The press reported on 23 November 2020, that a new decree was issued which introduces amendments to the UAE Companies Law. The most significant changes include the removal of restrictions imposed on foreign ownership. The changes are expected to have a noticeable impact on foreign investments into the UAE.
UAE participation requirements under the UAE Companies Law prior to the changes
The UAE Companies Law applies to most businesses undertaking economic activities in so called onshore or mainland UAE; i.e. essentially all areas outside the various free zones.
Foreign businesses wishing to operate in onshore UAE usually do so either through a limited liability company (LLC) or a branch/representative office of a foreign company (Branch).
For LLCs the 51/49 rule applied which meant that at least 51% of the shares had to be registered in the name of one or more individuals holding UAE nationality or companies wholly owned by individuals holding UAE nationality and that a foreign investor was limited to a maximum shareholding of 49%. Similarly, for a Branch it was necessary to formally appoint an individual holding UAE nationality or a company wholly owned by individuals holding UAE nationality as national service agent.
The UAE has in recent years taken steps to gradually relax the restrictions on foreign ownership and investments. In 2018 a framework was introduced through the UAE Foreign Direct Investment Law (the FDI Law) allowing foreign investors to apply to own more than 49% of the shares in a UAE onshore company operating in certain industry sectors in the UAE and subject to certain conditions. A ‘positive list’ was issued comprising of 122 economic activities across 13 sectors eligible for up to 100% foreign ownership. The new amendments supersede the FDI Law.
Changes introduced to the UAE Companies Law
As per the press reports, the changes to the UAE Companies Law are wide ranging and significant. The decree amends 51 articles and introduces a few new articles, mostly in relation to joint stock companies and LLCs. The most significant amendments are the abolition of the requirement that at least 51% of the shares have to be held by a UAE national and the removal of the requirement for a Branch to appoint a national service agent. Consequently, foreign investors will benefit from much greater flexibility and simplicity when doing business in the UAE.
Additionally, the press reports indicate that the following amendments will be made to the UAE Companies Law:
- permits the chairman and the majority of members of the Board of Directors of joint stock companies to be non-Emirati;
- permits the removal of chairpersons or senior executives of a company if found guilty of fraud or abuse of authority;
- allows shareholders to sue a company in civil court over any failure of duty that results in damages;
- permits electronic voting at annual general meetings;
- creates a committee (composed of representatives of the relevant authorities) to oversee activities that have a "strategic impact" and implement necessary measures required to license companies that operate in such areas (it is our understanding that the Cabinet will stipulate what activities shall be considered of a strategic impact);
- permits companies wishing to become joint stock companies, subject to the approval of relevant authorities, to sell as much as 70% of the company’s shares through initial public offerings, instead of the current 30% cap;
- mandates the Emirates Securities and Commodities Authority to establish the controls and procedures required for evaluating in-kind shares and the names of stakeholders attending the general assembly meetings of companies; and
- enables a publicly listed company to approve its capital increase through issuing bonds and converting them into shares.
With respect to business activities that have a “strategic impact” (item 5 above) we will have to await for the Cabinet to stipulate what activities shall be considered to be of a strategic impact and the required measures for licensing such companies. However, it is generally anticipated that strategically important sectors would include sectors such as oil and gas exploration, utilities and transport. Furthermore, purportedly the local authorities will have the power to determine the level of participation by UAE nationals in any company in onshore UAE, the impact and practicalities of which are not clear at this stage.
Most of the amendments are said to be effective as of 1 December 2020. However, the amendments related to foreign ownership, national service agent and boards of directors will take effect six months after they have been published in the Official Gazette. Companies will have one year to comply with the amended UAE Companies Law from the time its articles become effective. This transition period can be extended by the UAE Government.
Future of free zones
The UAE is home to over 45 ‘free zones’ which are specially designated areas with their own business and licensing rules and regulations that apply within the confines of that area and to all businesses registered in that free zone. Those rules are overseen by an independent regulator established for that free zone. Where specific laws or regulations have been enacted on a subject matter, these will generally override any conflicting federal or emirate law. In addition, there are two ‘financial’ free zones which are a special subset of free zones, namely the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). Like other free zones, they have their own regulator, laws and regulations; however, the financial free zones are common law jurisdictions with more substantial bodies of law largely based on English law.
Whilst there have always been some draw backs for free zone incorporated and licensed businesses, one of the main attractions for a foreign investor to set up a legal entity in a free zone has traditionally been the ability to retain 100% ownership and control of the entity.
It remains to be seen how free zones will position themselves, when 100% foreign ownership will be permissible in onshore UAE.
In this context it is however important to note and remember the many other advantages that free zones offer their clients when setting up their businesses within a free zone comparing to if the business was to be established in onshore UAE. Some of these advantages for a foreign company may include:
- some free zones provide corporate tax holidays which might become more of a selling point if there was a change in the tax regime in onshore UAE, provide exemptions from customs duty, and there are some designated free zones that provide certain exemptions from value added tax and customs (except where selling in the UAE or Gulf Cooperation Council market).
- Many free zones cater to specific industries and grant ready access to the knowledge, expertise and collaboration opportunities of other related operations in the area or sector, for example, the airport free zones, the media free zones and the industrial/manufacturing free zones with port access.
- The free zone regulator serves as one-stop-shop for all government related interactions and documents to be submitted to the free zones can be in English only (and are not required to be in Arabic).
We anticipate that the amendments will become clearer once the text is available and it is likely that further clarifications will be available in due course so that the full impact of the new amendments can be analysed in more detail, including, for example, how this might impact existing businesses and arrangements between foreign and UAE shareholders. It is however likely that many foreign investor will re-assess their existing arrangements with their Emirati business partners based on the new amendments and possibly other changes that might be introduced.