On November 25, 2020, the UAE Royal Cabinet announced the issuance of a new decree (the "2020 FDI Decree") amending the Federal Commercial Companies Law (Federal Law No. 2 of 2015) and superseding the 2018 Foreign Direct Investment Decree.
The newly announced decree significantly reduces restrictions on individuals and multinational companies seeking to invest and establish a presence in the UAE. Prior to this announcement, "onshore" companies (i.e. non-free zone entities) in the UAE were generally subject to strict foreign ownership restrictions, with a shareholding limit of 49% for foreign investors and a minimum 51% local shareholding requirement (held by an Emirati entity or individual). In the past year, the UAE has recognized exceptions for the relaxation of the local shareholding requirement in certain sectors.
The recent announcement of the 2020 FDI Decree comes as a welcomed adjustment to the prior foreign direct investment framework. Notably, the new framework:
- removes the minimum local ownership requirement applicable to LLCs (including sole-member LLCs) and JSCs;
- allows for the operation of local branches without the appointment of a UAE national to act as a local service agent;
- enables previously restricted corporate board seats to be occupied by foreign nationals; and
- eases previously imposed restrictions on general assembly meetings, giving shareholders of both LLCs and JSCs greater flexibility to call and hold general assembly meetings (including a lower ownership threshold requirement for calling such meetings and the ability to call and hold such meetings electronically).
The 2020 FDI Decree also calls for the creation of a special national committee that would oversee all matters relating to foreign ownership requirements. Among its other responsibilities, this committee would have full discretion to delineate certain sectors and/or activities as ones that would require a minimum local ownership percentage, and will likely work in tandem with each Emirate's Department of Economic Development to enforce such restrictions across the UAE.
The 2020 FDI Decree came into general effect as of December 1, 2020. However, provisions specifically relating to foreign ownership, corporate governance and local agency requirements will not go into effect until six months following the publication of the decree in the UAE's Official Gazette. Once any of the provisions of the 2020 FDI Decree are deemed to be effective, all covered entities will have one year to ensure compliance.
The 2020 FDI Decree ushers in a new and improved investment climate that is expected to have a significant ripple effect on the M&A, joint venture and private equity market in the UAE. For existing businesses, the decree is widely recognized as an incentive to recalibrate discussions on strategic alliances between foreign and local partners. In the next six months, companies operating in the UAE should reassess their onshore presence to better align with the commercial realities of their business operations. Foreign companies, in particular, should review their joint venture and other commercial arrangements with their local partners, including terms and conditions governing equity ownership, share transfers, options and exits, to determine whether their structures closely align with the roles and responsibilities that each partner brings to the business. New entrants to the market also benefit from a shift in focus to discussions around the value proposition of their local partners, and less on the need to establish nominee and other contractual arrangements as a means to comply with local partnership requirements.
In addition, any effect on free zones, which already offer foreign companies a 100% ownership option, could be an interesting by-product of the 2020 FDI Decree. While free zones offer other advantages and incentives, including a relative ease of doing business, sector-focused business environments and tax holidays, potential effects on company setup and operational activities in these jurisdictions remains to be seen. In practical terms, in this new climate, free zones may no longer be the immediate go-to jurisdictions for setup by foreign companies looking to establish 100% ownership and control of their businesses in the UAE.
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