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Fri 1 Jun 2018 12:25 AM

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What now for free zones?

Despite the momentous new foreign ownership and residency laws that were recently announced in the UAE, Dr Habib Al Mulla says the Gulf country has some way to go before it can compete with global economic powers

What now for free zones?
Al Mulla thinks the 10-year residency ought to be called a green card

It could be the UAE’s most transformative new law since the freehold law was passed in 2002. After decades of having a transient population of highly-skilled expats and overseas investors who lacked long-term visas and tenure, the United Arab Emirates is introducing 10-year residencies and 100 percent foreign business ownership in an ambitious bid to add fresh impetus to the economy. Such a move has facilitated comparisons to Singapore’s rise into a global economic force, and the majority of business owners, real estate experts, economists and employment professionals believe its implications will be nothing short of profound.

But one man with a knack for predicting the future had long suggested the change. Dr Habib Al Mulla, founder and chairman of local law giant Baker McKenzie Habib Al Mulla, proposed the same laws in what he calls both a “famous” and “infamous” article in 1997. He received harsh criticism at the time, but says two factors have since changed: time and people.

“Back then, I suggested three things: ownership of land for foreigners, long-term residency and 100 percent foreign ownership of companies. At the time, all three were considered taboo. I think it was too much to digest. But times have changed and people are more receptive to what I would call the concept of free trade,” says Al Mulla.

If you ask any foreigner why he is going to a free zone, he’ll probably say it is because he can enjoy 100 percent ownership”

Of course, precise details of the laws are yet to be revealed, as the department of immigration told Arabian Business it still hasn’t received a full set of instructions on what they entail. But not all entities are expected to thrive under the new legislation. What will suffer ultimately, Al Mulla predicts, are free zones.

“If I was now a director of a free zone, I would be concerned,” he says.

“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, probably 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.”

Foreign-owned companies will no longer have to be restricted to Dubai’s free zones

Free zones, which were long the sole pathways to complete ownership of foreign businesses, largely prospered on the basis of their unique offering, which aimed at boosting investment into the country. With that taken away from them, they will likely need another niche to live on.

“In general, free zones’ bestselling proposition, apart from the financial zones which have different propositions, is 100 percent foreign ownership. And for that, they have higher charges than what investors find on the mainland. That will slowly disappear, probably in five, maybe 10 years, and unless they find themselves another niche, I think they will struggle to survive,” says Al Mulla, hinting that the new law will offer investors a lower ownership charges.

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

He then goes on to qualify is statement slightly by saying that free zones such as Jebel Ali will continue to survive because they rely on logistics, while others will likely “fade and disappear slowly” or become specialised zones with innovative new concepts.

Over the past decades, free zones have been instrumental in increasing Dubai’s GDP and FDI”

Not everyone agrees with Al Mulla. Neil Petch, chairman of UAE business setup consultancy Virtuzone, is adamant that free zones are here to stay, particularly as they cater to start-ups and SMEs.

“Each FZ has a sweet spot and a specific segment to target and serve, but they share a low cost, light touch, low tax make-up that particularly suits start-ups,” he says.

Petch adds that the law will target global brands or smaller companies growing into larger ones, but it will not compete with free zones that cater to start-ups incubated in the country’s low tax environment.

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

First movers

While Al Mulla agrees that global giants will be among the first beneficiaries – followed by those in state-valued sectors such as nuclear technology and advanced healthcare – he says the law will eventually expand to other markets.

“At least in the first stage, I don’t think that [the ownership law] will apply across the board to everyone, including, for example, retail and small LLCs. I don’t think that’s the interest of the legislation at this point in time. They want to attract certain capital and certain types of sectors, mainly technology and global names. So it will start through that, but this is a [move] that once you start, you will not stop. And eventually, I think it will become a reality of life and it will expand to other sectors,” he says, adding that much of the inclusion will depend on the level of investment the legislation imposes.

Sheikh Ahmed Bin Saeed Al Maktoum, chairman of Dubai Free Zones Council

Only a week after the announcement of the new laws, Dubai free zones revealed they will make a number of changes to their offerings, including easing business set-up processes, reducing fees and implementing new e-commerce regulations.

While the move is centred around promoting flows of foreign direct investment (FDI), chairman of Dubai Free Zones Council (DFZC), Sheikh Ahmed Bin Saeed Al Maktoum, said it is also about seeing the emirate’s free zones as “more than just economic facilitators”.

“Over the past decades, free zones have been instrumental in increasing Dubai’s GDP and FDI inflows that are experiencing high annual growth despite the prevailing economic climate,” he said.

Sheikh Ahmed added that “due to their legislative and investment incentives and through adopting strategic initiatives that shape the future of trade and economy to consolidate Dubai’s status as an ideal business destination, they (free zones) have evolved into globally competitive models.”

We need to be ahead of the curve. We need to be active rather than reactive to these issues”

It’s not clear yet whether the initiatives will be introduced before or after the implementation of the new ownership laws in Q3 this year.

