What price freedom in a free zone?

The rules on how companies in free zones should operate are still being clarified. How, for example, can something as abstract as knowledge be kept within a zone's borders? Grey areas abound, and each zone decides for itself how to interpret the regulations. Neil Parmar reports. Neil Parmar looks discusses The National's exclusive series on the growth of free zones in the UAE Read all of our Free Zones series Learn more Like other businesses, the communications technology company Alcatel-Lucent wants to be more competitive while cutting costs. But after more than a decade of doing businesses from its Dubai office, Alcatel is looking to relocate to a nearby free zone, which technically means that it would operate "offshore". One argument for a move to the Dubai Internet City free zone, for instance, is that Alcatel would be closer to some of its rivals such as Hewlett-Packard and Cisco. "We want to make sure the customer will see us in the same place," says Alain Penel, the vice president of sales and support for the Middle East and Africa at Alcatel-Lucent Enterprise. Yet when it comes to free zones, another attraction for businesses big and small is often the money factor. Alcatel's office in Dubai operates under the aegis of a sponsor who earns a "lump sum fee on an annual basis", says Patrick Deflandre, a financial director for Alcatel in the UAE. "For the time being they are only a sponsor, so they don't interfere in the current management of the entity or business. This is why we're paying them a lump sum." Alcatel could ultimately benefit from a move to a free zone by generating "substantial savings, because we don't have to pay a sponsor", says Mr Deflandre. Sponsorship agreements to avoid what some see as outside interference in a business are common in the UAE, experts say. But observers note that some companies might be considering moving into free zones to safeguard themselves from future changes in the law. The Ministry of Economy had been expected to implement a so-called sleeping-sponsor law. It could have used penalties, such as fines, to deter people from entering agreements that are designed to sidestep certain rules. The implementation of this legislation, however, has been postponed for an eighth consecutive year. Under current regulation, a national must own at least 51 per cent of a business if it is not within a free zone, and be allowed to help to manage it. Companies that do end up relocating to, or launching within, free zones should be aware that although regulations are more relaxed, there are certain rules to follow, experts caution. Here is what they recommend for companies looking to sell products versus services. Scenario A: Providing Products It has been 15 years since the Dubai Airport Freezone (Dafz) was launched, with airlines and cargo companies mostly represented in the area. Since then, however, other businesses have moved in and trade in a variety of products including cosmetics and jewellery. But to sell lipstick, necklaces or other goods outside Dafz and within Dubai, Abu Dhabi or another UAE emirate, these businesses must funnel the items through a local agent or distributor. "It is true they cannot sell directly in the market," says Buthaina bin Fahad, the director of information and communication technology at Dafz. It is a similar story at the Dubai Internet City free zone, where a technology company by the name of FVC appoints local partners to sell its products and provide support to clients. "A local partner is important," says KS Parag, the managing director of FVC, which sells videoconferencing technology and other gadgetry. Mr Parag notes that he set up FVC in a free zone from the beginning because "it gives you the freedom of running the business the way you want to". The company's business model "has always been to work with partners". Other companies located in the UAE's free zones focus the bulk of their business on acting as distributors. GCT is one of more than 6,400 companies situated in a sprawling area known as the Jebel Ali Free Zone. The business got its start in 1997 and distributes technology products from countries such as Taiwan to companies throughout the Gulf as well as the wider Middle East and North Africa. More businesses may also be able to take advantage of a new law to distribute products. It would allow them to be located in the Jumeirah Lakes Towers (JLT) free zone, for example, and have a subsidiary or branch office that is situated outside the free zone and licensed by Dubai's Department of Economic Development. "They've recently opened that up for us and all free zones," says James Bernard, the director of business development and client management at JLT. Scenario B: Selling Services How do you contain something as abstract as knowledge within the physical borders of a free zone? That is the question many authorities and consultants have been grappling with in recent years. Physical products coming into the free zones are carefully tracked through customs procedures, and they are required to be sold through local distributors. But services such as legal or public relations expertise have often been provided "onshore" and outside the free zones where businesses are based - even when they should not have been. "Dubai, in particular, has found a little bit of a challenge with free-zone companies effectively competing with outside LLCs [limited liability companies]," says Quentin Lowcay, the managing partner of the Abu Dhabi office for Kensington Swan, a law firm. "I think the authorities have a challenge in terms of what's happening in reality, and [whether] to allow it, because free zones are very effective." A law passed in September allows free-zone businesses to become licensed in a way that would allow them "to operate outside of these areas", according to the Department of Economic Development. Companies will still be required to follow each emirate's laws and regulations, though no additional clarification was given. "There are grey areas," says Mr Bernard. "It's on a case-by-case basis." As it stands, each free zone takes its own approach to deciding whether consultants can provide services outside of their borders. At Dubai Healthcare City and Dubai Biotechnology & Research Park, "consultants do offer their services outside the free zones", says Marwan Abdulaziz, the director of business development of both sites. "That's not a restriction we have." But at Dubai Internet City, businesses are required to declare service contracts with different parties so that the free zone's authorities know where their staff is physically located for projects. Legal experts say that consultancies can meet with clients outside a free zone but that any actual work or services provided should be done from within a zone. Companies that do not follow this practice and send a consultant to work full-time in a client's office onshore could face steep fines. "They're harsh," says Samer Qudah, a partner at the law firm Al Tamimi & Company. "They're, on average, Dh50,000 [US$13,612] for each of the companies."

What price freedom in a free zone?

Free Zones: Many companies based in a free zone provide services outside, even when they should not. Here is what officials say business owners need to know.