The UAE is the region’s largest destination for FDI, with annual inflows steady at around $9bn a year, much of this is directed into the federation’s many free zones, such as Jebel Ali. His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai recently announced vital changes to the country’s residency programme, including foreign investors in the country to be offered a 10-year residency visa, as well as up to 100 per cent business ownership. This move aims to boost FDI by up to 15%.
Game changer
Historic news issued by the UAE cabinet last week will no doubt drive foreign direct investment and boost economic activity in the UAE. Over 120 economic activities across 13 sectors (including renewable energy, space, agriculture, logistics, hospitality, food services, information and communications, and manufacturing) were specified as being eligible for up to 100 per cent foreign ownership. The long-term goal of the UAE to stimulate, motivate and facilitate businesses and open and expand new economic sectors looks like coming to fruition. The new changes are expected to come into practice towards the end of the year.
100 per cent foreign ownership has been the preserve of the UAE’s free zones for many years though some may view this as compromising the attractiveness of free zones. However, each free zone offers much more than ownership benefits to attract investors. Benefits are tailored to a particular industry or business type, but generally include more efficient start-up processes and various tailored regulatory incentives.
The Federal Government has allowed the local governments in each of the seven Emirates to decide on the percentage of ownership in each activity. Therefore, in certain Emirates, some activities could still require a local shareholder even if the foreign ownership threshold increases. It is yet to be seen what approach will be taken by the respective Emirates. There are also conditions set for specific economic activities. For example, foreign construction companies will be limited to infrastructure projects such as airports, highways and sports facilities with a maximum value of AED 450 million.
There are a number of privileges offered to these new foreign direct investment companies (FDI Companies) given the potential benefits to the UAE Economy of these changes. These include the ability of investors to operate their business with reduced administrative costs, conduct duty-free trade within the Arabian Gulf as per the free trade agreement within the Gulf Cooperation Council, increased flexibility and not having to share profits.
Existing companies should be able to convert their corporate structure into an FDI Company, provided they settle their obligations under UAE law and other contractual requirements. However, we await further information on how local ownership may be transferred, either totally or partially and we expect the UAE government to release additional information in the coming months. Careful consideration of tax, compliance and regulatory issues, as well as the current nominee arrangement, among others, will be needed before carrying out the restructuring of a company as an FDI Company.
Given that many local businesses have faced numerous challenges in the prevailing economic conditions, foreign ownership should have a positive impact on the marketplace and be a game changer in the Middle East as a whole. No doubt this is a huge step forward for the region’s second-largest economy, and will help attract new foreign investors and liberalise the business environment. However, it is yet to be seen what impact it will have on the free zones.
It is the intent and objective of the Government of the UAE to attract and promote foreign direct investment in order to enhance domestic capital, technology and skills, for accelerated economic growth across the various sector. Foreign Direct Investment, as distinguished from portfolio investment, has the connotation of establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor.
We are still in the wait and watch stage, and keen to see how this announcement gels with the investor-friendly regime that has now been put in place.
Client Alert 2019-176
