It has been reported that a Presidential Decree was issued on 23 November 2020 in the United Arab Emirates (UAE), introducing significant changes to the foreign ownership regime in the UAE's Commercial Companies Law 2015 (Companies Law). The official Decree setting out the new law is yet to be published (publication is expected before the end of the year).
Background
Until recently, the general position was that all UAE entities incorporated on the mainland (that is, outside of free zones) required UAE nationals (or entities wholly-owned by UAE nationals) to hold a 51% shareholding. This requirement is embedded into the Companies Law. While it has generally been regarded as possible to alter the economic interests between the foreign shareholder and the local shareholder to a degree, and foreign investors have often entered into so-called 'side arrangements' with the local shareholder in relation to the economic ownership and decision making for the business, uncertainty has remained in relation to the effectiveness of these arrangements.
In 2018, the Foreign Direct Investment Law (FDI Law) was passed (supplemented by Cabinet Resolution No. 16 of 2020) to relax the foreign ownership restrictions in specified business sectors (known as the Positive List) - allowing up to 100% foreign ownership of certain Positive List businesses. However, in order to qualify for the foreign ownership exemption, the applicant needed to meet various relatively onerous requirements, such as significant share capital contributions, use of technology, and employment of UAE nationals. Further, ultimate approval was at the discretion of the relevant licensing authority.
Changes implemented by the law
We understand that the new law will amend the Companies Law to remove the general requirement for 51% shareholding by UAE nationals, and so generally allow 100% foreign ownership of UAE limited liability companies established on the mainland, and also abolish the requirement that a branch of a foreign company must appoint a UAE national to act as agent. These changes represent a significant departure from the controlled sectoral approach adopted in the FDI Law, which we understand will be repealed upon the new law becoming effective.
Local licensing authorities of each Emirate will still retain discretion whether to impose an element of UAE national ownership, and we understand certain strategically important sectors, such as oil and gas, telecoms and utilities, will remain subject to the foreign ownership restrictions (in effect, a new negative list).
Reports indicate that most of the changes implemented by the new law will take effect on 1 December 2020, although the key changes permitting 100% foreign ownership will become effective six months following publication of the Presidential Decree in the Official Gazette. Companies will be given a grace period (expected to be one year) to comply with any changes required by the new law.
Looking ahead
Whilst we await full details of the new law, the move to allow 100% foreign ownership of UAE businesses should significantly enhance the UAE's attraction to overseas investors - particularly those who may have been reluctant to enter the UAE market as a result of these ownership restrictions.
Foreign companies that currently have established businesses in the UAE, with mandatory local shareholding, may wish to review those arrangements in light of these developments if 100% legal ownership is desired.
These developments may also lead to an interesting discussion regarding the continuing benefits of free zones. Free zones generally already permit 100% foreign ownership, and also often provide a more familiar legal regime for foreign investors, but typically do not allow entities established within their region to trade on the UAE mainland. Some businesses established in free zones may now find it more attractive to establish themselves onshore (and combine onshore and offshore structures into a simplified corporate structure).
We expect further details of this new law will emerge shortly. Please do not hesitate to contact one of our team for further discussions regarding doing business in the UAE.
Authors: Simon Fraser (Partner), Stuart James (Partner), Matt Hartsuyker (Senior Associate), Sara Malek (Associate) and Rushal Noor (Associate)
