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New Foreign Direct Investment Law – Full Foreign Ownership or Smoke and Mirrors?

Dr. Michael Krämer

Author: Dr. Michael Krämer
Senior Lawyer.

Guiding Principle
In the UAE, the most common type of corporate entity to pursue business activities with is the company with limited liability, or short “LLC”. It is no secret that LLCs in mainland UAE require a UAE national majority shareholder, either a UAE national individual or a corporate entity fully owned by UAE nationals. Overcoming this “51/49” rule has been something the expat UAE business community has been dreaming of for a very long time. The newly issued “Federal Decree Law No. 19 of 2018 regarding Foreign Direct Investment” (“FDI Law”) promises paving the way for full foreign ownership. Does it live up to its promise? The answer is “yo” as in a mixture of both, yes and no.

A. 100% Foreign Ownership is Possible
Yes, thanks to the FDI Law it will be possible, in principle, for a foreign company or individual to fully own a mainland LLC in the UAE. In short, the FDI Law establishes a mechanism, which aims to enable the Departments of Economic Development to establish procedures enabling foreigners to establish “Foreign Investment Companies”. Some such Foreign Investment Companies may be fully owned by foreigners, some may be foreign owned up to a certain percentage only. This, as many other licensing requirements for such companies, has not been determined in the FDI Law as such, but will be subject to the recommendations and decisions of various authorities.

Once duly licensed, such Foreign Investment Company will be subject to various obligations and benefits. Obligations are likely to include mandatory employment of a certain extent of UAE national workforce (Art. (13) 3. FDI Law) and keeping various authorities informed on a continuous basis of the company’s activities (Art. (13) 6./7. FDI Law). The benefits, on the other hand, are mostly those, which “regular” companies in the UAE enjoy as well, such as the authority to transfer profits out of the country (Art. (8) 2. FDI Law) or, subject to approval of various additional authorities, to perform fairly standard operational procedures, such as merging with another company, changing shareholders or changing the legal form of the company (Art. (8) 5. FDI Law).

B. Smoke and Mirrors – Conclusion
Does the FDI Law really, as so many have hoped, abandon the 51/49 rule? Or are at least some industries now exempt from it? Realistically, the answer will have to be “no”.

In all its uncertainty, the FDI Law is very clear in one respect: while the doors to 100% foreign ownership are open in principle, the FDI Law has made sure that hardly anybody (if anyone) will ever make use of this “option”. Maintaining a UAE national “Sponsor” maybe uncomfortable and something most business operators in the UAE would like to avoid. Yet, it has become an established and fairly cheap exercise (nowadays, “Sponsors” ask for annual fees of as little as AED 15,000).

Successfully registering a Foreign Investment Company will most certainly be cumbersome. It will require dealing, on a continuous basis, with numerous UAE authorities. This, in short, means that registering and maintaining a Foreign Investment Company will be a rather expensive exercise. An obligation to employ members of the UAE national workforce on top, while applaudable in principle, is likely to add additional cost. The benefits of maintaining a Foreign Investment Company, on the other hand, are not many, apart from maintaining full ownership in an ideal scenario. Most “incentives” described in the FDI Law are such that any other commercial entity in the UAE enjoys as well.

In light of the above, I cannot help the impression that the FDI Law will end up being not much more than the proverbial carrot one will never reach.

Achievable in principle, but not so much in reality.

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