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Dubai has now become a de facto free zone hub

The free zones, to a major extent, have been an answer to the UAE’s diversification strategy and economic growth plans

The UAE has transformed to become one of the most favourable business destinations globally in recent years. A key factor behind this change has been the government’s targeted efforts to introduce and develop free zones across the country. The free zones, to a major extent, have been an answer to the UAE’s diversification strategy and economic growth plans. They have attracted businesses and investors globally, bringing more job opportunities, competitive salaries, a solid knowledge base, and an overall level of excellence.

Free zones have laid the foundation for attracting marketing, trade and investment opportunities leading to the rapid growth and success of the country’s finance, IT, logistics, trading, and media industries, among others. Currently, the free zones define a large part of the UAE’s private sector growth. More than 60,600 companies were registered in the country’s free zones as of February 2021, accounting for eight per cent of the total number of companies registered in the UAE.

45 free zones across the UAE

With its long history of establishing free zones to attract international business in the country, the UAE is now home to 45 such destinations, the highest in the world, with 10 more under construction. Many free zones cater to specialised sectors including trade, industry, energy and renewable energy, media and communications, metals and commodities, finance, healthcare, and IT which have grown to become the prominent pillars of the country’s private sector growth.

Start-ups, entrepreneurs and freelancers are also benefiting from incentives offered by the free zones in the form of reduced registration fees, visa extensions, and capital finance. The UAE’s first free zone — Jebel Ali Free Zone Authority (Jafza) — is now one of the largest in the world, catering to over 7,500 companies, generating 150,000 jobs, and accounting for a staggering 28 per cent of Dubai’s GDP.

Jafza a role model

The success story of Jafza became a blueprint for the establishment of several other free zones, not only in the UAE, but for the GCC as a whole. The UAE started promoting free zones as a central pillar of economic diversification, especially in Dubai which lacked substantial hydrocarbon resources. Dubai has now become a de facto free zone hub, home to 30 such facilities, including giants like Jafza and Dubai Multi Commodities Centre (DMCC). With over, 7,330 active registrations, 200+ applications each month, and a 94 per cent retention rate, DMCC is one of the largest and the fastest growing Free Zones in the UAE. Over 95 per cent of the established entities are completely new-fangled in the Dubai market, reflecting the appeal Dubai has among international entrepreneurs. 2018 figures from the Dubai Free Zones Council found that Dubai Free Zones were responsible for approximately 31.9 per cent of Dubai’s GDP during the first nine months of that year.

Free zones economic impact

To better understand the economic impact of free zones, it is essential to understand the key defining characteristics of the entities in the country that have led to this successful outcome. Free zones in the UAE are largely defined by their policies revolving around foreign ownership, labour regulations, taxes and other fees.

First, foreign entities registered with a free zone in the UAE enjoy 100 per cent ownership, circumventing the stricter foreign ownership policies in the mainland with ease.

Second, the free zones place close to no regulations on foreign labour, easing pressure on foreign entities to attract global talent to the UAE.

Third, companies within a free zone are exempt from taxes and other fees such as custom duties. Apart from these, the companies are also allowed up to 100 per cent capital and profit repatriation. The inherent benefits of a free zone have made it very easy for foreign businesses to establish base in the UAE.

Support for ancillary services

While most processes have been simplified by the government, several free zone authorities also extend support for ancillary services such as legal, medical, labour, and immigration, and options in space, style, tenure, and budget among others. The free zones have evolved to also provide individual freelance permits to international branch office licences, and from shared desk space on annual contracts to industrial warehouse leasing for up to 25 years. Everything is designed to attract and help international investors build businesses, grow trade and investment, and facilitate transfer of skills, knowledge and technology. The astounding number of international companies currently located across the UAE free zone bear testament to the success story.

In 2020, as the Covid-19 pandemic forced the global economies into a lockdown, dampening business and investment activity, free zones in the UAE remained at the helm of commercial activity. For instance, Dafza’s foreign non-oil trade reached more than Dh119 billion ($32.3 billion) in 2020. The free zone contributed 10 per cent to Dubai's non-oil foreign trade and 25 per cent to the total trade in Free Zones in the Emirate.

Pandemic fails to dent free zones model

In fact, the pandemic reinforced the significance of free zones as economic policy tools used by the UAE government to accomplish political and foreign policy objectives. Free zones in the UAE stepped up their efforts to strengthen the business climate by launching several initiatives which were largely in line with the government’s need to make a quick economic turnaround from the double whammy it faced in the form of health crisis and fall in oil prices.

While the UAE undertook large-scale measures to propel the private sector during the pandemic, ranging from easing visa policies to attract global talent to doubling on its efforts to lay the foundation for a technology-based economy, the free zones continued to attract businesses by lowering fees and introducing bespoke packages. For instance, the Umm Al Quwain Free Trade Zone introduced business LYTE packages, offering up to 50 per cent off, helping prospective investors to continue with their business set-up plans. The process of setting up business and acquiring licenses was also reduced from months to days.

The Umm Al Quwain Free Trade Zone also provided additional months of licence validity for existing companies and increased the visa quota for all new and existing businesses. Several other free zones in the UAE introduced online services for investors, which proved to be priceless for their continued growth during the pandemic. Some free zones even recorded an increased number of new registrations and business expansions during the pandemic, with technology-focused sectors seeing higher traction.

Free zones to advance foreign policy objectives

The UAE has also leveraged free zones to advance foreign policy objectives. In the wake of the agreement between the UAE and Israel to normalise relations, many of the newly formalized commercial linkages occurred with and among Gulf Free Zones. Dubai is using its flagship commercial entities to cement ties with Israeli counterparts.

In September, DP World — the Dubai-based multinational logistics company — and other government-related entities signed multiple agreements with Israel-based DoverTower Group, a shareholder of the Israel Shipyards port in Haifa and a partner in Eilat Port, with an aim to assess port and FZ development opportunities in Israel and establish a direct shipping route between Eilat and the UAE port of Jebel Ali.

Development of clusters

Moreover, the Israel Diamond Exchange and the Dubai Diamond Exchange, which is part of DMCC, inked an agreement to enhance cooperation in the diamond trade. The Jebel Ali Free Zone and Dubai Airport Free Zone Authority signed MoUs with the Federation of Israeli Chambers of Commerce in late September to support Israeli companies intending to establish businesses in Dubai.

Free zones will continue to encourage the development of clusters, further enhancing the UAE as a hub that encourages broader build-out of specialised infrastructure and develop sectors key to the economy while also facilitating job creation. Noting that free zones have become an integral part of the diversification plans of each Emirate, there is likely to be divergence in the development trajectories of such business hubs.

In the post-pandemic era, free zones are more likely to support the development of technology-based strategic industries, and offer global investors attractive growth propositions. As the country continues to build on strategic focus industries, flexibility and multipurpose utility will be the key traits of successful free zones in the UAE.

Shailesh Dash is a serial entrepreneur, ideator and mentor. Views expressed are his own and do not reflect the newspaper’s policy.