Is export of clothing to UAE competitive?
Author: Dr. Markus Oliver Heidak (Senior Manager #FORTSCHRITT)
- 19.05.21 -
Until shortly before the outbreak of the corona pandemic, the United Arab Emirates (UAE) had developed into an important international hub for air and sea transport. As a result, the emirates of Dubai and Abu Dhabi in particular have gained international importance as business locations.
Of course, the corona pandemic and the stagnating low price of crude oil also left clear economic traces here in 2020. According to GTAI (Germany Trade & Invest), the emigration of many “expatriates” has placed an additional burden on the consumption-driven economy (GTAI 2020). The forecasts of well-known economic institutes were not very promising in 2020. The research institute “Economist Intelligence Unit (EIU)” assumed a 5.7% decline in economic growth at the end of 2020.
However, the forecast recovery (EIU 2020) has been confirmed thanks to extensive crisis management and a sophisticated vaccination campaign. Despite the crisis in the Gulf region, the trade hub Dubai is currently reporting growing business. The aim of the UAE is to achieve the past foreign trade volume as quickly as possible. Before the 2019 pandemic, the import volume was USD 241.1 billion and the export volume was USD 315.9 billion (see Table 1, Central Bank UAE, GTAI 2021).
Tab. 1: Foreign trade of the United Arab Emirates before Covid-19
IN THE STARTING HOLES
So the UAE will be back in the starting blocks for the global economy as early as the spring of 2021. The extensive range of different free zones should continue to motivate entrepreneurs worldwide to expand their local presence in order to open up new markets through a UAE company location.
The total number of companies operating in the free trade zones of the UAE rose by 4.4 percent to around 60,600 by mid-February 2021 compared to the same period in the previous year (Arabian Business Feb. 2021). According to the UAE's National Economic Register (NER), companies operating in UAE Free Trade Zones account for over 8 percent of the total number of companies registered in the UAE, with most of them based in Abu Dhabi and Dubai.
There are currently over 44 freezones in the UAE. They were primarily created to attract foreign investors through simple incorporation processes, labor and immigration procedures, no income tax and 100% property rights. However, the recently announced changes in property rights governing foreign ownership of companies in the UAE could put a question mark over the future role of freezones. In November 2020 it was announced that the UAE would be abolishing the need for companies to have Emirati shareholders. While this move has largely been welcomed as a positive step forward, it leaves question marks about the numerous freezones across the country. Experience over the past five years has shown that Freezone operators have always reacted very quickly to changing market conditions. As a result, it can be assumed that attractive start-up packages will continue to give the freezones a certain advantage compared to pure mainland companies.
WHAT MAKES FREEZONES SO ATTRACTIVE?
The existing free trade zones are spread over the entire seven emirates (Dubai, Abu Dhabi, Sharjah, Fujairah, Ajman, Ras al-Khaimah, Umm al-Quwain). We have summarized the economically most successful freezones in Table 2. The freezones can be roughly divided into free trade zones for ports, airports and the mainland. In general, free trade zones are geographically separated areas with their own laws and administrative regulations that are under the supervision of an autonomous authority. However, one should not think of the freezones in the UAE as fenced and isolated areas. Most of them are imposing office towers with good connections to the country's most important traffic arteries (Fig. 1.).
Tab 2 .: Overview of the economically most successful freezones in the UAE (source: Benchmark 2021 #FORTSCHRITT).
Fig.1: The Dubai Multi Commodities Center (DMCC) Freezone is located in the Almas Tower in JLT (center). The DMCC currently hosts more than 18,000 companies, including brokers, banks, commodities exchanges, business support firms and professional service companies. (Source: DMCC.ae; Pixabay.com)
A combination of different factors has contributed to the Freezones' success to date.
The most prominent aspects are e.g. B .:
- No corporate and income taxes
- Access to a wide network of double taxation and investment protection treaties
- No restriction on profit repatriation
- A sophisticated regulatory framework and appropriate control instruments
- Simple administrative management through digital management offers
- Worldwide connectivity through the hub Dubai (UAE) and Doha (Qatar)
- No ownership restrictions
These factors have made the free trade zones in the UAE increasingly lucrative and attractive. The unique selling point of the free zones is that they allow 100% foreign ownership. Most freezones are so-called "multi-purpose zones": They allow a variety of economic activities with different focuses (e.g. logistics, trade, production).
