As published in Lexis Middle East Law Alert, written by Mohammed Assayed, Senior Associate, Corporate Department.
“Since its establishment, the UAE has been taking significant strategic steps towards attracting business and investment to the country. In 2018 in a move to strengthen the UAE status as a business hub, the Foreign Direct Investment Law, Federal Decree-Law No. 19/2018 was issued. This new law is a basis for liberalising foreign investment by allowing foreign investors to own up to 100% of businesses in certain sectors and activities in the mainland UAE,” Mohammed Assayed explains. “This is an important development as before the enactment of this Law, direct foreign investment was regulated by the Commercial Companies Law, Federal Law No. 2/2015, which required the majority shareholding (more than 50%) to be held by a UAE national which meant foreign investors could only be minority shareholders (with less than 50%). This restriction was a major concern for many foreign investors who in the past found themselves forced to seek different routes in order to protect their equitable interest including putting side contract agreements into effect which showed the actual corporate capital structure, or by incorporating their business on offshore in the freezones, where foreign investors could have full ownership of their business.
“Although some large foreign corporations for example, Apple Inc. have managed to gain exemptions which have allowed them to obtain a permit to set up on the UAE mainland and enjoy a 100% ownership without the need for any side contractual agreements.”
“In the recent past there have been steps towards this change of approach. For example, in September 2017, the UAE government amended Federal Law No. 2/2015 by granting the Council of Ministers the authority to issue a resolution determining activities and companies in which non-UAE natural or legal persons could own all of or majority of the share capital,” Assayed states. “Then, on May 2018 the Council of Ministers approved the decision to allow foreign investors to have up to 100 percent ownership on the UAE mainland.”
“Federal Decree-Law No. 19/2018 aims to further enhance and develop the investment and business environment in the UAE by establishing clear guidelines for foreign direct investing, which in turn will attract foreign investments, “ Mohammed Assayed explains. Article 2 of Federal Decree-Law No.19/2018 highlights lists its objectives which include affirming the UAE’s position as a major business hub both regionally and globally, attracting foreign direct investment, strengthening the UAE economy by broadening the production base, diversifying it and helping to attract advanced technology and knowledge and create job opportunities in various fields.”
The positive and negative lists
“One of the main changes in Federal Decree-Law No. 19/2018 is that it has established an index for permitted activities and sectors for foreign direct investing, which is called the ‘positive list’ and another index for prohibited activities for a majority stake foreign direct investing, called ‘negative list’, Assayed continues. “Under Article 7 of Federal Decree-Law No.19/2018 the negative list of activities and sectors include exploration and production of petroleum materials, investigations, security, military sectors, manufacturing of arms, explosive and military equipment, devices and clothing, banking and financing activities, payment systems and dealing with cash, insurance services, Haj and Umrah services, providing employment and recruitment of staff and servants, water and electricity services, fishing services, postal services, telecommunications services and audio and video services, land and air transport services, printing and publishing, commercial agency services, medical retail, e.g. private pharmacies and blood banks, venom and quarantine centres. The Council of Ministers is the only authority with the power to add or remove a sectors or activity from the negative list.”.
“However, although the law has specified the negative list, it has not specified the positive list,” Assayed adds. “Instead it authorises the Council of Ministers, following a proposal of a Minister and the recommendation of the Committee, to issue a resolution specifying the positive list. In addition, the Council of Ministers may, at the request of a local government authority and the recommendation of the Committee, issue a resolution approving certain foreign direct investment projects which are not included in the positive list.”
“The Law then specifies the resolution that will contain the legal form for the project and the percentage of ownership by a foreign investor, including whether it is 100% or lower and most importantly the minimum share capital of the Foreign Investment Company, which does suggest there will be still some restrictions on foreign companies i.e. size.”
“Under Articles 5 and 6 of Federal Decree-Law No. 19.2018, two Government bodies have been established to ensure proper monitoring and implementation of the law. These are a Foreign Direct Investment Unit and a Foreign Direct Investment Committee,” states Assayed.
“The Unit will be established at the Economy Ministry and have the important role, among other things, of proposing foreign direct investment policies, implementing these policies once they have been presented to the Committee and approved by the Council of Ministers and monitoring the performance of foreign direct investment in the state including submitting periodic performance evaluation reports,” Assayed notes.
“The Committee will be established by a resolution of the Council of Ministers and will be chaired by the Minister and a representative of each member of the competent authorities along with some representatives of other licensing authorities in the state, Assayed explains. “ Its role will be studying and submitting recommendation to the Council of Ministers on the positive list of sectors and activities and adding some sectors and activities to the negative list. It will also consider recommendations received from the competent authorities on approving licensing applications for foreign direct investment projects, which are not included in the positive list.”
Incentives and Guarantees
“Articles 8 and 9 of Federal Decree-Law No. 19/2018, grant a list of incentives and guarantees to license foreign investment companies (FICs),” states Assayed. “FICs will be treated as national companies and will be able repatriate, outside the state, the net returns of their investment projects, i.e. annual net income, proceeds of liquidations, and any proceeds resulting from settlement disputes relating to their investment project.”
“In addition, a foreign direct investment project may not be expropriated as a whole or in parts except for public interest,” Assayed adds. “The right to benefit from any allocated real estate to foreign direct investment project will also not be able to be cancelled, suspended or restricted except if there is a clear violation of the license conditions and a foreign direct investment project’s funds cannot be seized, confiscated, frozen or restricted except as a result of a court judgement.”
“However, there are a number of obligations a FIC must abide by, as specified in Article 13 of Federal Decree-Law No. 19/2018. These include employing and training UAE national executives and providing them with the necessary skills which means FICs may have to follow Emiratisation quotas.”
“Under Article 17 of Federal Decree-Law No, 19/2018, existing foreign direct investment projects which were established before the Law was implemented will maintain all their previous incentives, for the period specified in their initial agreements and contracts, and they will also benefit from the new incentives and guarantees which are specified in Articles 8 and 9 of Federal Decree-Law No. 19/2018, provided they reconcile their positions and obligations with the Law.”
“The new law includes a specific provision on settlement of disputes which may arise from a direct foreign investment,” Assayed adds. “According to Article 12 of Federal Decree-Law No. 19/2018, disputes such disputes may be settled by all alternative means of dispute settlement, i.e. the UAE courts and arbitration centers on and offshore.”
What’s the impact?
“Foreign direct investment in the UAE is considered one of the main pillars and drivers of the country’s economic growth. In 2017 alone, the UAE accounted for around $11 billion (approximately 22%) of Foreign Direct Investment inflows to the MENA region,” Assayed adds. “Therefore, the enactment of this Law is therefore a key decision as it will enable the UAE’s overall economy to leverage and further strengthen its position as the region’s leading business and investment hub on both commercial and practical aspects.”
“This change could also boost mergers and acquisitions activities as many offshore foreign entities may be motivated to either acquire or merge with well-established onshore firms,” Assayed continues. “It may also increase transparency which in turn could further enhance foreign investors’ confidence in the UAE economy. It could help amplifying growth and create more jobs. In addition, it will close the book on the side-agreement contractual practice, which is currently an extremely common indirect way of doing business on the UAE mainland.”
“This crucial step might be one of further steps towards reaching full investment and business liberty in the UAE and towards establishing some sort of second tier citizen rights for long-term investors,” Assayed concludes.
Mohammed Assayed is a senior associate in the corporate department at Horizons & Co, he can be contacted at [email protected].