100% Foreign Ownership of Companies in the UAE
The UAE government has announced important changes to the federal Commercial Companies Law, the most significant is related to the foreign ownership of mainland companies. This will grant foreign investors the full ownership of share capital in companies carrying out certain activities specified to that effect by the competent authorities. This means that foreign investors’ shares will not be limited anymore to a maximum of 49% like before, but can be up to 100% instead.
Introduction
Federal Decree-Law No. 26 of 2020 has amended or repealed over 50 articles of the UAE’s Federal Law No. 2 of 2015 on Commercial Companies (the “CCL”), the most significant of which is authorizing 100% ownership rights to foreign investors in mainland companies carrying out certain economic activities as specified by the relevant authorities of the UAE government.
The new privileges and incentives, given to foreign nationals in mainland UAE, are expected to increase the flow of foreign capital and enhance diversification in the state’s economy. The quest towards that objective began in 2018 with the formation of committees at the Ministry of Economy (in coordination with the Council of Ministers) mandated to propose policies allowing foreign investors in some economic sectors to own more than 49% in mainland companies.
The new amendment of CCL is expected to ignite and lead to a lot of activity in terms of possible mergers and acquisitions and existing business restructuring movements in the mainland companies where existing foreign investors may consider acquiring locally owned companies or even to a higher share in their existing stakes in local partnerships where they already participate in.
Historical Overview of Foreign Investments in the UAE
“Foreign investment” refers to a natural or corporate person who does not hold the UAE nationality and invests in the State according to applicable laws.
Foreign investment in the UAE has been on the rise since the late 1990s when the governing law was still the Federal Law No. (8) of 1984 on Commercial Companies. Several amendments followed until the issuance of the CCL in 2015. Unlike the predominant expectations at the time, the CCL did not modify the provisions relating to the percentage of national/foreign contribution in company shares.
The CCL sustained the context of the Federal Law No. 8 of 1984 and mandated in Article 10 that:
“With the exception of Joint Liability Companies and Simple Commandite Companies where all the joint partners of any of such companies shall be UAE nationals, any company established in the State shall have one or more UAE partners holding at least 51% of the share capital of the company.”
This provision prevailed for many years despite the rapid growth of the UAE’s economy and the increase of foreign investments in the country. As an alternative, many free zone jurisdictions provided foreign investors what mainland jurisdiction did not – that is, 100% ownership of their company shares.
Nevertheless, a free zone company is not permitted to operate outside the respective free zone. Only companies licensed by the Department of Economic Development are allowed to conduct their economic activities on the mainland. To overcome the restrictions of CCL’s Article 10, the Emirati and foreign business partners would enter into a Side Agreement to agree on a share-splitting formula that is different from the 51-49% maximum threshold set by governmental policies.
A controversy arose surrounding the validity of these side agreements for modifying the ownership of the share capital of a company in a manner that is inconsistent with the letter of Article 10 Clause 3 of the CCL and Article 2 of the Federal Law no. (17) of 2004 Concerning Anti-Fronting. These legal restrictions impacted the foreign nationals’ commitments to invest in the UAE, and serious steps were later taken to grant them full ownership rights in certain economic activities.
The Beginning of Change
To allow foreign investors to carry out activities in the mainland and enjoy full ownership of their enterprises, Federal Decree-Law No. 19 of 2018 on Foreign Direct Investment (the “FDI Law”) came into effect on 23 September 2018.
The FDI Law provided the framework of coordination between the Council of Ministers, the Ministry of Economy and competent authorities to study and examine the economic activities which are permitted to be carried out in the UAE through an FDI project. The FDI Law has been accompanied by a set of relevant regulations known as the “Negative List” and “Positive List”, which set out around 122 commercial activities that the foreign investor is permitted to invest in.
However, given that the FDI Law has been later repealed by the Federal Decree-Law No. 26 of 2020, it turns out that the activities referred to as the “Positive List” can no more be relied upon as a part of the FDI Law, due to the fact that the latter has been repealed. So it is not totally clear yet which activities will be exempted from the local contribution rule, and they are more than speculation now.
The local authorities of each Emirate were entitled to set their priorities and strategic sectors and provide recommendations to the Council of Ministers about the possible economic activities where foreign investors would be eligible for full ownership.
Despite these changes, the CCL still prevailed. Its provisions prohibited foreign investors from owning a share capital of more than the 49% threshold. In other terms, the FDI Law was somehow a practice to examine how prepared the authorities are to deal with this kind of change.
The First Statutory Change in the Commercial Companies Law
On 23 November 2020, UAE President Sheikh Khalifa bin Zayed Al Nahyan issued a Federal Decree-Law No. 26 of 2020 (the “Decree”) overhauling foreign ownership provisions of the CCL and introducing many changes to open up the economy to all nationalities.
One of the most remarkable amendments is to allow full foreign ownership of UAE mainland companies in certain economic sectors/activities. These activities are not clear yet as the positive list announced earlier by virtue of Cabinet Resolution no. (16) of 2020 which exhibited 122 activities permitted to hold 100% foreign ownership, has been based on the FDI Law. As the FDI Law has been repealed by the Decree, the Positive List could not be enforceable anymore.
