The United Arab Emirates (UAE) has scrapped federal rules that impose a 49% foreign investment cap on local companies, a requirement that has stopped and delayed investments into the country. 

The November law, which builds on last year’s liberalisation of ownership restrictions in select sectors, is the latest — and most drastic — in a series of changes intended to open the UAE’s economy to foreigners and establish a sophisticated and transparent business environment. 

“This is, by far and wide, the most significant step in relaxing the UAE’s foreign investment rules over the past 10 years,” says Darren Harris, head of corporate at PwC Legal Middle East. “The requirement to have majority local ownership represented a significant hurdle for foreign investment, including from private equity and venture capital investors.”

The law stops short of abolishing the 49% cap outright, as has been widely reported. Instead, it authorises each of the emirates to remove the restriction for their territory. Dubai and Abu Dhabi are tipped to take advantage first, and there is optimism that the other five emirates will follow suit. Foreign ownership restrictions for strategic sectors including oil and gas, transport and telecoms will continue.

The law also cuts red tape for new and existing businesses, including by removing the requirement that all foreign firms act via a local agent. 

Lifting the requirement that an Emirati national holds a controlling stake in all onshore companies boosts the Emirates’ appeal as a destination to establish regional headquarters, and its bid to become a gateway for investment throughout the Gulf and into Africa.

But it could diminish foreign interest in the UAE’s 40-odd free zones. Their lack of ownership restrictions have made these areas a magnet for foreigners wanting to retain full-control, but offshore arrangements do come with other limits. “Having a 100%-owned onshore business completely opens up the market to them, including by allowing them to transact with the public sector, which often requires an onshore presence,” says Mr Harris. 

Investors have already shown significant interest in the reforms. In the week following the government’s announcement, PwC alone received around 100 queries. The changes are tipped to spur mergers and acquisitions, particularly by private equity firms which have struggled under the current rulebook, given their preference for majority stakes, and greenfield investment. 

Data collected by investment monitor fDi Markets reveals that foreigners completed 309 greenfield projects between January and November 2020, down some 40% on the same period  in 2019.

State-owned news agency WAM said the reform “is reflective of the UAE’s forward-looking vision to open up its economy by creating a favourable legislative environment … and supporting companies operating in the country.”