18 Nov 2019

Onshore or Offshore

Authored by: Bilal Snaineh

The introduction of the Foreign Direct Investment Law (Federal Decree-Law No. 19/2018) in September 2018 was an important step towards liberalising the foreign owner- ship restrictions in the UAE.

Currently, under Article 10 of Federal Law No. 2/2015 (the commercial companies law as amended), foreign ownership of companies established onshore in the UAE is limited to a maximum of 49%. The remaining 51% (or more) of the shares in a company established onshore in the UAE must be owned by a UAE national shareholder or a company wholly owned by UAE national(s).

The aim of Federal Decree Law No. 19/2018 is to relax the foreign ownership restrictions set out under Federal Law No. 2/2015 in line with Federal Decree-Law No. 18 /2017 (an amend- ment to this law) which authorised the UAE Cabinet to increase foreign investors’ ownership in companies in certain sectors of the economy. Federal Decree Law No, 19/2018 does not allow 100% foreign ownership across all sectors of the economy but instead introduces a framework under which a Foreign Direct Investment ‘FDI Unit’ will be established within the Ministry of Economy. The main mandate of this Unit is to propose FDI policies, identify priorities, formulate relevant programmes and lead the implementation of the Cabinet-approved proposals. The FDI Unit will also oversee the establishment of a comprehensive database for UAE investments and assist in the registration and licensing of FDI projects. In addition, an FDI Committee was also established at the beginning of 2019 and has been tasked with designating which sectors of the economy are able to have more than 49% foreign ownership (and will be listed on what is being called the Positive List). The sectors which will not allow higher levels of foreign investment are listed in Federal Decree Law No. 19/2018 (and are being referred to as being on the Negative List).

Recently, the FDI Committee finalised the Positive List and raised it with Cabinet. On 2 July 2019, the Cabinet based on the mandate under Federal Decree-Law No. 19/2018 issued a Reso- lution which specified a total 122 economic activities across 13 sectors which will be eligible for up to 100% foreign ownership. These 122 activities are divided among three main sectors. The first is agriculture where 19 activities benfit from a foreign owner- ship increase. The main activities include cultivation of grain, legumous crops, vegetables, pulses, roots, tubers, cane sugar, flowers and blossoms, grapes, fruits and citrus, apples and fruit with seeds, fruit shrubs and nuts, aromatic crops, crops used for pharmaceutical products and cultivation of other products. The required minimum share capital for the majority of agricul- ture activities is 7.5m AED. The scond sector is industry where 51 activities benefit from a foreign ownership increase. These activities have been divided into light and heavy industries with different minimum share capital requirements for the majority of light industries of 15 m AED and minimum share capital for heavy industry of 100 m AED. Light industries include manufacturing garments, leather products, pharmaceutical products, aircraft maintenance and repair, aircraft engine maintenance and repair, vessell maintenance and repair, vessel engine maintenance and repair. Heavy industries include manufacture of motor vehicles, trailers, semi-trailers, ship parts, floating structure parts, commercial ship building, construction of floating or submerged drilling platforms and floating structures. Finally, there are 52 activities within services which benefit from a foreign owner- ship increase although the minimum share capital investments for most of the services have been reserved to the laws and regu- lations governing such activities, e.g. Federal Law No. 12/2014 Concerning the Audit Profession would still govern services such as accounting, bookkeeping, audit and consulting activities. The main activities listed under Services include hospital activities which require a minimum share capital investment of 100M AED and would be subject to considerations such as the number of hospitals or medical centres in a given area, civil engineering, elec- tricity, plumbing and other construction activities, demolition and site preparation, other specialist construction activities, building construction, rental of construction and demolition machinery and equipment but limited to infrastructure projects such as airport, highways and sports facilities with a value of 450M AED and educational activities (pre-school, primary, secondary and higher education), retail, trading, hotel and restaurant manage- ment. It is important to note the Positive List has not prescribed the foreign ownership percentage or the place where such activi- ties can be conducted, i.e. in any UAE Emirate or specific ones and under certain conditions to be imposed by the local government of that Emirate but this is expected to be clarified when the Resolu- tion is published.

The Positive List could be subject to change by the UAE Cabinet, so its final draft and certain practical implementations of Federal Decree-Law No. 19/2018 can only be confirmed when the Resolution is published in the Official Gazette.
 

