The Potential Impact of the new UAE Foreign Direct Investment Law

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27 Apr, 2020

By Laura Sperling, Paralegal, April 2020

The Potential Impact of the new UAE Foreign Direct Investment Law

UAE Federal Law No. 19 of 2018 on Foreign Direct Investment (“the FDI Law”) came into force in 2019, allowing 100% foreign ownership of UAE companies in certain sectors. The Commercial Companies Law no. 2 of 2015 (“the Companies Law”) has stated that UAE nationals must own at least 51% shareholding in Commercial Companies based outside of the Free Zones.  The Mars group became one of the first companies to take advantage of this new law in late August 2019 [1].

As part of this law a Foreign Direct Investment Committee (the “Committee”) and a Foreign Direct Investment Unit (the “Unit”) were established in the UAE to oversee the implementation of the FDI Law[2].

Positive and Negative lists of activities:

Article 6(2) of the FDI law stipulates that the Committee’s responsibilities shall include the maintenance of the negative list of activities contained in the law, which shall not be open to completely foreign ownership, as well as the issuance of a positive list of activities which shall be. The negative list, as per Article 7(2) of the FDI law, includes:

1.Exploration and production of petroleum materials.

2.Investigations, security, military sectors, manufacturing of arms, explosives and military equipment, devices and clothing.

3.Banking and financing activities, payment systems and dealing with cash.

4.Insurance services.

5.Hajj (pilgrimage) and Umrah services, providing employment and recruitment services for staff and servants.

6.Water and electricity services.

7.Services related to fisheries.

8.Postal services, telecommunications services and audio and video services.

9.Land and air transport services.

10.Printing and publishing services.

11.Commercial agents’ services.

12.Medical retail such as private pharmacies.

13.Blood banks, venom and quarantine centres.” [3]

So far, the positive list of activities, which has been approved by the UAE cabinet [4], includes:

-Transport and storage;

-Agriculture;

-Space;

-Manufacturing industry;

-Renewable energy;

-Hospitality and food services;

-Information and communication;

-Professional, scientific and technical activities;

-Administrative and support services;

-Educational activities;

-Healthcare;

-Art and entertainment; and

-Construction

At this stage, the following further requirements (as set out in Schedules 1, 2 and 3) have been released for the below sectors in order to qualify to be considered as an FDI Company:

1. For the Agricultural Sector, a minimum capital of AED 7.5 Million or AED 10 Million depending on the activity (as set out in Schedule 1) is required, and the Company must:

-Use new technology;

-Realise a high added value;

-Contribute to Research and Development; and

-Meet the requirements of UAE licensing activities.

2 . For the Industrial Sector, a minimum capital of AED 2 Million to AED 100 Million depending on the activity (as set out in Schedule 2) is required, and the Company must:

-Use new technology;

-Realise a high added value;

-Contribute to Research and Development; and

-Meet the requirements of UAE licensing activities.

3. For the Services Sector, a minimum capital from the minimum statutory requirement for the relevant activity under the Companies’ law, if applicable, up to AED 100 Million depending on the activity (as set out in Schedule 3) is required, and there are further restrictions placed on certain activities, such as Building and Construction activities which are only permitted for infrastructure projects of a large scale, such as airports, high roads, sports facilities, and projects worth more than AED 450 million.

Application process and requirements

Under Article 10 of the FDI Law, the relevant licensing authorities and competent authorities shall be free to specify their own processes and documents requirements relating to applications of increased foreign ownership in UAE companies. Following the submission of documents as per the relevant authorities’ procedures, the competent authority shall issue a decision five (5) working days after all its requirements and document requests have been met. In case of a refusal, Article 11 of the FDI law stipulates that any refusal regarding an activity outlined in the positive list may be appealed by the applicant within fifteen (15) business days from the date of the refusal.

Steps for Licensing a new FDI Project specified under the Positive List are as follows: 

 1.Submission of an Initial approval request, which should specify the Business Activity in the Positive List and the FDI capital (which shall not be less than the minimum required for the relevant activity) and Legal Form, permissible forms being:

-Limited Liability Company (LLC); and

-Private joint Stock Company (including Sole Proprietorship Companies);

2.Submission a foreign direct investment license application after obtaining the initial approval;

3.Reservation of the Trade Name. The name shall be followed by an indication of the legal form of the company and then the expression “Foreign Direct Investment (FDI)”;

4.Obtaining of approvals of relevant entities and authorities concerned with FDI Company Activity where required;

5.Joining Tawteen Partners Club and presenting proof thereof to the relevant authorities;

6.Obtaining approval and receiving FDI License After Paying the Fees;

7.Open a Bank Account on behalf of the company (under incorporation) and depositing at least 20% of the capital; and

8.Registration of the License with the Ministry of Economy (MOE).

