FREE TRADE ZONES : SPECIAL REPORT

Gulf states are making real efforts to attract foreign investment in a variety of sectors. The rules on foreign ownership are being relaxed in several countries, while buoyant oil and gas revenues are being used to drive the growth of other state-owned enterprises. Yet it is in the free trade zones (FTZs) that the most rapid progress is being made. Dubai has led the way but other parts
of the UAE are seeking to emulate its success, with such zones now being found in some very unexpected places.

The concept is simple. Foreign investors are offered a combination of an advantageous tax regime and modern infrastructure, including power, water, information communications technology (ICT) and transport services. Two of the biggest advantages of the system are not related to tax issues: the provision of purpose built property, so that companies avoid having to adapt existing buildings; and the ability to deal directly with a single authority, rather than dozens of government departments. The vast majority of FTZs are developed around ports or airports to serve export orientated industries. As a result, many projects have been developed next to the string of mega ports that have been set up in the region in recent years. The zones both benefit from the port infrastructure and are cited as a motivation for the development of the ports in the first place.

Given the Middle East’s geographic position at the crossroads of global trade, such zones can provide ideal locations for export and processing enterprises. In addition, free trade zone authorities increasingly market them as specialist centres, perhaps in automotive manufacturing or food processing, to allow investors to benefit from agglomeration through close proximity to suppliers and customers working in the same sector. Specialist horticultural and carpet free trade zones are even under development in Dubai.

The government of the UAE has put free zones at the centre of its drive for economic diversification. There are 42 zones at present and even more have been planned, although any new developers and investors may wait until proposed new tax legislation is passed, particularly if rules on foreign ownership are changed. At present, subsidiaries operating in the country are required to be mainly owned by UAE citizens, unless they are located in the free zones, where there are no such restrictions.

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