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What is the Difference between an Onshore and Offshore Company in the UAE?

MEDIA / Articles / 2021 / What is the Difference Between an Onshore and Offshore Company in the UAE?
As corporate service providers, we regularly get queries from prospective clients, from a diverse background, looking to setup their proposed business here in the United Arab Emirates (UAE) for various reasons, and across multiple industries.
 
For the uninitiated, the start of the conversation generally begins with an intention to setup a company or business in Dubai, UAE.
 
This vaguely worded statement then necessitates a further discussion as well as a breakdown of the criteria and circumstances of the client, which would ultimately inform our decision and advice as to whether a Dubai-based business is still the best option for clients.
 
This article seeks to provide a comparison between the onshore and offshore company regimes here within the UAE, for readers who may be interested in setting up their new UAE-based business, or readers who would like to know more about this Middle Eastern nation’s corporate and business environment.
 
To start, allow us to provide a brief look at Dubai and the UAE, and the available jurisdictions (onshore mainland and free zone and offshore regimes) for clients to gain a general understanding of the available options.
 
Brief Introduction to the UAE
Dubai is the established commercial and trading hub of the UAE, as well as the more renowned city-emirate amongst the other six, Abu Dhabi (the capital), Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, Fujairah, which altogether form the UAE, a federation of seven emirates.
 
Amongst the seven emirates, Dubai and Abu Dhabi are generally more well-known compared to the other five, which indirectly leads to queries that originated with a proposed Dubai company registration.
 
Despite generally being associated as an oil-producing state, the majority of proven oil-reserves in the UAE are located in Abu Dhabi, the capital, and the richest emirate thanks to its abundant petrodollar revenue.
 
Dubai was historically a pearl and gold trading hub, which then transitioned into the commercial and trading hub beyond the traditional gold and pearl (although gold still plays a large part in its non-oil economy), partly due to its smaller oil revenues.
 
The remaining other emirates, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah round up as the remaining federation members, each with its own specialty.
 
In spite of the fact that all the seven aforementioned emirates are a part of the country that is the United Arab Emirates, there exists friendly competition between them, with each engaging in minor ways to compete and ultimately creating a business-conducive environment for entrepreneurs and investors.
 
This manifests itself through the setup of various free trade zones (“free zone”) within the country, across the various emirates, which entice investors to setup shop within the respective free zones and to conduct and operate businesses from within.
 
Did you know that there are between 45- 50 free zone jurisdictions spread out across the UAE?
 
Onshore Company Jurisdictions in the UAE
Free zones, which allow for 100% foreign ownership, were an initiative in direct response to the existing federal-level regulations governing all emirates, to protect the local market by way of making it mandatory for UAE nationals to retain 51% ownership of shares in most commercial licenses operating in the mainland.
 
For instances wherein a foreign investor could hold 100% share ownership (such as a professional services license), UAE nationals are required to act on behalf of the foreign investor in the capacity of a local service agent or representative.
 
Such “local sponsorship laws” inhibit full foreign ownership and participation in the local market, thereby necessitating a workaround to a certain extent, hence free zones in the UAE.
 
This directly segmented the local onshore market into two categories, mainland and free zone companies.
 
Mainland Company in the UAE
Mainland companies are defined by the general inclusion of a UAE national as a majority shareholder and or authorized agent representative, as well as having full unrestricted access to the local UAE market.
 
Such entities are generally regulated by their immediate authorities, the Department of Economic Development (DED) of the respective emirates.
 
Free Zone Company in the UAE
Free zone companies, on the other hand, allows for 100% foreign ownership, and its direct access to the local market is only permitted to a certain extent.
 
The regulatory body for free zone entities are the registrars of the free zones.
 
Regulatory Bodies for Onshore Companies in the UAE
In addition to the DEDs or the free zone registrars for onshore companies, if the licensee conducts activities that fall under additional supervision, then the applicable, supplementary governing body’s approval and or oversight may also be required.
 
For example, a mainland, publicly-listed company licensed in investment fund management activities, located in Dubai, will fall under the purview of Dubai DED, as well as the Securities and Commodities Authority (SCA) and even the Central Bank of the UAE (CBUAE), where applicable.
 
If said company was incorporated in Dubai’s financial free zone, Dubai International Financial Centre (DIFC), then the relevant regulatory authority would be the DIFC Registrar, SCA, and likely the CBUAE as well, amongst other applicable bodies, where relevant.
 
Offshore Company Jurisdictions in the UAE and its Regulatory Authorities
Apart from the onshore companies offered in the UAE, there exists also an offshore, or International Business Companies (IBC) regime in the UAE, namely Ras Al Khaimah International Corporate Centre (RAK ICC), Ajman Offshore, and Jebel Ali Free Zone Authority Offshore (“JAFZA Offshore”).
 
UAE offshore companies are characterized by its minimum physical requirements, inability to conduct any business within the local market, 100% foreign ownership, and lack of tax residency status.
Offshore companies are regulated by their respective registrars.
 
Now that you are aware of the core defining features of the three main entity types in the UAE, what’s next?
 
At the start of the article, I pointed out that upon posing some queries to the prospective client, I would then be able to determine the specific jurisdiction that would adequately serve their needs.
 
