Introduction
The United Arab Emirates (UAE) has developed into an international business and investment centre with different types of companies that can be customised to accommodate the local and foreign investors. The availability of Free Zones, which are special economic zones that offer taxation incentives, an easy incorporation process and full foreign ownership, is one of the most appealing aspects of its business environment.
In such Free Zones, investors usually have two major choices of setting up a company: the Free Zone Establishment (FZE) and the Free Zone Company (FZC). Both of them have similar benefits within the framework of the Free Zone regulations, but at the same time, they are varied in terms of ownership, capital needs, and some details of functioning.
In this note, these differences are discussed in a systematic way, giving a complete insight into both types of business entities.
Knowledge about Free Zones in the UAE
- Definition
Free Zones in the UAE refer to the geographical regions in which businesses can establish their operation under specific conditions that differ from those of normal businesses operated on the mainland. They are geographic areas that are aimed at attracting foreign investments and developing certain sectors of the economy that include logistics, media, technology, and finance.
- Advantages
- Complete capital and profits repatriation.
- No personal income tax.
- Waiver of import and export tax in the Free Zone.
- Streamlined customs procedures.
- Simplified procedures in company registration.
- Legal Framework
The Free Zones have their own regulatory bodies, which include:
- Dubai Multi Commodities Centre (DMCC)
- Jebel Ali Free Zone Authority (JAFZA).
- Sharjah Airport International Free Zone (SAIF Zone).
- The Abu Dhabi Global Market (ADGM) is one of them.
These are the authorities that grant licences, control activities and violations.
General summary of Free Zone Establishment (FZE)
A Free Zone Establishment (FZE) is a company form that enables one person or a corporate entity to be the sole owner of a company, which can have up to 100 per cent as a share. It is an independent legal person that is not related to its owner, i.e. can enter into contracts, own property, and incur liabilities under its name. The shareholder is liable for the amount he has invested in the company.
FZE is best suited when the business owner or entrepreneur desires to make all decisions on his own. The minimum capital to establish an FZE depends on the Free Zones, although it tends to begin at approximately AED 50,000. The corporate hierarchy of an FZE is also easy since it demands a single shareholder and a single director. The company is also appealing to individual founders, consultants and small businesses in the sense that it enables operation with little administrative formality.
Introduction to Free Zone Company (FZC)
Free Zone Company (FZC), however, is established when there are two or more shareholders, up to a maximum of five shareholders. These shareholders can be either individuals, corporations or both. Similar to an FZE, an FZC is also subject to limited liability, i.e. the liability of shareholders is limited to their capital input.
The FZC is more appropriate when it comes to partnerships or joint ventures in which more than one investor is required. The general incorporation process is similar to that of an FZE; however, an FZC requires more paperwork, particularly regarding the share distribution, voting rights, and management duties. In most cases, there must be a board of directors or several signatories in an FZC to manage the affairs of the company. The capital requirements are similar to those of an FZE, but particular Free Zones can have slightly different minimum amounts. The structure gives the flexibility to conduct business collaboratively whereby various parties can share resources and expertise without the disadvantage of having to operate within a Free Zone setting.
Comparative Analysis: FZE and FZC
The major difference between FZE and FZC is the number of shareholders. Only one FZE is required, whereas two are required with FZC. Such disparity impacts the internal governance, decision-making process and administration needs. FZE has the advantage of being easy and fast to manage, as there is only one owner of the company. Conversely, an FZC involves group decision-making and possibly official board meetings, resolutions and approvals based on the number of stakeholders.
The structures are similar; however, in terms of taxation, both enjoy the same legal personality and have the same Free Zone privileges, including 100% foreign ownership, no income tax, and the right to repatriate profits. The limited liability applies to both, and the personal assets of stockholder(s) are safeguarded. The transfer of ownership in FZE may be more limited because of the single ownership; however, FZC offers more flexibility in the transfer of shares between partners when the authorities approve it.
Regarding suitability, FZEs suit a person seeking independence, and FZCs suit a partnership or corporation that seeks the means of formalising the joint operations under a common structure.
Business Consultant and Procedure Differences in Formation
The formation process of both FZE and FZC entities is similar since they start with an application to the corresponding Free Zone Authority. The applicants should provide an application for the offered trade name, business plan, as well as the necessary documents that include a passport copy, address evidence and, where applicable, an incorporation certificate and board resolutions in case of corporate shareholders. The following procedures are to reserve the name of the company, to prepare and notarise the Memorandum and Articles of Association (MOA/AOA), to pay the registration fee and to acquire a trade licence.
In the case of an FZC, there are more steps, which are concerned with elaborating the rights and responsibilities of every shareholder. The MOA/AOA needs to be specific on capital contribution, voting rights, and shareholding percentage, and profit distribution mechanisms. These formalities make the shareholders transparent and offer legal clarity in the event of a dispute.
FZEs as well as FZCs can obtain various licences, such as commercial, industrial, service, or e-commerce, depending on the nature of business. This is because the difference between the two is not the type of licence but the ownership and management structure that a given entity follows.
Financial and Taxation
Taxation-wise, FZEs and FZCs have the same benefits. Companies in the majority of the UAE Free Zones are tax-free on personal income tax, and in most instances, corporate tax over a given time (typically 15-50 years, renewable). They are also given the right to complete profit and capital repatriation and exemptions from paying customs duty on imports and exports in the Free Zone.
Nevertheless, in case such companies operate activities that will produce income on the UAE mainland, or are subject to the provisions of the federal corporate tax legislation instituted in 2023, a company can be taxable based on the amount of revenue and the presence of substance requirements. Nevertheless, Free Zone organisations usually have a very favourable fiscal situation in comparison to their counterparts on the mainland.
FZE to FZC Conversion
The two structures may be converted using Free Zone regulations. Once a new shareholder is introduced into the company that is already FZE, it may be turned into FZC; all corresponding amendments are to be made to the Memorandum of Association of the company, and approved by the Free Zone Authority. On the other hand, in case the entire shares of an FZC are sold to one person, the company can be re-registered as FZE. In both conversions, administrative charges, legal documents, and approval of the authority are incorporated. This makes it easy to adjust to the structure of the businesses as they develop or change their ownership.
Conclusion
To conclude, the difference between Free Zone Establishment and Free Zone Company is mostly to do with the ownership and management structure, as opposed to the operational or fiscal privileges. An FZE is an individual-owner structure that is used by individual entrepreneurs who want to have full control and easy governance. Conversely, an FZC is intended to be used to organise multi-shareholder recourses that imply joint decision-making and investment.
The two buildings offer the benefits of limited liability, tax incentives, and easy incorporation, which support the UAE as a global destination for foreign investment. The decision between the two is based on the business goals of the investor, the number of stakeholders and long-term business strategies.
