24 Nov 2020

Further Enhancements to the Foreign Direct Investment Regime in the UAE

Authored by: Ahmad Sergieh

The UAE President, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, has issued a decree (the ‘Decree’) which amends fifty one (51) articles of Federal Law no. 2 of 2015 regarding Commercial Companies (‘UAE Companies Law’) and adds a number of new articles relating to limited liability companies and public joint stock companies.

The amendment that has attracted most interest from media and investors relates to Article 10 of the UAE Companies Law which currently requires a UAE national, or an entity wholly owned by UAE nationals, to hold at least fifty one percent (51%) of the share capital of each UAE company that is incorporated ‘onshore’ (which term is commonly used to exclude free zones).

We understand that Article 10 will be amended to remove the requirement for a minimum of 51% UAE shareholding in onshore entities. However, the threshold (if any) of required UAE ownership is to be determined by a committee, comprising members of a number of governmental departments, which will determine which activities are considered to have a ‘strategic impact’ in order for foreign investors to be entitled to hold up to 100% of the legal interest in such companies.

Once details of the Decree are published, we will be able to advise on the extent to which the proposed changes to Article 10 of the UAE Companies Law will reflect the recent Foreign Direct Investment Law (‘FDI Law’) and/or further expand the possibilities for foreign ownership. By way of background, the FDI Law was issued on 23 September 2018, paving the way for relaxation of foreign ownership restrictions, and is understood to be repealed under the Decree.

Under the FDI Law, a committee called the Foreign Direct Investment Committee was formed by a Cabinet resolution and was tasked with developing economic policies for the implementation of the FDI Law including the following:

(i)         setting out a list of economic activities that may be carried out by a company wholly owned by foreign investors (‘Approved Activities List’);

(ii)        approving foreign investment projects to conduct activities that are not set out in the Approved Activities List following recommendations made by the relevant licensing governmental departments; and

(iii)       deciding on the benefits granted to specific foreign investment projects.

The Cabinet identified the following main considerations when making decisions pursuant to the FDI Law:

(a)        integration with strategic plans of the UAE;

(b)        achieving good returns and added value to the national economy;

(c)        increasing the level of innovation in the national economy;

(d)        providing job opportunities for UAE nationals;

(e)        impact on national companies engaged in similar activity;

(f)         competence, experience and international reputation of a foreign investor;

(g)        utilisation of modern technology; and

(h)        whether the activity achieves a positive impact on the environment.

We would expect similar criteria to be considered by the committee to be formed under the Decree when assessing whether particular activities have a ‘strategic impact’.

After the committee approves the list of activities, the relevant licensing governmental departments must set out the procedures to be followed by a company performing each such activity in the UAE.

Although, as was the case with the FDI Law, the Decree does not immediately identify which sectors will benefit from the relaxation of the current foreign ownership restriction, it is nevertheless a welcome and important item of legislation that should substantially contribute in further enhancing the attraction of the UAE as a business hub for foreign investors.

We also understand that further key amendments are under consideration, such as the following:

(i)         certain entities partly (or wholly) owned by the government in specific sectors will be exempt from the provisions of the Decree;

(ii)        certain restrictions would apply to existing companies wishing to amend their articles of association;

(iii)       branches of foreign companies may not be required to appoint a national service agent; and

(iv)       changes, in relation to listed companies, which include provisions for contributions in-kind, the public subscription threshold, and general assembly procedures.

Announcements made in relation to the Decree refer to the changes being effective from 1 December 2020. We will monitor developments closely.

If you require advice or would like to discuss foreign direct investment in the UAE, then please contact Ahmad Sergieh, Partner, Head of Corporate Dubai and Yasser Omar, Partner, Head of Corporate Abu Dhabi.