Besides the companies carrying out activities known before as the positive list and anticipated to be announced before the application of the 100% foreign ownership rule, the first article of the Decree states that there are companies that are completely falling out of the scope of this Decree, namely companies excluded by a cabinet resolution to that effect, companies fully owned by federal or local government or with a minimum 25% government shareholding if they are related to oil & gas or electricity or water or anything related to the energy sector.
The second exclusion from the provisions of this Decree is pertinent to companies carrying out activities of “Strategic Impact”. These activities are not clear yet as the Decree merely states that a committee formed by the competent authorities will determine what these activities are and the percentage of national contribution in the share capital or in the board of directors within their jurisdictions. This doesn’t necessarily mean that the local contribution will be 51% but probably 10% or 5%.
Companies carrying out any of these activities of strategic impact shall remain subject to the limitations and restrictions on foreign ownership, as stipulated in Article 5 of the Decree:
“No amendments may be made to the memorandum of association or other constitutional documents of an existing company which prejudice the UAE national ownership, if the company carries on such activities with strategic impact, without the consent of the competent licensing authority. Any procedure contrary to this article shall be nullified.”
The changes in the requirement of local share contribution exceed the multi-person LLC to apply to the one-person LLC. Based on the new text of Article 71 (2) as amended in the Decree, the same provisions of the multi-person LLC shall apply to the one-person LLC as much as it does not contradict its nature.
Furthermore, CCL’s Article 151 required that the “chairman and the majority of the members of the board (of a public joint-stock company, PJSC) shall be UAE nationals.” This provision was amended by the Decree. The Cabinet or the competent authority now determines the specific percentages of UAE national involvement on the board of a PJSC in each case – and the board’s constitution shall be in compliance with any mandated limitations and conditions.
In addition, the Decree’s Article 6 repealed CCL’s Article 329. It is no longer required for a foreign branch or a foreign company that sets up a branch in the mainland to UAE national agent. In addition, Article 6 explicitly continues to repeal the FDI Law (Federal-Decree Law no. 19 of 2018) and any other law or regulations that contradict the provisions of the Decree.
Another significant development is that shareholders in an IPO can now sell up to 70% of their shares (up from 30% under the CCL) where an existing company is converted into a PJSC.
Other amendments brought by the Decree reflect on, but not limited to, general assembly meetings, voting, the quorum for general assembly meetings, and mergers & acquisitions.
Direct Impact on Foreign Investments
Article 8 of the Decree states that the amendments will come into force on 2 January 2021, without prejudice to what is mandated in Article 7 which stipulates that the amendments relating to Articles 10, 151 and 329 (All articles related directly to local share contribution) will be effective only after six (6) months of publishing the Decree in the Official Gazette.
On June 1, 2021, the Department of Economic Development (DED) announced the list of business activities and commenced the registration of companies in implementation of the provisions of the Decree. The lists published, which may slightly differ between each emirate, include more than 1,000 commercial and industrial activity each, excluding the economic activities with a strategic impact.
For the full list of Dubai DED click here, please.
For the Abu Dhabi list click here, please.
The commercial activities in the list of full foreign ownership include, for example, general trading, road and building contracting, trading all kinds of vehicles, tobacco and cigarettes, food trading, clothes and footwear. The industrial activities include food manufacturing and packaging, production of cotton and textiles, paper production, paints, chemicals and detergents.
The new guidelines published by the DED did not require any additional fees, guarantees or minimum capital for the full foreign ownership. The procedures for the registration can be completed through the usual service channels or electronically through specific platforms. The DED is also presenting incentives to investors to encourage this kind of enterprise and provide support to achieve high rates of success.
With the amendments set out in the Decree coming into force, the status of existing companies will continue to be governed by the power of their Memorandum of Association (MOA) and by the decision of the partners themselves. The local share percentage of 51% in such companies can be reduced or withdrawn in accordance with the legal procedures followed.
This means that the Decree has a prospective not retrospective effect, and this may have confused many who have been excited to switch to the new status by default with the new regulations coming into force. However, to amend or remove the percentage of national shareholding accordingly, they still need to get the consent of the local partner and clear any rights and dues he may have pursuant to the applicable laws and regulations.
Conclusion
Building on the amendments that have started with the FDI Law of 2018 and its Negative/Positive Lists to the Decree-Law No. 26 of 2020 and what has changed, it is worth noting that the FDI Law didn’t actually change and amend the CCL law where the latter remained the default law and the FDI Law acted as the exception where activities mentioned in the Positive List do not require local share contribution.
On the other hand, the Decree-Law No. 26 of 2020 is now the rule with all the amendments it brought to the CCL, and the exceptions are restricted to the activities of strategic importance. Furthermore, some activities that have been outlined in the FDI Law as the Negative List will still fall under the restriction of the 51% local contribution rule.
These legislative changes for mainland companies are expected to impact the role of UAE’s free zone jurisdictions in a way which, prior to this change, provided a competitive environment to foreigners who were reluctant to make certain investments in mainland UAE at a time when they could not hold the controlling stake in these mainland investments.