That said, free zones are not the only area of concern. Foreign ownership has long been an uneasy topic for the UAE’s local community, which makes up around 16.5 percent of the overall population consisting mainly of expats.

“Are there concerns among Emiratis? Absolutely. There are some people who are still too concerned… particularly when you look at what I would call an imbalance of the population, where you have the majority of the population as foreigners. Our situation is a bit unique. You can’t compare it to other jurisdictions, for example the UK or Canada, where the expat community is a minority. Here it’s vice versa. So these are genuine concerns which need to be addressed,” Al Mulla says.

Solutions that could strike a balance between the two opposing interests include concepts such as temporary property ownership. The law, which Al Mulla also suggested in early 2007, could give foreign owners the comfort they need while alleviating concerns among Emiratis.

Fintech is one of the sectors that the new law will boost

“Foreigners do not want tenancy ownership… They want actual ownership. At the same time, you have concerns from some of the local community whereby foreigners are owning property. So why not come up with an innovative concept of temporary sale of property. It is possible and there are examples of it in other jurisdictions. It is actual ownership, but you could limit it to a certain time. So you can leverage it, sell it, mortgage it… You can exercise your full right of ownership on it, but at some point in time, that ownership expires,” he says.

Long-term planning

Residency is a trickier topic, as UAE citizenship is off the table for most expats. Though the government occasionally grants nationality to foreigners, the process remains unclear. And while the ten-year visa law is a major step towards attracting and retaining investors and high-skilled expat workers, Al Mulla says minor changes such as labelling could make all the difference.

“[Residency] would be a difficult situation considering the imbalance of the population. Having a long-term residency of up to ten years is a significant step, but sometimes you just need labelling. For example, rather than call the ten-year residency just another residency, why don’t we call it a green card? It will have the same permission but we would label it as a green card. This gives a lot of comfort for people,” he says.

Despite great strides by the UAE government to position the country among the world’s most dynamic investment hubs, more needs to be done to keep foreigners from fleeing to countries that offer what Al Mulla calls a “holistic” package. Instead of proposing partial solutions, he suggests a full bundle that impacts all sectors through short to medium-term policies.

“We need to understand that there is a slowdown in the economy and there are issues relating to the capital market, retail, real estate… Sometimes we are being reactive. So for example in tourism, we decide to open visas for certain nationalities, and some leaders in the hospitality business can vouch for that. Then we will see that real estate is a bit slow so we will allow students who finished universities to continue with their families. This is very useful. I’m not saying it’s not useful. But what we need is to look at a high-level holistic approach for the whole economy,” he says. “We need to be ahead of the curve. We need to be active rather than reactive to these issues,” he says.

Part of being active includes opening up more channels of investment for expats in areas ranging from property to consumer law. “We always talk about the fact that the expat community is transferring billions of dirhams to their home countries. Of course they are, because they don’t have a channel of investing it here. It’s only a few years since we allowed them to invest in the capital market… We should give them channels to invest their money here so that everyone will be benefitting,” he says.

Jebel Ali will continue to thrive due to its logistics importance, says Al Mulla

“There is so much that can be done. One of the measures that can be taken is to change the whole concept, which I don’t know where it came from, that rents have to be paid in one or two cheques. Why not make it a monthly payment like everyone in the world? That will ease the burden on almost everyone and they will feel more able to continue living in the UAE rather than flying their families back home and only the head of the family staying here to support them. We are losing people who are leaving because of some [laws]. I mean, why two cheques? What’s the rationale behind it? There is no rationale behind it,” says Al Mulla, his voice rising passionately at the issue.

“The market is changing, so why don’t we change? Why don’t we adapt? The government is adapting. The government is taking measures to change the situation and federal laws, so why not the [rest]?” he says.

Not one but many

The outspoken chairman believes changing hundreds of small “hidden” laws will grease the wheels of the economy and give incentives for people to stay in the UAE. While simple to change, they will have significant impacts on the business environment, substantially improving it.

“I see no reason why [this shouldn’t happen]. If the government is touching on what I would call the sacred taboos like residency and foreign ownership of companies, the smaller ones are easier,” he says.

The outspoken chairman further suggests updates to the UAE’s consumer law – which was enacted in 2006 – due to new businesses including e-commerce and fintech changing relationships between corporations and consumers. He proposes looking to the European Union, which has “one of the best consumer laws in the world”, according to Al Mulla, and studying their best principles.

The last thing we need is legislation with hidden twists and tricks and complications”

“If we want to be seen as one of the capital markets of the world, there are things we need to implement. We need to have the full package implemented so that we can say, ‘Yes, we are competing with world class cities like London, New York, Singapore’,” he says.

But the most crucial part of the undoubtedly profound move lies in the details, whereby it has to be direct, simple and transparent.

“The last thing we need is a piece of new legislation with hidden twists and tricks and complications, because that would not give the right message for the business community and the investors. It has to be properly implemented,” says Al Mulla.

While the UAE has some way to go before it can unreservedly compete with universal economic powers, for a country as young as 47, it most definitely is ahead of the curve. And having the likes of Dr Habib Al Mulla certainly helps.

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