The three main questions generally asked are as under,
  1. Does the client intend to conduct business within the UAE?
    Will it be a B2B, or a B2C setup? Or is it wholly for international business not involving the UAE?
     
  2. What is the business activity(ies) of the proposed company to be incorporated?
    Is it a commercial trading company, or a consulting services company? Is it a regulated activity, such as investment of third party funds?
     
  3. Does the client require physical presence in the UAE, by way of office setup, or UAE residence visa(s)?
    Would a virtual office satisfy, or would the client need a physical office space, and or UAE residence visas to legally reside in the UAE to conduct business operations?
Based on the initial revert to the above, we as consultants may preliminarily infer the type of companies suitable for clients.
 
If a client does intend to conduct business within the UAE, it is likely an onshore entity may be the most appropriate recommendation and the discussion would then proceed with Questions No. 2 and No. 3, for further evaluation of the case and the relevant choice of free zone and entity type.
 
If a client does not intend to conduct business activities within the UAE, at this stage with the limited information available, an offshore company recommendation may suffice; whilst seeking confirmation based on Questions No. 2 and No. 3 that the client understands the limitations of an offshore company vis-à-vis an onshore company in the UAE.
 
Let us now take a look at the below brief steps involved in the company incorporation process.
 
How to Setup Your Proposed Company in the UAE?

Mainland Company Setup in Dubai, UAE
  1. We determine if the business activities requested by the client requires a 51-49 shareholding structure, or for a local service agent arrangement (“local sponsorship laws”)
  2. We conduct the relevant name checks, name reservation and initial approval.
  3. We arrange for the applicable documents for company incorporation and registration, such as Board Resolution(s), Power of Attorney(s), Memorandum and Articles of Association.
  4. We seek out the relevant office setup requirements and acquire the Tenancy Contract.
  5. We incorporate the company.
  6. Trade License and other applicable company legal documents are issued.
  7. We start the process for residence visa application.
 
Free zone Company Setup in Dubai, UAE
  1. We determine the applicable free zone jurisdiction for the client, based on clients’ requirements for the business activities, budget and location of choice, as free zone companies have 100% foreign ownership and do not require consideration of a UAE national.
  2. We conduct the relevant name checks, name reservation and initial approval.
  3. We arrange for the applicable documents for company incorporation and registration, such as Application form(s), Memorandum and Articles of Association, Business Plan, Service Lease Agreement or Tenancy Contract.  
  4. We incorporate the company.
  5. Trade License and other applicable company legal documents are issued.
  6. We start the process for residence visa application.
     
Offshore Company Setup in the UAE
  1. We determine the relevant offshore jurisdiction in the UAE (we recommend RAK ICC due to its full suite of documentation and regulation that safeguards the interests of clients, as well as its global reputation).
  2. We conduct the relevant name checks, name reservation and initial approval.
  3. We arrange for the applicable documents for company incorporation and registration, such as application form(s), Memorandum and Articles of Association, UBO declaration form, Sanctions Policy Questionnaire.
  4. We incorporate the company.
  5. Certificate of Incorporation and other applicable company legal documents are issued.
Let us know take a look at the salient distinctive characteristics of UAE onshore and offshore companies.

Difference between Onshore and Offshore Companies in the UAE
 
Ability to Conduct Business Locally
  1. A Mainland Company can participate fully in the local UAE market and internationally without restrictions.
  2. A Free Zone Company can participate partly in the local UAE market with restrictions, and internationally without restrictions.
  3. An Offshore Company cannot participate fully in the local UAE market, and can conduct business internationally without restrictions.
 
Requirement for UAE national Participation
  1. A Mainland Company either requires a UAE national as a majority shareholder holding 51% shares, or requires a UAE national as a designated, authorized company agent.
  2. A Free Zone Company does not require the participation of a UAE national.
  3. An Offshore Company does not require the participation of a UAE national.
     
Applicability of Value Added Tax (VAT)
  1. A Mainland Company may be applicable for VAT upon fulfilling the threshold requirements.
  2. A Free Zone Company may be applicable for VAT upon fulfilling the threshold requirements.
  3. An Offshore Company is outside the scope of VAT in the UAE.
 
Status of Tax Residency
  1. A Mainland Company, upon meeting the requirements, is eligible to apply for a Tax Residency Certificate in the UAE.
  2. A Free Zone Company, upon meeting the requirements, is eligible to apply for a Tax Residency Certificate in the UAE.
  3. An Offshore Company, is not eligible to apply for a Tax Residency Certificate in the UAE.
 
Based on the above, we hope you, the reader, would now have a better understanding of the various jurisdictions offered in the UAE, and hopefully this will allow you to further pinpoint the most suitable type of business registration for you in Dubai and the UAE.
 
For further information regarding which free zone to choose in the UAE, please check out this article.
 
For further information regarding which offshore jurisdiction to choose in the UAE, please check out this article.

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Thank you for your interest in Freemont Group, the specialists in company formation, asset protection and legal and advisory . Feel free to contact us with any inquiry you might have. We will provide you with a free initial consultation, and a customized solution for your personal situation.