Amidst fears of global economic slowdown, it is always exciting to hear about the new steps the UAE is taking for sustainable long term growth of the country and its residents. In the past few months, UAE has introduced long-term residency to investors and high-earning ex-pats, new rules to speed up Small and Medium Enterprises (SME) payments, signed memorandums of understanding (MoUs) to boost trade, as well as implemented the passporting regime for domestic funds to support startups. As per the new FDI regime, several categories of business licenses will no more require Emiratis as sponsors with 51 percent shareholding rights from December 1st.
The Foreign Direct Investment Law
The UAE’s Commercial Companies Law mandates that a minimum of 51% of the share capital of any company incorporated in the UAE (other than under the laws and regulations of its free zones) must be owned by UAE nationals (or entities that are wholly owned by UAE nationals). The need to comply with the local ownership requirements has been viewed by many international investors as an undesirable feature of the legislative framework of the UAE which has led to either unnecessarily complex ownership structures or, in the most extreme cases, a reduced willingness to invest significant capital.
The FDI Law does not operate as an exhaustive, stand-alone piece of legislation or repeal the local ownership requirements in their entirety; instead, it provides a framework for the proportion of a company’s share capital that is permitted to be owned by non-UAE nationals to be increased through the passing of subsequent UAE Federal Cabinet Decisions and regulations passed by the governments of individual emirates.
The UAE’s 100% Foreign Ownership Rule
The long-anticipated and widely discussed Foreign Direct Investment Law, which will have game-changing implications on the investment landscape of the nation, was approved by the President, His Highness Sheikh Khalifa bin Zayed Al Nahyan.
The law, since in force, allows foreign ownership in “onshore” or mainland businesses. Traditional law allowed only 49% foreign ownership. 100% foreign ownership was only permitted in free zones or when setting up a professional services company. The long-awaited 100% foreign ownership of companies is now allowed in the UAE as per Cabinet Resolution No. 16 of 2020 on determining “The Positive List”.
The UAE is rightfully seen as the gateway to international business opportunities and more so now. The country is known for its pro-business culture and conducive infrastructure for foreign investment. The country’s stable political climate also makes it extremely favorable for investments. Added benefits include zero corporate taxes on gained profits and complete exemption on income tax among others. Now, opportunities are endless with the new reform which will benefit UAE’s economy and foreign investors alike.
The Positive List
The Foreign Direct Investment (FDI) Law provided for the formation of a foreign direct investment committee (the Committee) that was tasked, among other things, with submitting to the Cabinet an initial list of activities and sectors in which increased foreign ownership is to be permitted. This list of eligible sectors and economic activities has now been approved by the Cabinet and is known as the positive list.
The positive list presently sets out 122 commercial activities conducted in relation to 13 commercial sectors. It is evident that the selection of sectors has been made on the basis of the UAE government’s determination of those sectors it considers will receive the greatest benefit from increased levels of foreign investment and that is capable of acting as long-term drivers for sustained economic growth.
The commercial sectors included on the positive list are:
- Renewable energy
- The manufacturing sectors
- Transportation and storage
- Hospitality and food services
- Information and communication
- Professional, scientific and technical services
- Administration and support services
- Education services
- Healthcare services
- Art and entertainment; and
- The construction sectors
The Negative List
The FDI Law establishes that its relaxation of the restrictions on foreign ownership is not general but will apply to specific sectors and a limited number of commercial activities within those sectors. As such, the FDI Law sets out a negative list and provides that the permitted level of foreign ownership of companies that are licensed to operate in these sectors will not be increased beyond currently permitted levels.
The industries that are a part of the negative list include:
- The petroleum exploration and production sector
- Fisheries services
- The military and security sector;
- Postal and communication services
- The banking sector
- Land and air transport services
- The insurance sector
- Printing and publishing services
- Hajj and Umrah services
- Commercial agency services
- Labor and servant services
- Medical retail businesses
- Electricity and water services
It is important to note that the Federal Cabinet has the discretion to add and remove activities and sectors from the negative list, however, on the basis that the sectors included in the negative list primarily consist of those sectors that are deemed to be of a particularly sensitive nature.
Given the current economic effects of the Covid-19 crisis, the passing of the FDI Law of 2020 comes as a welcome move for new and existing investors and reinforces UAE’s appeal as a regional investment hub. We are certain that this move will bolster the UAE’s growth to reach new heights. Foreign ownership has been a concern for many entrepreneurs in the region, and UAE being one of the first to offer this will instill confidence in the wider community to follow suit for a more sustainable economic future.