New changes to UAE corporate and foreign ownership laws will abolish longstanding foreign ownership restrictions and remove substantial barriers to doing business in the UAE.
Federal Decree Law 26 of 2020 (Amendment Decree) was issued on 27 September 2020 by the United Arab Emirates (UAE) government on its publication in the Official Gazette. It introduced significant amendments to Federal Law 2 of 2015 (Commercial Companies Law) and repealed Federal Law 19 of 2018 (FDI Law).
In summary, the Amendment Decree introduced certain changes to corporate governance frameworks, foreign investment and ownership requirements, financial assistance prohibitions, board membership and takeover, capital increase, and listing rules for limited liability companies and joint stock companies, as applicable. Importantly, the Amendment Decree will also remove longstanding foreign ownership restrictions, including the requirement for “onshore” local companies to be 51% owned by UAE nationals. However, these foreign ownership changes will not take effect until six months from when the Amendment Decree was published in the Official Gazette.
These reforms are part of a wider UAE government agenda to economically diversify towards an innovation-led, knowledge-based economy, by continuing to pursue economic reforms aimed at increasing foreign direct investment (FDI) and reaffirming its standing as the primary business hub of the Middle East region. While the Amendment Decree does repeal recent advancements in the UAE’s foreign ownership laws, which leaves a temporary void, the Amendment Decree should be seen as a welcome and transformational step forward for the UAE.
What You Should Know
Below is a summary of the key takeaways of the Amendment Decree relating to the changes to existing foreign ownership restrictions:
- Repeal of the Foreign Direct Investment Law: On its entry into force on 2 January 2021, the Amendment Decree repealed the FDI Law, which only came into force in 2018. The FDI Law relaxed foreign ownership restrictions across 122 economic sectors and activities by introducing a “Positive List” and imposed limitations on foreign ownership across 13 economic sectors by introducing a “Negative List.” While the Amendment Decree will broadly remove foreign ownership restrictions by the end of March 2021, foreign companies, in the interim, will not be able to rely on exemptions in the FDI Law to register majority, foreign-owned local companies, including those with existing applications currently being processed by the respective Departments of Economic Development across the seven Emirates (DEDs).
- Abolition of 51% Local Ownership Requirement: The Amendment Decree will abolish the longstanding requirement for a local company to be owned 51% by UAE nationals, unless the company’s commercial activities are considered to have a “strategic impact” (see below for further discussion). It will also remove requirements for a majority of directors of a joint stock company to be UAE nationals (other than companies carrying on “strategic impact” activities). These are important developments for attracting FDI into the UAE, and are expected to substantially reduce registration and administration costs for businesses. However, the Amendment Decree provides the “competent authorities” (i.e., the respective DEDs) in the respective Emirates with the authority to specify local ownership and board participation requirements for companies, subject to certain powers delegated from the UAE Cabinet to a Committee (as described further below). Therefore, it is possible that different Emirates may adopt differing approaches to local ownership and board participation requirements across sectors.
- “Strategic Impact” Activities: Pursuant to the Amendment Decree, the UAE Cabinet will establish a committee (Committee), comprising representatives from each of the DEDs, that will be responsible for determining: (i) a list of commercial activities considered to have a strategic impact on the UAE’s economy (Strategic Impact List); and (ii) additional licensing controls to impose on companies undertaking commercial activities in sectors listed on the Strategic Impact List. While no further guidance has been given by the UAE government on what sectors are likely to be listed on the Strategic Impact List, we expect many or all of the sectors listed on the “Negative List” in the FDI Law to be listed on the Strategic Impact List. These include the oil and gas exploration and production sectors, and national security related sectors.
- No Requirement for a Local Agent: Currently, foreign companies establishing a branch or representative office in the UAE are required to maintain a local agent. The Amendment Decree will remove this requirement, thereby further reducing registration and administrative costs for business.
- Future of Free Zones: UAE economic free zones have historically attracted many investors and businesses because of the ease of doing business. For example, most permit up to 100% foreign ownership, and offer other incentives including favourable regulatory and tax regimes. However, once the new foreign ownership changes take effect, and as many DEDs continue efforts to simplify regulatory processes, many free zones are likely to experience lessening demand and new challenges of attracting business. Notwithstanding this, the financial free zones of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) will continue being popular, particularly within the financial services industry, as investors and financial institutions continue to be attracted by the common law legal frameworks, independent court systems and well-developed financial regulatory regimes of the DIFC and ADGM. Other free zones focused on developing ecosystems among certain industries and sectors are also expected to retain competitiveness.
Ultimately, the Amendment Decree is a welcome development, which will remove substantial barriers to doing business in the UAE. However, until the Strategic Impact List has been issued by the Committee, and further implementation guidance provided to the respective DEDs regarding licensing procedures and foreign ownership requirements, the immediate effects of the Amendment Decree will not be realised.
If you have any questions, or you would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Joanna El Khoury