UAE raises ownership limits to help drive diversification

* This article has been co-written by Tufayel Hussain, an associate in Reed Smith’s Europe and Middle East corporate team

In less than a year, the Government of the United Arab Emirates has announced several sets of fundamental changes in foreign direct investment policies. An earlier announcement in 2018 was aimed at accelerating investment flows by up to 20%, from the 8% average growth rate, as estimated by the Ministry of Economy.

The UAE is the region’s largest destination for FDI, with annual inflows steady at around $9 billion per year. Much of this is directed into the federation’s many free zones, such as Jebel Ali. Sheikh Mohammed Bin Rashid Al Maktoum, vice-president and prime minister of the UAE and ruler of Dubai, also recently announced vital changes to the country’s residency programme, including the offer of a 10-year residency visa to foreign investors in the country, as well as up to 100% business ownership within specific sectors. This move aims to boost FDI by up to 15%.

The historic news announced by the UAE cabinet last week confirming 100% business ownership would be allowed for over 120 economic activities across 13 sectors (including renewable energy, space, agriculture, logistics, hospitality, food services, information and communications, and manufacturing) is a game changer which will no doubt drive foreign direct investment and boost economic activity.

Coming soon

The long-term goal of the UAE to stimulate, motivate and facilitate businesses and open and expand new economic sectors looks like coming to fruition. The new changes are expected to come into practice towards the end of the year.

For many years, 100 per cent foreign ownership has been the preserve of the UAE’s free zones. Although some may view this latest rule change as compromising the power of free zones, each zone offers much more than ownership benefits to attract investors. Benefits are tailored to a particular industry or business type, but generally include more efficient start-up processes and various regulatory incentives.

The federal government has allowed the local governments in each of the seven emirates to decide on the percentage of ownership in each activity. Therefore, in certain emirates, some activities could still require a local shareholder even if the foreign ownership threshold increases.

It is yet to be seen what approach will be taken by the respective emirates. There are also conditions set for specific economic activities. For example, foreign construction companies will be limited to infrastructure projects such as airports, highways and sports facilities with a maximum value of 450 million dirhams ($120.6 million).

Although the changes will benefit the UAE’s economy, there are a number of privileges offered to these new foreign direct investment companies (FDI companies). These include the ability of investors to operate their business with reduced administrative costs, to conduct duty-free trade within the Arabian Gulf (due to the Gulf Cooperation Council free trade agreement), increased flexibility and not having to share profits.

It is also clear that existing companies will be able to convert their corporate structure into an FDI company, provided that they settle their obligations under UAE law and other contractual requirements. However, we await further information on how local ownership may be transferred, either totally or partially, and we expect the UAE government to release additional information in the coming months. Careful consideration of tax, compliance and regulatory issues, as well as the current nominee arrangement, among others, will be needed before carrying out the restructuring of a company as an FDI company.

Given that many local businesses have faced numerous challenges in the prevailing economic conditions, foreign ownership should have a positive impact on the marketplace.

It is the intent and objective of the UAE government to attract and promote FDI in order to enhance domestic capital, technology and skills. Foreign direct investment, as distinguished from portfolio investment, has the connotation of establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor.

We are still in the watch and wait stage, and are keen to see how this announcement gels with the investor-friendly regime that has been put in place.

Any opinion expressed here is the authors’ own.

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