04 Apr 2017

Manufacturing Sector

Authored by: Hadef & Partners, Sector Groups

Manufacturing Sector

Free importation into the UAE – an incentive for local manufacturing

The UAE Federal Law No.2 of 2015 concerning commercial companies provides that a minimum of 51% of the share capital of a limited liability company (“LLC”) incorporated “onshore” in the UAE (i.e. not in a free zone), must be owned by UAE nationals or by a corporate entity which is wholly owned by UAE nationals (“UAE Ownership Requirements”).

In order to be able to carry out manufacturing as a business activity, an LLC must obtain an industrial production licence (“IPL”) from the UAE Ministry of Economy (“MOE”). This is in addition to the industrial licence obtained from the relevant Department of Economic Development (“DED”) in the Emirate in which the LLC carries on business. An IPL enables a LLC to import raw materials and machinery into the UAE, for the purposes of being used by such LLC to manufacture goods, without paying customs duties at the entry point into the UAE (which is otherwise usually payable at the rate of 5% of the value of the imported goods/raw materials).

Free Exportation to other GCC member states – an incentive for local manufacturing

Typically, manufactured goods are subject to customs duties, charged on the importer, depending on the customs regulations of the importing country. However, the situation is different in relation to importation from within the GCC.  

Goods manufactured by a LLC holding an IPL may be exempt from customs duties in the event that such goods are imported into any GCC country pursuant to the Common Customs Law of the GCC States approved by Federal Decree 85 of 2007 (“GCC Customs Law”). Such exemptions are conditional upon obtaining a certificate of origin (“COO”) and a value added certificate (“VAC”) for such manufactured goods from the MOE. 

In order to obtain a COO and a VAC from the MOE, a LLC must meet the following two conditions:

  1. its share capital must satisfy the UAE Ownership Requirements; and
     
  2. at least forty per cent “value” must be added to the goods during the manufacturing process taking place in the UAE.

Exportation and importation via UAE Free Zones

UAE free zones, such as the Jebel Ali Free Zone (“JAFZ”), allow a free zone company (“FZCO”) to carry out industrial activities, and such FZCO may be owned one hundred per cent by persons who are not UAE nationals (“Foreign Ownership Benefit”).

Unlike a LLC, a FZCO is not subject to any UAE customs duties and can, therefore, import raw materials and machinery into the relevant free zone without having to pay customs duties. The same exemption applies to exportation from the free zones, as no customs duty is charged upon the exportation of manufactured goods outside the territory of the UAE.

However, the main issue encountered by a FZCO carrying out industrial activities is that it is not qualified to obtain a COO or a VAC from the MOE, and the FZCO is consequently unable to benefit from customs duty exemptions pursuant to the GCC Customs Law, where such manufactured goods are exported to GCC countries.  

In order to attempt to overcome this, pursuant to the JAFZ Authority Rules of 2016, the JAFZ Authority permits a FZCO to be established with a national industrial licence (“NIL”), subject to the satisfaction of two criteria:

  1. fifty one per cent of the share capital of the FZCO must be owned by GCC nationals; and
     
  2. forty per cent ”value” must be added to the goods during the manufacturing process taking place in the territory of the UAE .

The advantage of the NIL is that it entitles a FZCO to obtain a COO and VAC subject to the MOE’s approval. However, we note that such COO and VAC may not actually entitle the FZCO to the benefit of the customs duty exemptions provided pursuant to the GCC Customs Law as mentioned above. The NIL can not always therefore be solely relied upon by companies looking to export to other GCC member states. This is because Article 88 of the GCC Customs Law clearly provides that goods imported from free zones into or out of a GCC member state shall be treated as “foreign goods” and subject to customs duties upon entry to the relevant member state.

We have significant experience in advising manufacturing businesses looking to establish in the UAE or to restructure their existing operations, including devising and implementing corporate structures to capture the benefits of:

  1. the protection of capital, assets, profits, and management control by using free zone companies; and
     
  2. the ability to secure COOs and VACs to entitle a LLC to make use of the customs duty exemptions provided by the GCC Customs Law.

For more information, please contact us on sectors@hadefpartners.com