Freedom of choice
The many benefits of Free zones cannot be ignored
The many benefits of Free zones cannot be ignored but, with the possibility of a new ownership law coming into place, will construction companies decide to take their business elsewhere?
The fast developing Middle East has proven to be a key area of opportunity that is too good to miss for foreign investors hoping to expand into an international market and offer their services to the construction sector.
Despite the downturn, projects are progressing in the region and there is still a demand for building materials, which is expected to increase as the economy gradually picks-up.
But, where is the best place for these companies to do business?
SETTING UP SHOP
Since their introduction into the UAE, free zones are arguably the best place to set up shop. The main reason being – they play a vital part in the growth of the economy by allowing companies to operate with 100% foreign ownership and 100% exemption from income and corporate taxes.
The construction industry is benefiting from this in two ways: the ability to set up in the UAE without altering their global company status and operational methods, and secondly, the ease with which foreign firms can operate in the free zones has meant a wider choice of international standard services and products are readily available in the local market.
Free zones also provide easy access to airports and seaports, which is ideal for companies importing and exporting cargo.
“We provide our clients with a key location at the apron of the busiest airport in the Middle East. This unique advantage offers unparalleled convenience to businessmen,” says Dubai Airport Free Zone (DAFZ) director general Mohammed Al Zarouni.
“Easy access to the airport reduces cargo costs, which results in an increased profitability of products.”
SIGNS OF GROWTH
The popularity of free zones has grown in recent months, even amid the global crisis, according to recent reports.
“The market is improving,” says George Abraham, marketing manager of Global Resources, a consultancy firm, which helps foreign companies set up in UAE free zones.
During the summer Abraham said monthly enquiries fell to around 200, but since Ramadan the market had improved and now they were receiving closer to 350 a month.Interest has mainly come from within the Middle East, mostly from Saudi Arabia and Kuwait and Qatar.
“People are focusing mainly on the service industry and management consultancy business. Manufacturing companies have also begun to come in again,” he observes.
RAK Free Trade Zone (RAK FTZ) is one of the fastest growing free zones in the area with 7000 companies registered there since its establishment in the year 2000.
“From January to November 2009, we have registered 1662 companies from different sectors,” says RAK FTZ CEO Oussama El Omari.
“Next year, we are expecting to increase this number by more than 50%.”
Business is also booming in Dafza. The firm reported a 48% increase in revenue during the first half of this year, compared to the same period in 2008.
And, Al Hamriyah Free Zone (Hafza), Sharjah issued more than 100 trade licences monthly in Q1 of 2009, which shows a reasonably sustained level of growth compared to 2008 when an average of 125 licences were issued monthly.
“To date we have approximately 4500 companies from 132 countries, specialised in heavy and medium manufacturing, to import, export and re-export as well as services,” says Hafza marketing director Hadi Kassem.
Celebrations of success could soon be silenced, however, as proposed new legislations to allow international companies to hold 100% ownership of businesses anywhere in the UAE could lead companies to move out of free zones.
CHANGES IN THE LAW
At present, foreign businesses must have a UAE national as a sponsor and are limited to a maximum 49% stake, except in free zones.
The move could give construction suppliers more freedom to choose a home for their companies, paving the way for technology firms to make large capital investments in the UAE and diversify the economy away from its present status.
Also, as units outside free zones undergo a price correction, rental prices of units inside free zones are showing no signs of change.
“We are yet to witness a drop in rental prices in Sharjah Airport International Free Zone (Saif Zone), which in time will make expansion unattractive in this zone,” says Bruce Shahabi, director of operations for Combisafe Gulf, a firm operating in Saif Zone, which offers safety solutions to construction sites.
“A recent increase in power charges does not help the situation either.” Dafza and RAK FTZ admits that its prices will not alter but are becoming more flexible.
“Our prices stay the same, however we do consider payment terms for companies facing some difficulties,” says Zarouni.
“This year we have been sensitive to the economic situation and applied a reduction on our fees, as well as adding value by including services at zero cost that would be otherwise charged. We are not planning to alter our price structure at this moment. In 2010 we will work on introducing a series of value added services designed to allow businesses to reduce their start up time and costs,” adds Omari.
So, how will free zones remain competitive for national investors when or if the new legislation is implemented?
“In my opinion, free zones will remain competitive for international investors seeking a base in the UAE, even after a proposed new law allows companies to operate outside their jurisdiction with full ownership rights,” insists Jebel Ali Free Zone (Jafza) chief commercial officer Ibrahim Al Janahi.
“A company based in Jafza will have advantages over other companies as part of an established business community with excellent infrastructure services.”
One of the key benefits that free zones offer is convenient access to various service companies that operate around them. Dafza Online Electronic Services is one example.
“This service was specially developed to cater to the needs of Dafza’s customers for speeding up all types of services required by them, which ranges from on-line proceeding of visa applications, residence, license, and the renewal of these documents,” explains Ophelia Pais executive assistant of Newell Rubbermaid, a supplier of labelling solutions, which operates in Dafza.
Wherever foreign investors choose to lay their hats, it seems that international companies are driving the economy forward by offering their enterprise to the Gulf’s developing construction sector.
The UAE has a strong head-start in this respect, as it allows international companies to work in the country independently, but its neighbours are already playing catch up.
Saudi Arabia, for example, is working on establishing six economic cities to promote foreign investment. Planned free zones for the kingdom include Eastern Economic City, Hail Economic City and Madinah Economic City.
The fact that Middle Eastern countries are willing to learn from developed countries reflects a maturing market and bodes well for the future of the construction industry.
Benefits of free zones
- 100% foreign company ownership
- 100% corporate and income tax exemption
- 100% repatriation of capital and profits
- Fast issuing of trade license, often within 24 hours
- Exemption from commercial levies
- Locations are adjacent to bulk trading and transit areas such as airports and seaports
- Range of accommodation options on a lease basis
- Simplified sponsorship and visa process for staff
The UAE government is preparing legislation within the next month that allows investments in developing the country’s industrial base outside free zones with full ownership privileges for investors.
Foreigners who set up industrial companies may be the first to have 100% controlling interests in their firms under the relaxation of ownership rules, according to recent reports.
Current Ownership Law
At the moment UAE law requires foreigners to have an Emirati as a sponsor and limits them to a maximum 49% ownership of businesses. The exceptions are free zones, where foreign companies can have 100% ownership.
Construction suppliers operating in free zones
Combisafe Gulf – Saif Zone
A UK-based firm providing safety solutions, such as fall protection for construction sites.
Newell Rubbermaid – DAFZA
A supplier of industrial label printers, which can be used to label cables and to highlight dangerous machinery.
Triplefast – JAFZA
A manufacturer and supplier critical threaded fasteners and gaskets.
Ista – DAFZA
An energy and water consumption-based billing firm.
Clipsal Middle East – Saif Zone
A regional subsidiary of the Australian electrical accessories firm.
Onyx Building Systems – Saif Zone
A civil contracting company, which also manufactures steel and