On 23 September 2018, enactment of the Foreign Direct Investment Law, introduced the possibility of majority foreign ownership in UAE companies. A detailed analysis of the new Foreign Direct Investment Law is beyond the scope of this article.
The Foreign Direct Investment Law provides that a Foreign Direct Investment Committee (the Foreign Direct Investment Committee) shall be formed by a decision of the Cabinet and shall be presided over by the Minister of Economy (the Minister).
The Foreign Direct Investment Committee shall have the authority to study and provide recommendations to the UAE Cabinet after coordinating with the local governments, regarding the following:
- setting out a list of economic activities that may be carried out by a company wholly owned by foreign investors in the UAE (the Positive List);
- adding certain sectors and activities to the Negative List (defined below);
- approving foreign investment projects to conduct activities that are not set out in the Positive List following recommendations made by the relevant licensing governmental departments; and
- deciding on the benefits granted to foreign direct investment projects in the UAE.
The Foreign Direct Investment Law provides for a list of economic sectors where foreign direct investment is not allowed (the Negative List). The Ministry of Economy (the Ministry) reserves the right to amend the Negative List as it deems appropriate. These sectors are as follows:
- oil exploration and production;
- investigation, security, military (including manufacturing of military weapons, explosives, military hardware, equipment and clothing);
- banking and financing activities;
- Hajj and Umrah services;
- certain recruitment activities;
- water and electricity services;
- services related to fisheries;
- post, telecommunication and other audio visual services;
- road and air transport;
- printing and publishing;
- commercial agencies;
- medical retail activities, including as pharmaceuticals; and
- poison banks, blood banks and quarantine centres.
The Prime Minister of the UAE issued a statement on 2 July 2019 announcing the Cabinet’s approval of a Positive List of 122 economic activities in sectors such as agriculture, manufacturing, renewable energy, electronic commerce, transportation, arts, construction and entertainment. While permitting majority or 100 per cent foreign ownership in certain sectors would be a major development, the Positive List imposes additional requirements such as minimum capital requirements on some activities, obligations to employ advanced technology on other activities, and requirements to contribute to the Emiratisation of the workforce on others. For many business and service activities, existing restrictions and qualifications are expressly retained. The Commercial Companies Law stipulates that companies in the UAE must be 51 per cent owned by UAE nationals or companies wholly owned by UAE nationals, thus limiting foreign ownership to 49 per cent (the foreign ownership restriction). Branch offices of foreign companies are permitted without the participation of a UAE shareholding, but require the appointment of a UAE agent to conduct limited commercial activity in the country. There are, however, significant exceptions to the foreign ownership restriction, such as:
- GCC nationals, and companies owned by GCC nationals, are granted national treatment in respect of most commercial activities and are therefore exempt from the foreign ownership restriction;
- the foreign ownership restriction does not apply in respect of economic activity in free zones, enabling foreign investors to wholly own relevant entities established in free zones; and
- foreign companies may establish branch or representative offices to conduct limited amounts of economic activity in the UAE (however, these do not have a separate legal personality) (together, the foreign ownership exceptions).
The Property Law prevents foreign ownership of real property with the exception of areas designated by the respective governments of a particular emirate.
The Commercial Agency Law effectively excludes foreign investors from undertaking distribution and agency businesses in the UAE as it requires that distribution of a foreign principal’s products must be conducted through an exclusive UAE agent, which in turn must be a wholly owned UAE entity or a UAE citizen. Exclusive agents may be appointed for the UAE or a particular emirate. Underlying agreements establishing commercial agencies may be registered by the agent (provided it is a UAE national or wholly owned by UAE nationals) with the Ministry, and following such registration, can only be terminated by mutual agreement, notwithstanding the expiry or breach of such contract.
Under the Competition Law, the conduct of any form of economic activity or holding of intellectual property rights by a natural or legal person in the UAE that affects competition inside the UAE, or occurs outside the country but has the ability to affect competition in the country, requires the approval of the Ministry. This includes any transaction, including mergers and acquisitions that result in a dominant market position. Similar approvals must be sought in respect of transactions relating to particular industry segments, such as the banking sector, which is further subject to a 20 per cent profit tax. The Competition Law has only recently been enacted and its exact scope is still unclear.
The provisions of the Government Tender Regulations apply to all procurement operations and contracts of supply, execution of work and provision of services performed by UAE federal bodies, but exclude the following federal entities: the Ministry of Defence, the State Security apparatus, and all military purchase transactions conducted by the Ministry of Interior and determined by a decision from the Minister of Interior and federal bodies bound by international agreements or obligations pertaining to the purchase transactions carried out by such bodies.
The Bankruptcy Law replaces and repeals the previous legislation on the subject, Book 5 of the Commercial Code, which was seldom used in light of its perceived shortcomings. Perhaps the most important new feature of the new Bankruptcy Law is the introduction of a regime that allows for protection and reorganisation of distressed businesses. Other key features of the new Bankruptcy Law include the following:
- A debtor can seek court protection and assistance while it agrees to a financial arrangement with its creditors without having to proceed to bankruptcy proceedings (preventive composition). Rather than having to proceed directly (or at all) to bankruptcy proceedings, preventive composition will afford the debtor the opportunity to reach an agreement with its creditors for the repayment of sums owed, while under court protection from individual creditor claims. This option will be available to the debtor only if it has not been in default for more than 30 consecutive business days and is not insolvent. The debtor will not be able to dispose of any property, stocks or shares, make any borrowings, or (if a company) change ownership or corporate form while it is undergoing this process.
- A creditor (or group of creditors) must now have a debt owed of at least 100,000 dirhams before it can initiate bankruptcy proceedings.
- Under previous law, the UAE Penal Code treated bankruptcy as a potentially criminal act, even if not accomplished by fraud. The new Bankruptcy Law abolishes the criminal provisions relating to non-fraudulent bankruptcy, eliminating the perceived stigma under the prior law. Despite this, the new Bankruptcy Law in many circumstances still provides for criminal liability of entities and persons involved in a case of bankruptcy, and the existence of these provisions may continue to give owners, directors and management significant cause for concern.
- Criminal proceedings relating to ‘bounced’ cheques will be suspended for the duration of the preventive composition or restructuring procedures.
- A debtor can raise new finance during the preventive composition or restructuring process, with court approval.
While the new Bankruptcy Law favours debtors by giving them greater flexibility and protections in the event of insolvency, it remains to be seen how it will be implemented in practice and whether debtors make use of its provisions. Nevertheless, the introduction of an insolvency regime that offers protection and encourages restructuring to enable troubled businesses to survive what would otherwise have been a bankruptcy situation is welcome, and is a milestone development in the UAE’s business law landscape.
Lastly, free zones enable 100 per cent foreign ownership. However, companies established in a particular free zone are limited to conducting their business within the designated geographic area of the free zone and thus prevented from engaging in commercial activity in the UAE outside the relevant free zone.
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