CHOOSE THE RIGHT FREEZONE
The Jebel Ali Freezone (JAFZA) in Dubai was the first free trade zone in the United Arab Emirates in 1985. Over the past 30 years, their model was first copied, then expanded and finally reinvented. The "new wave" of free trade zones are so-called "themed zones", which are limited to companies whose business plan matches the main topic of the zone, be it media, internet or financial services.
The selection of a suitable free trade area depends on a number of criteria, of which we have briefly summarized the most important:
- Availability of suitable licenses and subject areas.
- Prefer a suitable location (e.g. proximity to the main customers or shortening the supply chain). The location should also be considered in relation to the planned residence of the employees.
- The cost of starting and running a business varies from zone to zone. An important factor to consider is the cost of the business premises. As a rule of thumb, the further the zone is from an urban area - e.g. B. Dubai or Abu Dhabi City - the cheaper the premises will be.
- Some zones also offer inexpensive and versatile options in the form of flexi offices / smart offices / shared offices.
- Qualitative administrative and logistical support, e.g. B. for license processing, visa processing etc.
- Branding and credibility of the selected Freezone. The internal ratings of regional banks with regard to the most famous freezones are relevant if financing is required. There are clear differences here between established freezones and newcomers.
EXISTING LICENSE TYPES AND THEME ZONES
Choosing the right business license is of the utmost importance and one of the first steps in the process of incorporating a company in the UAE. Business activities in the UAE are essentially divided into four categories:
- Commercial license
- Professional license
- Industry / production license (Industrial license)
- Freelance license
Fig. 2: Overview of different Freezone license types
The trading license allows companies to trade both inside and outside the UAE. These include, for example:
- Trade in publications and media materials
- Trade in used furniture
- Trading in oil and gas
- Trade in spare parts
- Trading in gold and precious metals
- Chemical trade
- Trade in automobiles
- Trade in safety equipment
Any individual or company that generates income from the exercise of intellectual services is required to have a trade / professional license to offer their services in Dubai and the rest of the UAE. Advisory, auditing and legal services are covered by the Professional License in Dubai. IT service providers, freelancers, artists and craftsmen etc. can also apply for the Professional License in the UAE.
- Advice and services
- Insurance advice
- Computer consultations
- Information technology consultations
- IT infrastructure consulting
- Environmental advice
- Tax advice
- Marketing consultations
- Management consultancy
Industry / production license (Industrial license)
In order to be granted an industrial or production license, it is imperative that the company has a physical office in the UAE. There are several types of specific industry licenses:
- License to manufacture clothing
- Manufacture of meat products
- Manufacture of dairy products
- Manufacture of pet food
- Manufacture of carpets
- Manufacture of electrical appliances
Freelance work has already grown in popularity in the UAE. The freezones of Dubai, Abu Dhabi, Ras Al Khaimah and Fujairah already offer so-called “Freelance Permits” for individuals. These permits are for specialist media, technology, arts, and entertainment individuals who wish to provide their services on an advisory basis in addition to their full-time employment.
Currently, Dubai Media City, Dubai Knowledge Park, Dubai Internet City, Ras Al Khaimah Free Zone Authority, Fujairah Creative Zone, Twofour54 etc. all offer freelance permits for individuals. Freelance licenses are issued to the following creative and media professionals:
- Audio / sound engineer
- camera operator
- Media specialist
SELECT THE RIGHT SOLUTION - BUT HOW?
There are currently (as of March 2021) a total of 44 freezones in the UAE (ZITAT). For companies with the desire to expand, research can quickly lead to frustration, as the number of different offers can easily lead to confusion.
In the past few years we have observed that the choice of a specific free zone is often based on the recommendation of a business partner. Furthermore, entrepreneurs often associate the Freezone name with the future company. Software development companies, for example, often decide very quickly in favor of the “Dubai Internet City Freezone”.
