Landmark law to permit up to 100% foreign ownership in onshore UAE

The government of the United Arab Emirates (UAE) continues to introduce measures, including key legislative changes, intended to further diversify the UAE’s economy away from its historic dependence on oil revenues. One key focus has been upon the introduction of measures that increase the UAE’s attractiveness as a destination for foreign direct investment (FDI).

In recent years, in a move to compete as a global marketplace, the UAE has: revised its Commercial Companies Law; enacted an upgraded bankruptcy regime; instituted VAT legislation; and introduced reporting requirements allowing the UAE’s authorities to comply with international norms in respect of fiscal transparency and global co-ordination of tax regulation. There is also an increased focus on combating money-laundering, bribery and corruption following the ratification of the United Nations Convention against Corruption and the Arab Convention to Fight Corruption.

One of the most noteworthy legislative changes in this programme of reform has been the enactment of the Foreign Direct Investment Law (FDI Law) in September 2018.

The Foreign Direct Investment Law

The UAE’s Commercial Companies Law mandates that a minimum of 51% of the share capital of any company incorporated in the UAE (other than under the laws and regulations of its freezones) must be owned by UAE nationals (or entities that are wholly owned by UAE nationals). The need to comply with the local ownership requirements has been viewed by many international investors as an undesirable feature of the legislative framework of the UAE which has led to either unnecessarily complex ownership structures or, in the most extreme cases, a reduced willingness to invest significant capital.

The FDI Law does not operate as an exhaustive, stand-alone piece of legislation or repeal the local ownership requirements in their entirety; instead it provides a framework for the proportion of a company’s share capital that is permitted to be owned by non-UAE nationals to be increased through the passing of subsequent UAE Federal Cabinet Decisions and regulations passed by the governments of individual emirates.

The negative list

The FDI Law establishes that its relaxation of the restrictions on foreign ownership is not general, but will apply to specific sectors and a limited number of commercial activities within those sectors. As such, the FDI Law sets out a negative list and provides that the permitted level of foreign ownership of companies that are licenced to operate in these sectors will not be increased beyond currently permitted levels.

The industries included on the negative list include: the petroleum exploration and production sector; fisheries services; the military and security sector; postal and communication services; the banking sector; land and air transport services; the insurance sector; printing and publishing services; Hajj and Umrah services; commercial agency services; labour and servant services; medical retail businesses; electricity and water services; and poison control centres, blood banks and quarantines.

It is important to note that the Federal Cabinet has the discretion to add and remove activities and sectors from the negative list, however, on the basis that the sectors included in the negative list primarily consist of those sectors that are deemed to be of a particularly sensitive nature. We do not envisage that the removal of any activities is likely to occur in the short term.

The positive list

The FDI Law provided for the formation of a foreign direct investment committee (the Committee) that was tasked, among other things, with submitting to the Cabinet an initial list of activities and sectors in which increased foreign ownership is to be permitted. This list of eligible sectors and economic activities has now been approved by the Cabinet and is known as the positive list.

What activities are captured by the positive list?

The positive list presently sets out 122 commercial activities conducted in relation to 13 commercial sectors. It is evident that the selection of sectors has been made on the basis of the UAE government’s determination of those sectors it considers will receive the greatest benefit from increased levels of foreign investment and that are capable of acting as long-term drivers for sustained economic growth.

The commercial sectors included on the positive list are: renewable energy; space; agriculture; the manufacturing sector; transportation and storage; hospitality and food services; information and communication; professional, scientific and technical services; administration and support services; education services; healthcare services; art and entertainment; and the construction sector.

Official communications from the UAE government have stated that the commercial activities within a given sector that form part of the positive list are intended to be innovative in nature.

What conditions need to be satisfied?

The inclusion of a commercial activity on the positive list does not, however, mean that:

  1. companies conducting those activities may have 100% foreign ownership – instead, the inclusion means that companies intending to conduct these activities may have foreign ownership of more than 49%, but the maximum level of foreign ownership for a given commercial activity will be determined at an emirate by emirate level; or
  2. permission will be granted automatically and on an unconditional basis – instead approvals are to be granted on a case-by-case basis and may be subject to compliance with particular conditions.

The conditions that need to be satisfied vary dependent on the sector, activity and compliance with existing regulation, but are primarily focussed upon compliance with: a) minimum levels of investment; b) minimum levels of employment of UAE nationals; and c) the continued use of innovative technologies and processes.

By way of example, the requirements for agricultural sector businesses to be eligible are:

  • a minimum share capital of AED7.5m for most activities in this sector;
  • participation in the Emiratisation Club and compliance with particular requirements in respect of the employment of a minimum proportion of UAE nationals; and
  • evidence of the deployment of modern technology in the production process.

The requirements for manufacturing sector businesses are:

  • a minimum share capital ranging from AED15-100m (with lighter industries (such as garment, leather products and pharmaceuticals manufacturing and aircraft engines, vessels and vessel engines repair and maintenance) at the lower end and heavier industries (such as motor vehicle, trailers, semi-trailers, commercial ships, ship parts, drilling platforms and floating structures manufacturing) at the higher end of this range);
  • participation in the Emiratisation Club and compliance with particular minimum requirements in respect of the employment of UAE nationals; and
  • evidence of the deployment of modern technology in the production process.

The requirements for service sector businesses (divided into four main activities: hospital activities, civil engineering, education and retail trading) are:

  • a minimum share capital ranging from AED70-100m;
  • participation in the Emiratisation Club and compliance with particular minimum requirements in respect of the employment of UAE nationals; and
  • compliance with various other requirements imposed by regulatory bodies.

Reception and practical impact

The publication of the positive list comes as a much welcomed and much anticipated change in the UAE position with regard to foreign investment. As Expo 2020 approaches, it provides an opportunity for foreign investors to own the majority of shares, if not all of the shares, in many different types of business within the UAE.

The infancy of the Cabinet decision and the fact that the Department of Economic Development (DED) in each emirate has discretion to determine the extent to which the permitted level of foreign ownership is to be increased beyond 49% means, however, that the full practical impact remains to be seen and international investors are advised to continue to monitor this emerging situation closely.