ONSHORE VERSUS OFFSHORE IN LIGHT OF THIS

Since Federal Decree Law No. 19/2018 was issued, a number of questions have been raised, including questions on the future of the UAE’s various freezones and their continued attractive- ness in light of this Law. Firstly, it is important to remember that Federal Decree Law No. 19/2018’s main economic objective is to attract foreign investors that do not already have a business or investment presence in the UAE by providing them with the opportunity to have up to 100% ownership of their projects to conduct the 122 activities in the Positive Lists. This Law does not intend to discourage foreign investors from establishing their business in a freezone, or to disrupt the business of the freezones by encouraging freezone businesses to ‘re-domicile’ away from the free zones and move to the onshore jurisdic- tion. This is supported by Article 7(3) of Federal Decree Law No. 19/2018 which states that the Positive List which would be embedded in the Resolution might have restrictions as to the place where certain FDI projects can be established, i.e. they may be restricted to certain Emirates of the UAE. It is understood that this Article and the information available so far on the Resolu- tion is intended to provide protection for the UAE freezones. As seen by the Positive List Federal Decree Law No. 19/2018 intends to target companies which have capital and business models which are able to positively influence the UAE’s economy. As a result, in order for an FDI project to avail the benefits of this Law, the Resolution may impose certain conditions on an FDI project, such as specifying the level of foreign ownership permitt (which could be 100% or less); specifying the type of legal entity required to carry out business in the relevant sector (e.g. private joint stock company rather than a limited liability company); applying minimum capital requirements as set out in the Positive List; and enforcing Emiratisation requirements,

e.g. being a member of the Emiritisation Partners’ Club at the Ministry of Human Resources and Emiritisation. Federal Decree Law No. 19/2018 also intends to provide assurances to foreign investors that profits generated in the UAE; proceeds of liquida- tion of an investment; and funds collected from the settlement of any dispute relating to an FDI project can be transferred outside of the UAE, subject always to existing legislation.

This provides substantial comfort to foreign investors and confirms the UAE’s well-established and investment-friendly culture will continue.
 

TIME TO HEAD OFFSHORE?

It is also not envisaged that those whose business activities are included in the Negative List will decide to move from onshore to offshore. The Negative List sets out sectors which are restricted to UAE nationals or sectors where foreign investment is allowed, but up to a maximum of 49%. Therefore, existing onshore companies, with foreign shareholders, would have already satis- fied the UAE shareholding requirements under Federal Law No. 2/2015 and therefore would not be affected if their sector has been included on the Negative List, unless their sector becomes entirely restricted to UAE investors only.
 

SWITCHING FROM FREEZONES TO ONSHORE?

It is conceivable that freezone companies whose activities are included on the Positive List may wish to consider moving to the onshore jurisdiction. These companies would be able to benefit from being onshore, e.g. selling their products directly in the UAE market. They would also be able to bid for government tenders (since FDI companies are to receive equal treatment to that offered to ‘national companies’ as per Federal Decree Law No. 19/2018 and will also enjoy a wider range of office leasing options). Another advantage for those who decide to become onshore companies over freezones companies will be their ability to trade directly in the UAE rather than having to appoint a distrib- utor or agent in order to sell their products in the UAE.
 

FREEZONE BENEFITS

However, there are also a number of advantages that freezones have which are not currently replicated onshore. Therefore, despite Federal Decree Law No. 19/2018, certain companies that wish to establish or operate a base in the UAE may still prefer to do so in one of the freezones rather than in the onshore jurisdic- tion. For example, for the relatively low share capital require- ments imposed by the freezone regulations in general compared to those set out under the Positive List, for tax optimisation in relation to their international imports/re-exports and for compa- nies and/or entrepreneurs which provide professional services, including consultancy services. It is also worth remembering in addition to offering 100% foreign ownership, it is generally accepted that freezones also offer the following advantages:

  1. the documentation is more suited to foreign investors;
  2. long-term leasing options (up to 25 years) are available on favourable terms;
  3. recruitment and workforce processes are simplified, faster and cheaper;
  4. the easy availability of legal, housing, immigration, labour and other facilities; and
  5. a faster incorporation process (which can be done online through a portal).

The Dubai Freezones Council also recently announced they are considering providing one license which would allow operation in multiple freezones. Details of this single license has yet to be announced but it could be seen as another benefit of sett ng up in a freezone.

Ultimately and notwithstanding Federal Decree Law No. 19/2018, whether or not a business should be established in a freezone or onshore will continue to depend on a number of factors. The main factors being capital investment requirements, the nature of the business activities (whether it is trading or professional); the client base’s presence (whether it is onshore or international); and the place where the actual business activi- ties are conducted (e.g. onshore or internationally). Alongside the additional options that may be available under the Federal Decree Law No. 19/2018 when deciding whether to establish a company onshore or in a freezone, these factors and the various advan- tages and disadvantages of setting up onshore or in a particular free zone should continue to be carefully considered.

The introduction of Federal Decree Law No. 19/2018 is good for investment in the UAE in general and its introduction is expected to raise the level of competitiveness among the various freezones and the onshore jurisdiction. This added competition should reflect positively on the UAE economy.

(Originally published in Emirates Law magazine)

 

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.