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can anyone please explain what exactly is the 'free zone'?

cheers

A free zone is an area (in the case of the UAE a number of areas); that are set up within the national borders of the UAE to encourage business in the region, without the normal business constraints that you would have in setting up a business within the UAE.

In the case of the UAE, setting up a business within the free zone can be done without having a local business partner - as is the requirement in the UAE.
All earnings in the free zone are tax free, in the case of manufacturing concerns tax is payable as the products exit the free zone and enter the UAE.
In the case of consultancy based businesses (such as an architect where no product is produced) there is no tax on earnings.
The employment regulations differ in the free zone; the company administering the free zone (the free zone authority) is the main sponsor of employees, employees do not have to have a local (UAE national) sponsor as is the case with business outside of the free zone.

Normally setting up a business in the FZ comes at a cost; more prominent FZ’s have higher office rentals and set-up costs (payable to the FZ authority) than those which are a little bit off the beaten track (e.g. Ras Al Khamah). Strictly speaking you are supposed to confine your activities to the FZ; for example if you have a Landscaping company in the FZ you are supposed to only have offices and conduct your work within the FZ, you could not conduct building or installation/ maintenance activities legally outside of the FZ – although in practice many company’s and consultancies operate in this fashion.

http://www.uaefreezones.com/

A number of other GCC countries also have FZ's in the region (e.g. Qatar, Kuwait etc.)