The United Arab Emirates (UAE) has recently issued the long-anticipated Federal Law No. 19 of 2018 on Foreign Direct Investment (the FDI Law), which further opens up the UAE mainland market to foreign investors and strengthens the country's position as the leading foreign investment destination in the region. This follows the announcements made by the UAE in May 2018 regarding plans to boost foreign investment into the country.
Does the FDI Law allow 100% foreign ownership of companies based on the UAE mainland?
Yes, 100% foreign ownership is anticipated under the FDI Law. However, it will not apply to all sectors and to all applicants. The percentage of foreign ownership permitted under the FDI Law is yet to be determined by Cabinet Resolution (the Resolution). The Resolution will specify whether 100% of foreign ownership will be permitted under Article (7) of the FDI Law, or whether a lower percentage (and thus a local joint venture partner) will be required.
What authorities are responsible for implementing the FDI Law?
The FDI Law introduces a new foreign direct investment committee, which will be presided by the Minister of Economy (the FDI Committee) and a foreign direct investment unit (the FDI Unit), which will be established within the Ministry of Economy. The FDI Unit will be responsible for setting strategies and policies related to foreign direct investment in the UAE, while the FDI Committee will be the authority entrusted with making proposals to the Cabinet on matters related to the implementation of the law, including, but not limited to, sectors falling within the scope of the FDI Law and the benefits granted pursuant to it. In addition, the relevant local authorities within each Emirate will be entrusted with the implementation of the FDI regime within the relevant Emirate.
Which entities and activities can benefit from the FDI Law?
The exact types and forms of entities and their minimum capital requirements to be observed under the FDI Law are also yet to be determined by the Resolution. The UAE government will be issuing a "Positive List" specifying the activities and sectors, including the Emirates in which such activities are allowed to be conducted as a foreign direct investment.
On the other hand, the FDI Law introduced a "Negative List" consisting of 13 activities which may not be conducted under the foreign direct investment regime, including, but not limited to, security and military related activities, oil and gas exploration and production, banking and finance services, insurance, postal, telecommunications and transport services, and commercial agency services. Free zone companies may also not be established under the foreign direct investment regime.
For the first time, a UAE law defines the concept of foreign capital, which, under the FDI Law, includes: (i) cash transferred from outside the UAE; (ii) profits generated from foreign investments in the UAE; (iii) foreign and local financial securities; (iv) fixed assets; and (v) intellectual property rights.
What are the benefits provided by the FDI Law?
Companies established under the FDI Law will, to the extent legally permissible, enjoy the same treatment and benefits granted to companies based on the UAE mainland. The FDI Law affirms the customary benefits and guarantees in relation to freedom of repatriation of funds. It also protects against expropriation of assets for public interest, guarantees the continuous use of real estate property by the foreign investor, and prohibits the seizure of assets of the FDI project except by judicial decision. The decision approving the establishment of an FDI project may set out further benefits such as the exemption of some of applicable laws.
The FDI Law provides for expedited procedures for the approval of any FDI project whereby the relevant authorities only have five days to approve the application. The FDI Law also provides for an appeal mechanism for rejected applications.
Disputes related to an FDI project may be resolved via alternative dispute resolution methods, and court cases in connection with FDI projects must be looked into on an expedited basis.
Finally, the FDI Law, acknowledging the importance of confidentiality of the applications for these types of investments, imposes severe penalties (including imprisonment and fines up to AED 10 million) on whoever discloses sensitive information regarding the technical, financial and economical aspects of any FDI projects.
While the FDI Law marks another important development towards opening up the UAE mainland market, there are a number of important details that still need to be addressed, such as the Positive List of sectors and commercial activities, the permitted corporate forms, foreign ownership percentage per sector, Emiratization requirements, and other potential exemptions from the Commercial Companies Law.
It is also not entirely clear under the FDI Law whether exiting onshore foreign businesses established under the traditional joint venture model may apply for an FDI designation and what the repercussions would be if such application is accepted.
The Resolution is expected to address these matters and provide further guidance. We will continue to monitor this very important change and provide updates on related developments as and when they arise.
To speak to us in relation to any foreign investment issues in the UAE, please feel free to contact one of the lawyers below, or your usual Baker McKenzie contact.