Entrepreneurs in the United Arab Emirates must decide between establishing their businesses in a free zone or on the mainland. While free zones offer benefits such as a 0 % corporate tax rate, they also have limitations, particularly in terms of office space options. Recently, free zones have started issuing no-objection certificates (“NOCs”) allowing licensees to set up offices on the mainland, which this briefing explores in detail.
1. Introduction
Setting up a business in the United Arab Emirates (“UAE”) requires careful consideration of various factors, one of the most important being the selection of an appropriate location.
Due to various incentives, free zones have gained significant popularity among the business community. Today, the UAE offers more than 40 free zones. However, free zone companies face restrictions on their activities outside the free zone where they are established and are generally required to lease office space within the free zone itself. As a result, office space in free zones is in high demand and can be quite expensive.
2. What is the concept and rationale behind No-Objection Certificates for mainland office leasing?
An No-Objection Certificate (“NOC”) for leasing office space in the UAE mainland is a document issued by a free zone authority, stating that it has no objection to the licensee renting office space outside the free zone, specifically in the mainland.
Issuing an NOC is a strategic move for free zones to attract new clients, increase license sales, and address potential office space shortages within their jurisdiction. Additionally, issuing NOCs generates revenue for free zones.
3. Does an NOC authorize office rental in the mainland?
While an NOC appears to offer flexibility for free zone companies to secure office space outside their zone, it is essential to approach this with caution.
An NOC merely states that the free zone authority does not object to its licensee renting an office in the mainland; however, it does not provide legal authorization for such rental. The jurisdiction of a free zone authority is limited to its own territory and does not extend to authorizing companies to lease commercial real estate outside its borders. Therefore, possessing an NOC does not provide legal authorization to lease mainland commercial space.
Additionally, free zone authorities commonly include a non-liability disclaimer on the NOC, releasing themselves from responsibility. This shifts the liability to the free zone company rather than the authority.
To legally operate in the mainland, companies must obtain a business license from the Department of Economy and Tourism (“DET”) in Dubai or the relevant authority in other emirates (Department of Economic Development – “DED”). Establishing an office with employees in the mainland constitutes business operations there and requires either a DET/DED license or a dual license. A dual license is granted through a partnership between the free zone and DET/DED, currently available through a limited number of free zones.
4. What are the implications of renting office space in the mainland without the relevant license?
Renting office space in the mainland without a valid mainland or dual license can result in fines, ranging from AED 100 to 100,000 if discovered by authorities.
Under UAE Labour Law, employers are strictly prohibited from hiring workers without first obtaining a work permit from the Ministry of Human Resources and Emiratisation (“MOHRE”). Work permits are only issued to licensed establishments registered with DET/DED. Non-compliance can lead to severe penalties, including fines ranging from AED 50,000 to 200,000 for employers.
5. Conclusion and Outlook
In some cases, companies may mistakenly assume that an NOC grants them the authority to lease office space in the UAE mainland, leading to significant risks, such as fines and legal consequences for non-compliance with UAE regulations. It is crucial for companies to prioritize regulatory compliance, fully understand the legal landscape, and obtain the necessary licenses before renting office space in the mainland.
While NOCs may seem to offer flexibility, their limitations must be understood, and companies must adhere to legal frameworks to mitigate risks, including monetary fines. The inclusion of a non-liability disclaimer protects free zone authorities from liability if their licensee faces fines for renting mainland office space without the appropriate license. This disclaimer also clarifies that the NOC does not grant mainland operational authorization. However, NOCs can still be misleading for licensees, creating a false impression of authorization.
Considering the implications of the UAE Labor Law and other potential consequences, leasing office space in the mainland without a valid mainland or dual license can result in severe penalties, including fines, legal sanctions, and potential business disruptions. Therefore, it is vital for free zone companies to understand and comply with all legal requirements before initiating any business activities in the UAE mainland.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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