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Article on FDI law

Finally, a Real Possibility: 100% Foreign-Owned Companies in the UAE

In September 2018, the United Arab Emirates gave expats and foreign companies a ray of hope that they would soon be able to own their on-shore company without Emirati partner, as they issued the new Decree-Law No. 19 on Foreign Direct Investment (the “FDI Law”). This law was the first of its kind in the UAE, giving the Emirates the opportunity to support and initiate economic diversity as well as increase its attractiveness for foreign investments. Subsequent regulations clarified the approach of the authorities and now make a 100% foreign ownership in a UAE mainland company a real possibility.

A Quick Recap

Until recently, all companies in the UAE had to have a 51% local Emirati corporate or individual shareholder. The only way to circumvent this and still have more or less 100% control over ones´ company in the UAE, was through a free-zone incorporation, a sole establishment, a mainland limited liability company with a side agreement providing for full control or a special permit for highly prominent foreign companies – naturally, all these options have significant disadvantages or are simply not feasible. However, the FDI Law now allows for any “licensed foreign investment Company (“FDI Company”) to be treated as a national company” and abolishes the requirement for an Emirati shareholder for such entities – however, not for all companies, as will be outlined below.

Activities Eligible for 100% Foreign Ownership

The FDI Law provides for certain activities to be contained in a so-called “negative list” and others to be contained in a “positive list”.

Negative List

The (first) Negative List was already contained in the FDI Law itself. All companies engaged in activities that fall under the Negative List of economic activities, are not eligible to register as a 100% foreign owned company. This Negative list includes all sectors which are

  • - reserved for the government operations of the UAE,
  • - highly regulated or
  • - related to the Islamic Sharia.

Negative List:

Exploration and production of petroleum products, investigation, security, military sectors and the manufacture of weapons, explosives, military equipment, machinery and uniforms; banking activities, finance, payments and cash handling systems; insurance services; Hajj and Umrah services and

Positive List

The first positive list was leaked in 2019, but it was not until early 2020, so almost a year later, that the UAE government officially published a Cabinet Resolution which included the long-awaited Positive List and related requirements in the Official Gazette.

The sectors and activities seem in principle to be unamended from the previously circulated draft positive list, namely agriculture (19 activities), industry/manufacture (51 activities) and services (52 activities), 122 in total. By way of example, vegetable & fruits production, manufacture of foods and beverages, manufacture and repair of vessels and vehicles and educational and hospitality management services are included in the positive list.

The required investment volumes as provided for in the positive list depend significantly on the chosen activity and range from AED 2 million to AED 100 million; for certain activities they also remain as per specialised legislation in place in each emirate (e.g. for engineering or construction). Other restrictions and requirements potentially to be imposed for such foreign investment projects are not mentioned in this Cabinet Resolution itself. Instead, imposing additional requirements will be in the discretion of the competent licensing authority in each emirate (Article 6 of the Cabinet Resolution). The licensing authorities are in the process of issuing relevant forms and conditions – the Dubai Department of Economic Development has already issued such a rather basic form, which includes the further documents to be provided.

Further FDI Requirements

The DEDs of each emirate have created bords which are responsible for investigating any FDI Positive List applications.

Corporate forms available for FDI companies are either limited liability companies (“LLC”) or private joint stock companies (“PJSC”).

An applicant-company wishing to make use of the FDI Law will be required to create an extensive profile of their business. Whether an already existing registered company or a new entrant to the market, an especially important requirement verified by the DED is the capital to be provided for the FDI project. A potential FDI company must be able to prove they have the necessary capital, which varies on a case-by-case basis depending on the economic sector and activity of the business. Fixed assets and moral rights, such as franchise rights, patents, trademarks and tradenames registered as per the laws in force in the UAE will be considered as foreign capital.

Each company must demonstrate their capability of delivering valuable economic growth to the economy of the individual emirate in which they wish to apply. This includes showcasing the company’s financial statements, their budget in recent years and their plan for the coming three years, in particular as to their contribution to the economy of the UAE and the specific emirate in question.

manpower supply services; Water and electricity services, Post services, telecommunication services and audio-visual services; ground and air transportation services; commercial agency services; medical retail trading, such as private pharmacies and poison centers, blood banks and quarantine stations.

All requested documentation must be submitted together with the applicant-company’s memorandum of association to the DED of the emirate in which the seat of the company is planned for approval, followed by a 20% share capital deposit to a UAE bank and finally, further approvals and registrations with the Ministry of Economy. The applicant-company will also have to register for a special program with the Ministry of Human Resources and Emiratisation, the Tawteen Partners Club, to showcase their dedication to the Emirati workforce, including meeting higher Emiratisation quotas, incorporating development and training programs for Emiratis and to commit to no Ministry regulation violations.

Each individual Emirate carries out independent company reviews and might apply specific incentives should the business profile and the initial capital be of sufficient value and interest to their local economy. In such events, the Authority might notify the applicant to complete and submit further information and documentation as per their requirements.

Once the application is submitted, the Authority is committed to providing their feedback within just 5 working days, though in practice this might take longer. If the DED or any other relevant Authority (including the Ministry of Economy, or the Ministry of Human Resources and Emiratisation, etc.) rejects the application for licensing an FDI company, such final rejection will not be subject to an objection or appeal.

Summary

The option of a UAE entity with 100% foreign ownership and control is now not only theoretical anymore but can be applied for and obtained through legal means. That said, an FDI application is certainly complex as there are many aspects – strategic, administrative and legal – to consider in the long term. Also, it will likely be primarily applicable for multinational companies with a high investment volume or for companies in fields of special interest to the Emirati legislator, like e.g. ensuring food self-sufficiency or creating manufacturing and technology hubs. The concrete implementation and approval process by the licensing authorities in each emirate will also need to be carefully reviewed. In any case, it is a very important legislative step to further attract foreign investments in the UAE economy.

If you have any questions or require any advice or legal assistance regarding the above, please contact Dr. Clemens Daburon (clemens@daburon-partners.com) or Ms. Sali Jumah (sali@daburon-partners.com).

Daburon & Partners Legal Consultants LLP

Email: info@daburon-partners.com

Tel.: +971 2 6948655

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Address: Office 2404, 24th Floor Al Sila Tower - Abu Dhabi Global Market Square - Abu Dhabi, UAE

Daburon & Partners Legal Consultants LLP is a boutique law firm providing comprehensive legal advice to international companies acting in the UAE. Our lawyers have been advising in Abu Dhabi for more than 10 years. With a team of Western-trained and experienced lawyers, we develop economically sensible and tailor-made solutions for our clients in German, Arabic, English and French. The firm's clients include medium-sized and large local and international (especially German and Austrian) companies.

Our German-speaking lawyers are the officially appointed legal advisors of the Austrian and Swiss embassies in Abu Dhabi.

Practicing for more than a decade in the UAE, we have acquired in-depth experience of the UAE s legal system ́s often daunting intricacies, and at the same we have gained a thorough understanding of our clients’ businesses within the UAE & Gulf market. By combining legal knowledge and commercial expertise we can best advise our clients in their day-to-day legal affairs and strategic legal planning and we can help them to bridge the legal and cultural divide between them and their counterparties inside and outside of court.

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Disclaimer

The contents of this article have been carefully prepared as per the authors' current knowledge. No liability is assumed for the correctness and completeness of the content or for changes in the meantime.

© 2020 Reprinting, in whole or in part, and any type of reproduction and distribution are only permitted with the express consent of the authors.

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