News reports published on 23 November 2020 (for more information see the Emirates News Agency's press release and Gulf News' report) made the exciting announcement that the United Arab Emirates ("UAE") is abolishing:
- the restrictions on foreign ownership of limited liability companies; and
- the requirement that a branch of a foreign company appoints a UAE national to act as agent.
This is a very welcome and positive announcement, which will serve to enhance the global position of the UAE as a very attractive destination for foreign investors.
A move away from the FDI landscape
Under the UAE's Commercial Companies Law 2015 (as amended) ("CCL") all companies (including limited liability companies, private and public joint stock companies) are subject to a restriction that the maximum amount of share capital capable of being owned by a foreign investor is limited to 49%.
Recent laws relating to foreign direct investment (including the Foreign Direct Investment Law of 2018 and Cabinet Resolution No. 16 of 2020) ("FDI Laws") have progressively relaxed the restriction on foreign ownership within certain sectors of the UAE economy (defined in the FDI Laws as the "Positive List"). A foreign investor looking to obtain 100% ownership under the Positive List also needed to comply with strict requirements relating to minimum capital investment, technology use, capital expenditure in the UAE, a research and development commitment and engaging UAE nationals.
It is understood that the new law will repeal the FDI Laws and will leave the local licensing authorities with the discretion to prescribe the investment conditions attaching to 100% foreign ownership.
Certain sectors of the UAE economy will also be excluded from the new law, including oil and gas, transport and telecoms.
The new law is likely to reduce the expense of doing business in the UAE. For example, dispensing with the need to engage a UAE national as agent to a branch office will remove the need to pay annual fees and to interface with the agent for the purposes of obtaining UAE residency and employment visas.
The new law will amend the CCL. Individual licensing requirements will be prescribed by the government authorities, principally the Departments of Economic Development, and this will serve as a framework to understand how 100% foreign ownership will be facilitated.
The new law may also serve to be a catalyst for:
- M&A activity from foreign investors seeking to obtain control of UAE businesses;
- consolidation of current free-zone activities with on-shore activities, including streamlining office space and work-force in the UAE; and
- further high value foreign direct investment in the UAE.
We recommend foreign investors who have investments in the UAE to consider their current shareholding arrangements and the extent to which they enable them to take 100% control of their local UAE business. This is most likely to be relevant where the UAE national is a non-active shareholder and not involved in the UAE business. In such instances, it may be appropriate to work with the UAE national to agree on a strategy to transfer 100% legal control.
The future of the free-zones
The new law may also require consideration of free-zone business. Free-zones have, so far, permitted 100% foreign ownership and exemption from corporate tax and customs duties. We anticipate the tax advantages of free-zones will remain and therefore foreign investors looking to structure their operations in the UAE may still want to consider free-zone operations as part of their wider market strategy.
We will provide further guidance on the new law once it is published in full (anticipated to be 1 December 2020). In the meantime, if you have any questions on this topic please contact Tim Casben, Suhail Mirza or Simon Elliott.