UAE free zones, which offer foreign companies full possession without a local partner, will ‘struggle to survive’ under the new 100% ownership law, according to Dr Habib Al Mulla, chairman of Dubai law firm Baker & McKenzie.

The legislation, set to be introduced in Q3 this year, will weaken free zones’ bestselling proposition, Dr Al Mulla said.

“What will suffer ultimately, I think, are free zones. They will need to find another niche for themselves because their main and bestselling proposition is 100% foreign ownership - apart from the financial zones which have different propositions. And for that, they have higher charges than what investors find in mainland. That will slowly disappear in 5, maybe 10 years, and unless they find themselves another niche, I think they will struggle to survive,” he told Arabian Business.

While some free zones will survive on logistics and goods, others will convert to specialised districts, he said. Ultimately, however, they will have to introduce to new concepts to continue to operate, he added.

“Of course, some of them will continue to survive because of, for example, logistics, goods, but others will fade and disappear slowly or will become specialised zones or will have to innovate and come up with some new concept. What that concept could be? At this point I have no idea,” he said.

Lower charges

In addition, Dr Al Mulla expects the new ownership law to offer lower charges than those presented in free zones.

“If you ask any foreigner who is investing in a free zone why he is going to a free zone, it is probably because he can enjoy 100% ownership of his company. If that is available to him in mainland at a more reasonable cost, why should he not go there?” he said.

“If I was now a director of a free zone, I would be concerned. I will immediately think of the cost I am charging my tenants, I would think of my process and procedures, I will try to make it easier, maybe move to an online portal with my processes. I will need to give the investor something that they will not find on the mainland. Otherwise, it will be an issue for them,” he said.

'Free zones will continue to thrive'

In direct contrast to Dr Al Mulla, chairman of UAE-based business setup consultants Virtuzone, Neil Petch, believes free zones will continue to thrive despite full foreign ownership of companies, likening the new law to the establishment of free zones in the 1980s in that it “filled the business community with confidence”.

“The role of free zones, now numbering over 50 in the UAE, is here to stay. Each FZ has a sweet spot and specific segment to target and serve, but they share a low cost, light touch, low tax make-up that particularly suits start-ups,” said the chairman of the UAE-based business setup consultancy.

Petch added that the changes to onshore companies “will serve more as an obvious means for smaller companies now growing into larger ones, than as a competitor to the start-ups being incubated in the UAE’s low tax environment".

“For every company that evolves from free zones to onshore, expect five or ten to come from Europe, Asia, or the States, as they realise that the UAE’s low tax environment represents a far better choice than previous favourites Cyprus, Malta, Singapore, Hong Kong and Monaco, to name but a few,” he said.