business activities.
The Free Zones are created to attract companies that deal in trade and export. A company can have one of its branches in a Free Zone, and the branch is treated as an extension of the company and not as a separate company. In the scenario wherein a branch is in the Free Zone, the company needs to show itself as a solvent Free Zone entity. In order to be registered in a Free Zone, some requirements with regard to the initial share capital would need to be followed. These requirements vary depending on the Free Zone in question and are dependent on the purpose of the company. Companies can choose to either have a physical office in the Free Zone, or rent a virtual office if a full sized physical office is not needed. There are some restrictions that a Free Zone company has when conducting business in the UAE.
The Free Zones were mainly formed to attract the investors to operate business, some of the attractive business privileges they offer are:
- 100% ownership of your company
- Zero taxation
- No requirement to share 51% of your company with a local sponsor
- No customs duty for import/export
- Shareholders and the employees are eligible for getting UAE residency visas
- 25 years lease options, warehouse facilities, availability of areas for production and assembling
- Inexpensive workforce and easy recruitment procedure
An offshore company is flexible enough to have a mixture of features. Though offshore registrars are structured under free zone and it enjoys benefits that a free zone company does in terms of ownership, it cannot be used as a direct substitute for a free zone company.
The biggest difference between an offshore company and a Free Zone company is anonymity. That an Offshore company's details are kept anonymous and free zone company's information is available upon request.
The offshore company can open an account in a UAE based bank, and also invest in UAE and outside it. The company can also purchase land in a pre-demarcated area in Dubai, and any income gained by the company can be completely kept by itself in the bank account.
Also, there is no need for any minimum capital threshold, which is another key differentiator compared to a Free Zone company. Offshore companies are used as holding companies or asset companies for other organizations operating within or outside the UAE.
Moreover, an offshore company has its own advantages such as less setting up costs, no requirement to lease an office space and eligibility to own real estate. These companies have only office address and are registered in the UAE without being entitled to operate business activities directly in the UAE. The shareholders of offshore companies are not entitled to get residency visas.
According to the UAE laws, an offshore company shall not be considered as doing business in the UAE, if it:
- leases a property to be used as a registered office or owns real property on any free zone areas
- maintains business records within the UAE
- holds business meetings with the company members within the UAE
- holds a bank account in UAE banks for the purpose of conducting its routine operational transactions