10 Jun 2021

Relaxation of Foreign Ownership Restrictions: Lists of Approved Activities

Authored by: Ahmad Sergieh

In brief:

  1. Opportunities for foreign investment and ownership in the UAE have been further enhanced following the publication of lists of approved activities by each of the Abu Dhabi and Dubai Economic Departments.
  1. A review of the existing corporate structure should be considered to assess the optimal way to acquire or reduce the shares held by a UAE national shareholder.
  1. Careful consideration should be given to the legal and practical considerations associated with regulated activities set out in the approved lists.

The UAE President, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, issued on 27 September 2020 the Federal Decree promulgating Law No. 26 of 2020 (“Decree”) pursuant to which a substantial number of articles of Federal Law no. 2 of 2015 regarding Commercial Companies (“UAE Companies Law”) have been amended.

Understandably, the aspect of the Decree which has attracted most interest from media and investors is the modification of Article 10 of the UAE Companies Law, which required 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).

Article 10 was amended to remove the specific requirement for a minimum of 51% UAE shareholding in onshore entities. However, it is also stated that the threshold previously required for UAE ownership (if any) will be determined by the Cabinet upon the recommendation of 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.

Interestingly, a list of the relevant activities permitted for the purpose of 100% foreign ownership has been published by each of the relevant Economic Departments in Abu Dhabi and Dubai. Meanwhile, no Resolution has yet been issued by the UAE Cabinet regarding the list of activities that would be considered to have a ‘strategic impact’.

As noted above, each of the Abu Dhabi and Dubai Economic Departments has issued a list which includes more than one thousand approved activities within a broad range of industrial and commercial sectors.

The Dubai list of approved activities also includes a wide range of trading related activities, meaning that foreign investors may now hold the entire legal interest in the share capital of a Dubai trading LLC. The Abu Dhabi list has additional focus on agricultural and industrial activities. From a structuring perspective, it is yet not clear whether the Abu Dhabi Economic Department will accept a wholly foreign owned Dubai trading LLC to establish a trading branch in Abu Dhabi.

It is also worth noting that both the Abu Dhabi and Dubai Economic Departments appear to have decided not to impose any minimum share capital requirements in relation to any of the approved activities nor is any special procedure required to be followed in order to to give effect to the relaxation of foreign ownership restrictions. Therefore, careful consideration should be given to the provisions of the memorandum and articles of association of existing LLC’s as well as any shareholders agreement or other similar arrangement in order to determine the optimal manner by which the nominee shares held by the local UAE shareholder should be reduced or acquired by the relevant foreign investor.

A number of issues still remain outstanding with respect to regulated activities being included in the relevant lists being published. For example, a number of clients wishing to establish a manufacturing facility will apply for an Industrial Production Licence which entitles them to a number of benefits including an exemption from a five percent (5%) fee imposed on raw materials imported to the UAE. It remains to be seen whether applicable laws will be amended in the near future to enable foreign investors to retain, or to apply for, an Industrial Production Licence.

The Decree also provided that branches of foreign companies are no longer required to appoint a national service agent.

We are available to assess the following on behalf of clients:

(i)         whether particular business activities are addressed by relevant lists of approved activities;

(ii)        whether existing corporate structures should be revisited in order to further mitigate potential risks and issues associated with UAE national nominee shareholders; and

(iii)       the extent to which we are able to assist in respect of the relaxation of foreign ownership restrictions for regulated activities (as described above).

The published lists now identify sectors that will benefit from relaxation of foreign ownership restrictions, which is a welcome and important step that should substantially contribute to further enhancing the attraction of the UAE as a business hub for foreign investors. We look forward to the other Emirates following in this direction and await publication of applicable lists.

Conclusion:

The publication of lists of approved activities which derive from Law No. 26 of 2020 is an extremely important development in relation to foreign direct investment in the UAE. For more information, please contact Ahmad Sergieh, Partner, Head of Corporate, Dubai a.sergieh@hadefpartners.com or Yasser Omar, Partner, Head of Corporate, Abu Dhabi y.omar@hadefpartners.com.