More than 300 FDI projects have launched in the Persian Gulf every year since 2011, according to greenfield investment monitor fDi Markets. Incentives towards doing business in the region include a business-friendly environment and numerous free zones, many of which – particularly in the United Arab Emirates – have been recognised by fDi Magazine’s annual Free Zones of the Year awards.
The Gulf Co-operation Council (GCC) countries boast innovation, natural energy resources and a favourable location at the crossroads of Asia and Africa with access to fast-growing and high-yield markets. But while benefits abound, laws for entering the market as a foreign business can be tricky, and they vary from country to country. While free zones allow – as the name suggests – freedom from local regulations and complete ownership of a non-domestic company, 'onshore' businesses in some Gulf countries must grant partial ownership of the company to a local partner, be it an individual or a company. And the extent of required local partner share ownership can range from zero – as in Saudi Arabia – to 51%, as is the case in the UAE.
“Because of these variations, it’s always recommended that these industries take professional advice from local law firms to ensure that their choices or agreements are rightly drawn up to protect their interests,” says Samer Qudah, head of corporate structuring at Al Tamimi & Company, a corporate law firm with 25 years' experience across the Middle East.
Flexibility is key
The choice of a local partner will differ from company to company, depending on its objectives and the industry in which it operates. The selection will also depend upon the reason a partner is required. There may be a need for an agent to distribute a company’s products so that it does not have to physically establish itself in the region, or for a genuine objective partnership in a joint-venture arrangement. There could even be a need for a silent partner, brought to the company just to satisfy the requirements of national shareholding ownership.
To avoid pitfalls, companies should be educated on how the system works in each Gulf country and be clear about their expectations of the arrangement, according to Mr Qudah. “Depending on that, you need to ensure the agreement is rightly drawn by the parties," he says. "If that understanding is made clear from the outset, the likelihood that an issue would arise will be slim.”
John Martin St Valery, founder and director of Dubai-based Links Group, a firm that advises companies moving into the UAE and Qatar, believes that freedom and flexibility are the most important factors to consider when establishing a partnership with a local entity. “That’s what companies should look for going into any new market – what are you tied to, how can you exit? If you want to sell your business, do you have the ability to do that, or is it up to your local partner?” he says.
On the topic of an exit strategy, Mr Qudah adds: “In a local partnership agreement, one would want to secure an easy exit from this agreement for whatever reason; if something goes wrong, you’d want to ensure you could exit that relationship without any disastrous outcome. So something to make sure of is an exit strategy and exit provisions allowing you to terminate that agreement or replace the local partner when needed.”
The 51% factor
“We found that that barriers to entry for foreign companies still exists. To be told that you have to give up the majority shareholdings of your company – 51% in the UAE – is quite a disincentive,” says Mr St Valery. “Foreign companies can now very easily mitigate this risk through a sensible and secure model.”
Links Group is a pioneer in that it manages 100% national-owned companies to act as a 'corporate nominee' partner for foreign companies, thereby providing foreign company asset protection while shielding the local partner from undue risk. The system was created through partnership with Dubai FDI, the foreign investment office of Dubai government’s economic development department. The system was created in conjunction with the UAE foreign investment office and the Dubai government.
“If you have a locally owned company that owns the 51% rather than an unknown individual, then you can have a contractual arrangement that says actually beneficial control and ownership remain with the foreign party,” says Mr St Valery. “The local entity holds that 51% in effect in trust.”
While there is no trust arrangement by law in the region, says Mr St Valery, it is recognised as a contractual arrangement. “The Links Group thus holds 51% of a company’s shareholdings, and in return for a fee, perhaps labour and immigration or visa services, we’d pass the ownership of those shares back to the foreign party if they wish to divest or sell the business or move out of the market.”
While this corporate nominee system is not universally used in the region, it is growing fast, according to Mr St Valery. “I wouldn’t say it’s the norm yet, but it has certainly become more evident over the past 10 years. More boutique firms are following our model, which shows the market is maturing.
“That’s our model – separating commercial engagement with the local community, which is essential, from ownership of the business, which must remain beneficially yours.”
Links Group has about 300 client companies for which it acts as a local sponsor, 45% of which are from the UK. Among the top sectors represented are construction, real estate, education, retail, green energy and health.
While choosing a location is primarily dependent on sector and business activity, the UAE remains the leading GCC country in terms of ease of doing business, ranked 22nd by the World Bank's Doing Business ranking. Bahrain, meanwhile, was one of the first countries in the region to pass an investment law. “Bahrain is probably the most advanced GCC country, allowing 100% foreign ownership, and certain nationalities are treated as Bahraini as well," says Mr Qudah. "Qatar has passed a new commercial companies law allowing 100% ownership in certain sectors, and Oman also offers many free zones accommodating 100% ownership.”
Saudi Arabia has investment laws allowing 100% foreign ownership in certain sectors and activities, and Kuwait has recently passed a similar law. The UAE maintains its restricted rule of 51%-49% local-foreign ownership, but is currently discussing an investment law allowing for 100% foreign ownership subject to cabinet approval in certain strategic industries, according to Mr Qudah. “All the GCC countries are moving towards opening up their companies to attract more FDI,” he says.