An existing company may change into an FDI company provided that the following is provided:

-The legal form of the existing company shall be one of the forms specified for FDI Companies.

-If the legal form of the existing company is different from those forms specified for the FDI Companies.

Steps for the conversion of an Existing Company to an FDI Company are as follows: 

1.Obtaining the approval of the organization organizing the activity;

2.Joining Tawteen Partners Club and presenting proof thereof to the relevant authorities;

3.Obtaining approval and receiving the license after paying the fees;

4.Deposit at least 20% of the capital; and

5.Registration of the license with the Ministry of Economy.

Documents requested to support any applications under the law to allow a company to be entirely under foreign ownership shall be at the discretion of the relevant authorities and could potentially include information regarding the company’s global presence, any subsidiaries and projected offices and number of staff in the UAE and worldwide. At this stage, it looks as if the law will likely (at the very least initially) focus on the larger international companies rather than SMEs. As mentioned above, if a Company is approved to be registered as an FDI company, it will need to deposit at least twenty percent (20%) of its capital before the licence is issued.

Additionally, the UAE Cabinet could still impose restrictions, which may be sector specific, for example:

-There may be minimum capital or projected staff numbers imposed in order for Companies to be able to apply to the authorities under the FDI law;

-They may cap the maximum threshold of foreign ownership allowed in specific sectors;

-Emiratisation requirements may still be imposed in certain sectors; and

-The form of legal entity which may apply for a higher percentage of foreign ownership in certain sectors may be restricted.

Currently, one may lodge project license application whose activity is not specified under the positive list by means of the following steps:

1.The foreign investor should submit the application for approval of the project license to the Competent Authority of foreign direct investment, which has the right to not approve the application, or to submit the request to the FDI Committee for consideration, after coordination with the Licensing Authority, and after consultation with the local government in the concerned Emirate;

2.If the request is submitted to the FDI Committee for consideration, the Committee’s recommendation shall be submitted to the UAE Cabinet. In the event of a decision by the UAE Cabinet approving the request, the investor shall be notified through the competent Authority upon completing the necessary data and documents; and

3.The competent authority may, in the event if a decision of the Council of Ministers approving the request, notify the applicant of the completion of what it deems necessary to provide data, information and documents, and the competent authority shall issue approval of the license within (5) working days from the date of meeting the required documents and procedures [5].

The decision of the Competent Authority to reject the license request that is not included in the positive list is final, and not subject to appeal.

Disputes that may arise from any FDI project may be settled through all alternative means of dispute resolution. If it is not settled, the cases may be referred to the competent courts.

Potential impact on the UAE market and conclusions

The advantages of increased foreign ownership to foreign companies and individuals include the potential circumvention of needing a local sponsor, which would reduce costs of maintaining a company, as well as provide guaranteed control over the company in question, which would in turn increase foreign investors’ confidence. However, at this stage only a few companies have garnered approval for complete foreign ownership under the FDI law, and the extent of its application to smaller enterprises and individual investors remains to be seen.

In the long run, if applications under the FDI law for complete foreign ownership were to be readily granted to SMEs, this may make certain free zones, with the exclusion of the common-law ADGM and DIFC, effectively redundant. However, at this stage, as mentioned above, it remains to be seen how the FDI law shall translate into practice regarding its wider application, and at this stage it is likely that only the larger international corporations will succeed in their applications initially.

Therefore, SMEs are likely to continue to operate as they have been so far under the Companies Law at this stage. Also, it remains to be seen which restrictions the UAE government shall impose in relation to the specific activities and sectors.

 [1] https://gulfbusiness.com/food-chain-mars-buys-100-dubai-unit-following-new-uae-foreign-ownership-law/

[2] Articles 5 and 6 of the FDI law (https://jiac.it/wp-content/uploads/2018/12/Federal-Law-Regarding-Foreign-Direct-Investment.pdf)

[3] Art 7(2) of the law

[4]  Resolution issued by the UAE Cabinet on 2 July 2019

[5] UAE Ministry of Economy foreign Trade Sector Investment Department Circular