May 21, 2018

UAE Cabinet Resolution - An end to 51% local ownership?

Last night, the UAE Cabinet announced that it has passed a resolution to relax the onshore foreign ownership restrictions in order to spur economic growth in the UAE. This move has the potential to affect all businesses in the UAE, whether onshore or established in a free zone. In this short briefing, we outline the current restrictions and the possible implications of this change.

This move has the potential to affect all businesses in the UAE, whether onshore or established in a free zone.

Article 10 of the UAE Commercial Companies Law (Federal Law No. 2 of 2015) sets out the foreign ownership restriction.  Any company established in the UAE must have a UAE national shareholder holding at least 51% of the capital.  This position carried over from the previous Companies Law. 

In September 2017, under Federal Decree-Law No. 18 of 2017, the UAE government indicated that a relaxation in this restriction may be forthcoming.  Decree-Law No. 18 allows the UAE Cabinet to issue a resolution to determine the activities and companies in which a foreigner may own all or the majority of the capital. 

Last night's news suggests that this Cabinet Resolution has been passed by the UAE government.  Further details are not yet available.  It remains to be seen whether the relaxation will apply to all types of entity, across all sectors.  By way of comparison, in Saudi Arabia, the sector determines the percentage of foreign ownership permitted, and in some sectors capital must be wholly owned by Saudi nationals.  On the face of it, the news reports suggest that full foreign ownership of all UAE entities will be allowed by the end of 2018. 

The announcement also contained details of new long-term visas of up to 10 years for investors, certain professionals in medical, technical and scientific fields, and students.

The UAE government has stated that it will issue a report in the third quarter of 2018 as part of its implementation plans.  The details of how this change will be effected in practice will be critical in the months ahead.

Some issues to be addressed include the following:

LLCs – protective arrangements

In many cases, foreign investors have put in place arrangements to protect their minority interest.  Foreign investors will need advice on the terms of those arrangements and to plan for their restructuring.  The UAE national shareholder's co-operation is likely to be needed for a transfer of the 51% holding, at least in practice.  Therefore, foreign investors may expect a commercial negotiation in relation to any such restructuring.

LLCs – number of shareholders

Currently, the UAE Companies Law allows a single UAE national shareholder to hold all of the capital in a UAE LLC.  Unless this provision is amended, a foreigner will not be able to hold the entire LLC capital through one entity.

Branches – decision to convert

Foreign investors may have preferred to establish a branch of an overseas company, rather than an LLC, due to the foreign ownership restrictions.  However, there is no limited liability for branch offices operating in the UAE as they are not separate legal entities from their "parent".  Overseas companies may wish to revisit that decision in the future and convert to an LLC.  A further question is whether this new legislation will also permit UAE branch entities to operate without a UAE national branch sponsor.

Free zones

One of the key advantages of establishment in one of the UAE free zones is the right to 100% foreign ownership.  If the Cabinet Resolution allows full foreign ownership in all sectors onshore, this will clearly affect the perception of the benefits of a free zone establishment.  However, there are other advantages for free zone entities including customs and duty exceptions, and a tax free period granted under Emirate law. 

Free zone entities are currently required to operate only within the boundaries of the free zones. In practice, it will be interesting to see whether those operational barriers are removed from the licence conditions.

Tax?

The UAE Ministry of Economy has announced that it is considering the implementation of a federal corporation tax.  In Saudi Arabia, the imposition of income tax on corporates is linked to foreign ownership.  Details on the UAE government's proposals for corporation tax have not been published as yet.  It will be interesting to see whether a connection is made between foreign ownership and the imposition and/or rate of tax, and whether it will apply in the free zones. 

Regardless of the extent of the relaxation, this is a significant development in the UAE's modernising agenda and legal landscape.  In the last three years, the UAE government has enacted a new Companies Law, Bankruptcy Law, and VAT legislation, with news emerging just last week of the new Arbitration Law being signed.  The relaxation of foreign ownership has the potential to be the most wide reaching of all.