Overview of UAE Free Zones

Concept of a Free Economic Zone

A Free Economic Zone (FEZ) is a designated geographical area governed by a set of rules that differ from those generally applied in the country. The purpose of establishing a free zone is to support the development of businesses or specific industries, attract foreign investments, promote employment growth, and encourage diversified economic development.

Until the mid-20th century, the Emirates were essentially desert villages. This changed in 1966 when oil was discovered 60 nautical miles offshore.

The discovery of oil in the UAE triggered rapid economic growth. In just 25 years, the UAE transformed into one of the nations with the highest living standards. However, Sheikh Zayed believed it was unwise to keep the country’s economy dependent on fluctuating oil prices and sought other development paths. This led to the creation of the first free economic zone.

The first FEZ—Jebel Ali Free Zone (JAFZA)—was established in 1985. Initially, its development was slow because companies were hesitant to use a port managed by their competitor. In 1990, the Dubai Government appointed an independent commercial company as the port authority, attracting large corporations like Mercedes Benz and Swarovski. Additionally, the government made significant investments in building new offices and warehouses.

Today, the UAE has over 45 free zones, greatly stimulating the country’s growth trajectory. Free zones are now considered a powerful driver of international trade and foreign direct investment, boosting the UAE’s economic growth after the pandemic. Dubai’s free zone model has proven effective in developing existing economic sectors and creating new, more specialized ones such as the green economy, knowledge-based industries, advanced technology, manufacturing, and logistics services.

Key Statistics

In 2018, trade volume in Dubai's free zones reached AED 394 billion. In 2020, this figure grew to AED 464 billion. In 2021, the contribution of free zones to the non-oil economy reached 72.2%. It is projected that by 2030, the contribution of free zones to Dubai's GDP will reach AED 250 billion.

Legal Framework Governing Free Zones

Free zones in the UAE are individually established by each of the seven emirates, and their regulations differ from those applied to the mainland UAE. While federal criminal law applies to free zones, federal civil laws (such as the Commercial Companies Law) apply only where the free zone authorities have not developed their own rules. In many ways, free zones resemble foreign countries located within the UAE.

For example, the Dubai International Financial Centre (DIFC) has its own contract laws, company formation and insolvency regulations, property rules, and an arbitration center with its own judicial system, including an Appellate Court.

Unlike the UAE's legal system, which is based on civil law, DIFC’s laws are entirely based on common law principles.

Free Zones vs. Dubai Mainland

Before the 2018 reforms, foreign investors could only own 49% of shares in companies registered on Dubai's mainland (outside free zones), with the remaining 51% owned by UAE nationals. Additionally, branches of foreign companies had to appoint a local agent for most functions.

The Federal Law No.19 of 2018 on Foreign Direct Investment (FDI Law) introduced new legal frameworks, allowing exceptions to the 51/49 rule, but only for specific sectors and with licensing requirements. Each emirate publishes a list of activities open to foreign investors. In Dubai, for example, the list includes about 1,100 activities.

Can a Free Zone Company Operate in Dubai Mainland?

Only if it obtains a license from the Dubai Department of Economic Development (DED). The DED is the sole authority authorized to issue licenses in Dubai under Law No. (13) of 2011, which governs economic activity in the emirate. Operating without a license can result in a fine of up to AED 100,000.

Employment Law in Free Zones

Employees in free zones generally do not fall under UAE Labor Law. Instead, each free zone has its own labor laws, and employees must comply with the rules of the respective free zone authority. Workers in free zones are employed under contracts with the free zone authority, but the provisions of these contracts must still comply with UAE Labor Law.

Free Zones in the UAE

1. Jebel Ali Free Zone (JAFZA): Initially designed as a global logistics hub, it expanded into e-commerce, petrochemicals, oil & gas, and IoT.
2. Dubai Multi Commodities Centre (DMCC): Focuses on commodities such as gold, diamonds, and cryptocurrencies, as well as financial services and technology.
3. Dubai Airport Free Zone (DAFZ): Located near one of the world’s busiest airports, DAFZ is known for Islamic finance, smart city initiatives, and innovation.
4. Dubai Silicon Oasis (DSO): A hub for technology companies and startups focusing on AI, smart city solutions, and blockchain.
5. Dubai Internet City (DIC): Supports companies in ICT, software development, e-commerce, and consulting.
6. Dubai Media City (DMC): Home to media companies and freelancers offering marketing, event management, and consulting services.
7. Dubai International Financial Centre (DIFC): A federal financial free zone with independent judicial authorities, financial regulators, and companies in finance, banking, and investment.

This article provides a comprehensive overview of the growth and significance of free zones in the UAE, highlighting their role in diversifying the economy and promoting international trade and investment.