As soon as founders begin to deal with the small print, however, a new question arises: How can we minimize the costs for company registration, or at least keep the costs as low as possible in the first year? With these thoughts in mind, the hunt for the best price usually begins.
However, company founders should not only look at the license fees, but also a number of other cost items that we will consider in more detail later.
INVESTMENT OR COST DRIVER?
Before we get into the details, let's first outline all the types of investments that can drive the total up or down:
- Registration fee
- License fee
- Rental costs for the Flexi-Desk, offices, warehouses
- Share capital requirement
The registration fee is a one-time payment that only needs to be budgeted for the first year. It varies from Freezone to Freezone and can range from a few thousand AED to 15,000 AED (3,388 EUR, rate May 2021). Since the focus is primarily on the annual operating costs, one should not only focus on the different high registration fees, as a relatively low registration fee can result in a fairly high license fee.
The cost of the annual license renewal (Tradelicense) varies significantly between the existing freezones. Prices range from AED 2,500 (EUR 564 rate May 2021) to AED 50,000 (EUR 11,294 EUR rate May 2021), depending on the licensing activities selected.
Flexi-desk or office rental
Flexi-Desk options are an important criterion, especially for start-ups and young companies. A Flexi-Desk is a desk that can be used monthly for a fixed period of time, but does not have to be. So anyone who likes to work from home is happy not to have to pay monthly for an expensive office. The price range for flexi-desk rental is between AED 10,000 (EUR 2,258, May 2021 rate) and AED 20,000 (EUR 4,517, May 2021 rate) per year and fluctuates only slightly between the individual freezones. It is important to know, however, that not all freezones in the UAE offer flexi-desk rental. Some only allow use in the first year, and from the second year onwards, moving to a standard office is mandatory. Of course, this is a strong cost driver that must be incorporated into your own business case.
For example, if you opt for the Dubai Airport Free Zone, you have to move to one of the offices on offer in the second year. But there are also freezones that do not offer a Flexi-Desk option at all. Furthermore, some freezones provide a job together with a quota for a residence visa, which is especially interesting for sole proprietorships.
Share capital contribution
Since the budget is an essential point at the beginning of the expansion, founders should also consider the physical payment of the share capital to the new Arabic company account. There are different regulations between the individual freezones and emirates with regard to the amount of the deposit. In Dubai, most freezones require a minimum deposit of AED 50,000 (EUR 11,294, rate May 2021), which is declared as the company's share capital. However, there are also other freezones in Dubai that allow a company to be set up without an immediate deposit of the share capital, such as B. Dubai South (former DWC Free Trade Zone).
An interesting aspect of the freezones from the northern Emirates is that the existing market is closely monitored in order to further increase one's own competitiveness. As a result, new start-up packages are offered again and again, which differ significantly in price from the Dubai and Abu Dhabi freezones.
In general, if you have a low budget, provide intellectual services and only need one or two residence permits at the beginning, you should consider setting up a company in one of the northern emirates.
Established companies that value a meaningful location are better off in Dubai. There is a wide range of well-established and well-known freezones here. However, there is no general recipe for making the right choice. Every single Freezone in the UAE offers a certain number of benefits. If you would like to know more about setting up a company in the free trade zones of the United Arab Emirates, please do not hesitate to contact our team of advisors.
Our benchmark analysis of the most important freezones in the UAE as well as our personal experience will help you choose the right freezone for your expansion. We help you to compare the criteria for setting up a company and to choose the right Freezone for your business requirements according to your needs.
Excursus: Our activities in the United Arab Emirates
#FORTSCHRITT, in conjunction with our cooperation partner Heidelberg Global Business Consult, began in 2016 to make these new business locations accessible to European start-ups and to open up new markets. Thanks to our on-site presence, we have been able to steadily expand our experience in setting up a company, entering the market and expanding over the past 4 years. Above all, the Freezones offer foreign companies numerous license options, so that offers are available for almost all economic activities.
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