When we heard rumours that 100% business ownership (by this we mean no local sponsor and no giving up 51% of your company) was coming to Dubai, we jumped to find out more…
Long-term, it’s potentially devastating news for UAE Free Zones – the much-anticipated decision by the UAE Cabinet to permit 100 percent ownership of UAE companies by non-nationals.
The pivotal decision could quickly boost increase foreign investment and further accelerate the development of the country’s economy. The UAE government has indicated it plans to issue a report in Q3 of 2018 as part of its implementation plans, though it is not yet clear when the implementation of the new resolution will happen.
Andrew Morris, Partner at Banks Legal, a UAE legal consulting firm, established in 2009, discusses the new foreign ownership resolution and the considerations to take into account for both existing and prospective businesses in the UAE: “This decision has been welcomed with immense interest from the business community and is one of the most significant decisions to impact foreign direct investment in the UAE, following a number of legislative improvements in recent years.”
The scope of the decision will not be apparent until implementation has concluded. However, there is a general consensus it is likely to be a staged implementation, with certain sectors opened up to 100 percent foreign ownership before others. There may be additional conditions for qualifying sectors to meet, in order to take advantage of the decision.
At present, only companies based in UAE free zones can be entirely foreign-owned. Introducing 100 percent foreign ownership will encourage investment from investors and businesses previously deterred from committing investment into the UAE, due to the requirement of having an Emirati partner holding a minimum of 51 percent of the company’s shares.
While it is currently a matter of speculation as to who will be able to take advantage of this decision, there are things businesses can think about now in case they are able to take advantage of it: “Existing LLCs should have protective arrangements in place that include a mechanism whereby the foreign partner can take advantage of any law change permitting 100 percent ownership (or ownership above the currently permitted 49 percent) by requiring their Emirati partner to sell their shares to the foreign partner on pre-agreed terms. If these arrangements are not in place, then now would be a good time to incorporate such arrangements.”
Regardless of the contractual arrangements in place, foreign partners will need to engage their Emirati partner at the appropriate time, in anticipation of seeking to take advantage of the decision. As with any business partnership, careful consideration should be given to how this transition can be managed smoothly and amicably.
In case it remains necessary to have a minimum of two partners in an LLC (as the existing law provides for), it may still be appropriate to have a corporate nominee, albeit this vehicle need not be Emirati-owned. While we would expect the majority of foreign investors to be interested in taking advantage of 100 percent foreign ownership, there may well be instances where foreign partners are content with their existing arrangements and the costs of restructuring could ultimately be more than existing nominee costs.
While it remains to be seen whether the requirement for branches of foreign companies to have an Emirati service agent will be relaxed or removed, foreign companies may be able to ‘convert’ their branch operations to a wholly foreign-owned LLC structure. This may deliver significant benefits including ring-fencing liability at a UAE level and may offer tax structuring efficiencies.
Those who are looking to establish business operations in the UAE, or expand existing operations, will naturally be interested in taking advantage of the new resolution. As implementation may not occur for some time, and may not ultimately be available to all businesses, advice will need to be taken on whether to delay plans until the scope of the resolution is clarified, or to proceed under the existing law using a structure that makes it as easy as possible to transition to 100 percent foreign ownership, should that business qualify.
This significant decision of the UAE Cabinet follows a number of a number of legislative developments in recent years including the new Companies Law, Bankruptcy Law and the VAT Law, further demonstrating the UAE government’s continued efforts to modernise legal framework in support of continued economic development.