Foreign ownership restrictions have traditionally been the greatest single impediment to FDI in the Gulf region. That legislative picture has been changing over the course of the past decade with some Gulf Co-operation Council (GCC) countries – notably Saudi Arabia, Bahrain, Kuwait and Oman – allowing ever-greater possibilities for unrestricted foreign investment in an ever-increasing range of economic sectors.
In many respects, the United Arab Emirates (UAE) appeared to have fallen behind somewhat in the race to liberalise the economies in the Gulf despite offering a zero-tax environment and superb infrastructure. Though foreign companies were entitled to establish branches for some activities, there was no simple structure for the creation of a local limited liability company to ring-fence local liabilities and potentially ameliorate the effects of domestic taxation in the investor’s home jurisdiction.
Foreign ownership in the UAE in most fields of endeavour was limited to a 49% equity interest, with foreign investors required to partner with a local Emirati or GCC partner who would hold the remaining 51% interest. Full foreign ownership of companies was allowed only in designated free zones, designed to encourage foreign investment in designated industries, with their activities largely restricted to that free zone.
New foreign investment opportunities
The situation changed in dramatic fashion on 2 July 2019 with the announcement of a decision of the Federal UAE Cabinet to permit up to 100% foreign ownership for 122 economic activities across 13 industry sectors in the UAE. The affected sectors comprise: transport and storage; agriculture; space; manufacturing; renewable energy; hospitality and food services; information and communication; professional, scientific and technical activities; administrative and support services; educational activities; healthcare; art and entertainment; and construction.
The decision was made pursuant to the provisions of Federal Decree Law No. 19 of 2018 (the ‘Foreign Investment Law’) which came into force in November of last year. That law stipulated that the cabinet would, by resolution, establish a ‘Positive List’ of areas in which increased foreign ownership would be permitted. The decision represents the first iteration of the Positive List.
Among other things, the Foreign Investment Law also established a Negative List, spelling out those areas in which increased foreign investment in UAE industries would not be permitted. These areas include: petroleum exploration and production; fisheries; investigation, security, military sectors, and manufacturing of weaponry, explosives, military equipment and associated devices and uniforms; postal, telecommunications and audio-visual services; banking and financing activities, payments and funds management systems; land and air transport services; insurance services; publishing and printing services; Hajj and Umrah services; commercial agencies services; labour and servant services, and recruitment of personnel; medical retail businesses (e.g. privately owned pharmacies); electricity and water services; and poison control centres, blood banks and quarantine services.
New benefits and protections
The cabinet decision certainly offers a great deal of promise to foreign parties seeking to invest in the UAE. However, the actual text of the decision or any resolution promulgated under it have yet to be made public so not all of the relevant details and means of implementation are yet clear. However, foreign companies availing themselves of investments in those areas covered by the decision will certainly enjoy some new benefits and protections under the Foreign Investment Law. There are many positive signs here, as well as some that will trigger caution or perhaps even concern.
Among the positives, foreign investors will be encouraged by the wide range of new activities – 122 in all – in which they can enjoy investment up to a 100% stake. Companies licenced under the Foreign Investment Law (FDI Companies) will be treated as national companies, subject to other legislative restrictions. It is unclear whether this treatment will extend to the holding of real property in the UAE, something which is presently quite tightly controlled.
These FDI Companies will be entitled to transfer their locally generated profits, proceeds of liquidation and monies obtained through the settling of disputes out the UAE without restriction. This right had previously been guaranteed by practice but not by express law. Employees of such companies will also be entitled to freely and unrestrictedly transfer their wages and other paid entitlements out of the UAE.
FDI Companies are granted express special guarantees against the seizure of their ownership or assets except in the case of public interest and then only for fair compensation.
Subject to approval from the competent legislative authority, an FDI company can admit new partners, amend its Articles of Association or sell its business or assets. This latter term should have a positive effect on M&A in the country. The approvals process for FDI companies will be a streamlined one with the competent authority required to approve qualified applicants for FDI Company status within five days of their satisfaction of the approval requirements.
Issues yet to be addressed
However, there are some remaining questions and potential issues concerning these fundamental changes that will need to be addressed. Neither the Foreign Investment Committee nor the FDI unit of the ministry of economy, charged under the Foreign Investment Law with the oversight and the implementation of foreign investment respectively, has been formed to date. The formal procedures for the approval of FDI Company status have yet to be established as well.
General government announcements accompanying the decision have suggested that implementation as regards the Positive List will be left to the local governments of each of the seven Emirates comprising the UAE. This has raised some concern as to whether, for example, different investment requirements or even investment thresholds will be created in different Emirates. This would not be unusual – for example, there are currently considerable discrepancies among the Emirates in the administration of the Commercial Companies Law, a Federal statute which create some issues in terms of investor certainty. It also creates some uncertainty as to precisely when and where the changes will be implemented and how they will look. Finally, FDI Companies will be required to employ and train Emirati nationals in accordance with a Cabinet Resolution which has yet to be promulgated.
Nevertheless, the advent of the decision in July, taken with the Foreign Investment Law of 2018, amounts to a radical and positive change in direction for the UAE. It is a significant development, which is highly likely to lead to substantially increased levels of foreign investment in the UAE.
Douglas G. Smith is a partner at law firm Squire Patton Boggs LLP in Dubai.