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Residence permit in UAE by entity incorporation

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UAE
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The article provides the guidelines on setting up a legal entity in the UAE and applying for a residence permit as a company founder. Further, it discusses the advantages and downsides of main entity types for doing business in Dubai, in the UAE and worldwide in 2022.

Obtaining an Emirates ID card by starting up a business is one of the fastest ways to become a UAE’s resident. Entity incorporation takes from 2 to 8 weeks depending on company type. A residence permit by entity registration is issued for three years and may be repeatedly extended while the entity is validly operating.

Pros and cons of doing business in the UAE

Pros:

  • 0% tax rates. Free trade zones in the UAE impose no income tax, as well as no dividend, nor payroll taxes.
  • VAT rate is 0% on sales of goods to foreign countries, VAT rate of 5% is applied if business is done in the UAE.
  • Fast-track application for residence permit: the Emirates ID valid for 3 years is issued for business owners right away.
  • Low costs and short terms of the application proceedings: approx. 1 – 2 months for the entire process.
  • Visa for family members. Business founders can apply for residence permits for their spouses and children under 21 years if the income level and available accommodation cover the needs of the entire family.
  • No requirements for permanent stay in the UAE. A resident must visit the UAE at least once every six months, yet transit constitutes a visit — a passport stamp is an eligible proof of the visit.
  • Simple and clear accounting. Many free zones do not ask for annual financial reports.
  • Favourable policies. The country's government strives to attract foreign business and investment by introducing anti-corruption policies, quality public services and convenient digital platforms.

Cons:

  • Access to bank services. Opening a corporate account is a complex procedure for companies incorporated in the UAE’s free zones. A bank would investigate the capital source and the existence of an actual office or leased co-working space. Entity presentations and corporate websites are also subjects to check. The company’s business model needs to be transparent for the bank. Presenting foreign affiliates and associates with an international credit history would be an advantage while opening a corporate bank account in the UAE.
  • Thorough security check. Founders need to undergo a background check through migration and international databases.
  • Controversial reputation of the UAE jurisdiction. Business founders targeting the European markets need to know that the EU considers Dubai to be an offshore jurisdiction. An UAE entity would have to go through a detailed check in order to open a branch or affiliate in Europe. However, tight security measures would be applied to all companies from zero-tax jurisdictions such as the British Virgin Islands or Liechtenstein.

Choosing type of legal entity

There are two main choices for starting up a legal entity in the UAE as a foreigner: mainland company or free zone entity.

Mainland company in the UAE

A mainland company is good for doing business in the UAE’s local market. It is a good fit for  restaurants, shops, beauty salons, and private hospitals.

In the past, a mainland company could be incorporated only with a 51% share of a local partner. This requirement of shared ownership has been recently cancelled. Currently, foreigners can control the UAE mainland company entirely.

Still, a local agent with UAE citizenship must represent the interests of a foreign investor. The agent has no share in the company and acts as a formal warrantor who interacts with the local authorities on behalf of the company.

Advantages:

  • Many business activities are allowed.
  • Easy access to corporate banking.
  • Domestic and international business operations.

Disadvantages:

  • A physical office in the UAE is compulsory upon company incorporation.
  • Company registration is attested and approved by several authorities.
  • Audited financial statements must be filed.
  • A single business licence cannot include several activities: a business founder has to specify a single activity.

Free zone entity in the UAE

A free zone entity is a boon for doing business online or outside of the UAE: consulting services, IT and media, trade, online education, etc. There are over 50 free zones in the UAE to choose from when opening this type of company.

Advantages:

  • Fast and simple incorporation: one-stop shop for entity registration.
  • Complete foreign control. A foreign investor has 100% of entity shares and no local agents involved to represent the company.
  • No obligatory health insurance for the company’s employees.
  • No minimum requirement on office space. Office or coworking floor space is not a subject for regulation when it comes to opening a corporate bank account.
  • No minimum requirement on capital. The authorised capital of the entity depends on a particular trade zone — some zones do not impose any minimum requirement on the capital.
  • Residents are assisted by a freezone operator. Free zones attract businesses to their areas, compete for investors and grant them various benefits. Free zones can assist with accounting, provide a co-working space. Creative free zones help to find contractors and hold exhibitions. Free zones are interested in development of foreign investors’ businesses and often render them business incubator services.
  • Low administrative costs. Free zone is less costly than a mainland company in terms of opening fees and annual administrative costs.

Disadvantages:

  • Limited access to the local market. It is prohibited to do business outside of a free zone, unless a local resident is engaged. An offline shop registered in a particular free economic zone may conduct trade only in such zone. At the same time, UAE freezone companies face no restrictions on doing business abroad.
  • Limited access to local banking service. It is rather difficult and time-consuming to open a bank account in the UAE.
  • Limited number of residence visas. Only two residence visas are issued by default if a shared coworking place is leased for a legal address. More residence visas can be obtained through acquiring more floor space in co-working places.
  • Doubtful jurisdiction repulation. Free zones are even less reputable jurisdictions for Europe than UAE mainland companies. It would be even more difficult to scale your business from a UAE free zone to European markets.

Choosing free zone for entity incorporation

There are 50 Free Economic Zones in the UAE. Each free zone has its own public governance structure: a registrar, migration authorities, police, customs, healthcare facilities.

Two major free zones have their own courts. The legal system of Dubai International Financial Centre (DIFC) is based on English law: the DIFC court provides litigation and wills services at common law rather than Sharia law.

The Free Economic Zones have no single regulator neigher at the single Emirate’s nor at the UAE national level. Here is Tranio’s guidance on how to navigate between multiple free zones and choose the best legal residence for your entity.

What you need to know when choosing a free zone in the UAE?

1. Entity’s activity

Identify the free zones dedicated to your entity's business activity. Generally, the Free Economic Zones focus on certain business lines, such as trade, media, IT, education, manufacturing, logistics, startups, finance, design, healthcare. For instance:

  • Dubai Internet City (DIC) is engaged with IT, software and web companies.
  • Dubai International Financial Centre (DIFC) is a business hub for finance, fintech and ecommerce companies.
  • Dubai Design District (D3) facilitates fashion, art and design startups.

2. Types of licences

Study the types of licences available for registration of your entity. A licence specifies the type of an entity’s business activity. Choose the type that covers your entity’s business activity to the maximum extent possible. Otherwise, if your entity is found to be conducting other types of activities, the regulator would impose a penalty or even block your entity’s bank account.

3. Office

One of the main documents required for entity registration and bank account opening is a lease agreement for a real – brick-and-mortar – office space or a shared co-working place. A bank representative can visit your office or request to provide a picture of the office.

An entity is expected to have business substance in the free zone. The size of the office determines the number of residence visas provided to the founder and his employees. Generally, one visa is granted per ten square metres of the floor space.

If a physical office is not needed for the business activity specified in the entity licence, the company owner can lease working space in a co-working place. However, the number of residence visas granted in such a case would be minimised — hardly more than 2-3 visas.

An entity that engages in goods imports or export would need access to a seaport or airport. Moreover, such ad-hoc commercial facilities, as warehouses and retail shops, are not available in all the free zones. Dubai Airport Freezone (DAFZA) is one of the leading zones for importing and exporting companies. The first free zone in the UAE was established in the port Jebel Ali (JAFZA) in 1985 and is linked to 140 ports globally.

4. Residence visa

A residence visa is granted to the owner or entity's employee in the free zones. Some free zones impose additional visa requirements, e.g. procurement of health insurance. There are zones that require a deposit payment amounting to several salaries or return flight fares.

5. Budget

Estimate your costs: registration and licence fees and charges, lease payments for the first two years of your entity’s operations in various free zones. Consider visa charges, including charges of residence visas for shareholders and all the employees.

There is a competition between UAE free zones for attracting new residents by low rates and affordable services. Local advisors often cooperate with a particular free zone and get their commission for attracting more business founders. This is the reason why so many startups are registered in Dubai’s free zones that are totally unfit for their business type.

Further relocation costs might exceed the original incorporation budget by several times undermining the attempt to save up. Do not be unreasonably frugal while choosing a free zone if you really want to do business.

6. Authorised capital

Contribution of a particular amount to the authorised capital of your entity is one of the most common requirements for entity incorporation in the UAE. The minimum amount of the authorised capital ranges by free zone. Some zones do not impose minimum capital requirements.

7. Annual audit report

Free Economic Zones do not generally require the submission of financial statements or audit reports. However, there are some free zones where reporting is requested. For instance, submitting an audit report at the end of a financial year is compulsory in Dubai Multi Commodities Centre (DMCC). Only one of the UAE auditors approved by the DMCC may submit the report. Failure to submit an audit report timely is penalised.

UAE residence visa

There is no concept of a residence permit in the UAE legislation. The UAE authorities grant the foreigners settling down in the country a long-term residence visa similar, in fact, to a residence permit.

Foreigners obtain a residence visa for three years upon registration of a mainland company or a free zone entity. Such residence permit may be extended repeatedly while the entity is validly operating or as long as the visa holder is employed. Permanent stay in the UAE is not required but a residence visa might be cancelled if the holder stays away from the country for six consequent months.

The investor may act as a sponsor for his spouse and children that would then also get their residence visas. The investor who employs his/her parents or other relatives in the entity or obtains a golden visa may relocate them too.

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