Snapshot: foreign investment law and policy in United Arab Emirates | Aici


Law and policy

Policies and practices

What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

The United Arab Emirates (UAE) encourages participation of foreign investors in the economy through various initiatives.

The UAE has many jurisdictions for incorporation of companies. Each emirate of the UAE has its own licensing authority. In addition, there are more than 40 free zones and each free zone is a separate jurisdiction for incorporation. A foreign investor (an individual or a corporate) wishing to establish a presence in the UAE, depending on the business model, has the option to either establish its presence in mainland or onshore UAE (outside of the free-zone areas) or in one of the free zones of the UAE.

Until recently, there were certain restrictions on foreign investors from owning majority shares in companies incorporated in mainland/onshore UAE. However, since 2020, the UAE has introduced significant changes to its legal landscape regarding foreign direct investment (FDI). The UAE has recently enacted Federal Decree-Law No. 32 of 2021 on Commercial Companies (the new Companies Law), which came into force on 2 January 2022. It replaced Federal Law No. 2 of 2015 on Commercial Companies (the old Companies Law). The Companies Law is applicable to all entities established in the UAE outside of the free zone areas. The Companies Law (among other things) solidifies the concepts of foreign ownership of companies, corporate governance and minority protection. The recent changes to the legal landscape have removed the requirement for a company (such as a limited liability company, which is the most common form of entity used by investors) to have at least 51 per cent UAE national ownership. Subject to certain restrictions on limited activities, a foreign investor can establish a 100 per cent foreign-owned company in the UAE.

The UAE cabinet has issued a list of strategic impact activities and the rules for licensing companies that engage in any of the listed strategic impact activities. These activities will continue to have certain restrictions on foreign ownership. Cabinet Resolution No. 55 of 2021 on the Determination of the List of Strategic Impact Activities (the Cabinet Resolution) identifies the following broad strategic impact activities:

  • security and defence activities and activities of a military nature;
  • banking, money exchange, finance company and insurance activities;
  • printing currencies;
  • telecommunications;
  • Hajj and Umrah services;
  • activities of Quran memorisation centres; and
  • fisheries-related services.

 

For each strategic impact activity, depending on its nature, a specific UAE authority has been identified as the regulatory authority. For example, the Ministry of Defence and the Ministry of Interior are the relevant regulatory authorities for the activities in the security and defence sector. Each regulatory authority has been provided with a broad range of powers to determine the percentage of permitted FDI and enact rules and conditions applicable to the strategic impact activities under the purview of the regulatory authority.

Free zones have always allowed 100 per cent foreign ownership. These free zones, which may establish separate regulatory environments within their designated jurisdiction, are attractive to international investors owing to clear and market-oriented regulations, the ability to incorporate wholly foreign-owned entities and guaranteed tax holidays on all corporate taxes.

The UAE is not a party to the WTO Plurilateral Agreement on Government Procurement. Accordingly, government procurement is generally awarded to local companies and suppliers where possible.

The UAE does not impose foreign exchange control regulations either in or outside the free zones.

Main laws

What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

Given the absence of a centralised investment law in the UAE, FDI is regulated by a number of distinct legislative texts, including but not limited to:

  • Federal Decree-Law No. 32 of 2021 on Commercial Companies (the Commercial Companies Law);
  • Cabinet Resolution No. 55 of 2021 on the Determination of the List of Strategic Impact Activities (the Strategic Impact Activities Resolution);
  • Federal Law No. 18 of 1981, as amended (the Commercial Agency Law);
  • Federal Law No. 4 of 2012, as amended (the Competition Law);
  • UAE Economic Substance Regulations;
  • Cabinet Resolution No. 4 of 2019 on Procurement and Warehouse Management Regulation in the Federal Government, as amended (the Government Tender Regulations);
  • Dubai Law No. 7 of 2006 Concerning Land Registration in the Emirate of Dubai and similar laws enacted in other emirates (the Property Law);
  • Federal Decree-Law No. 9 of 2016 On Bankruptcy, as amended (the Bankruptcy Law); and
  • laws and regulations applicable in the various free zones.

Scope of application

Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

The Commercial Companies Law is the principal statute that regulates companies incorporated in the mainland/onshore UAE. A foreign corporate investor also has an option of establishing a branch office in the UAE. Branches of foreign companies are permitted without the participation of a UAE shareholding. In certain regulated activities (eg, oil and gas business activities), branches of foreign companies are required to appoint a UAE national agent (who is not a shareholder of the foreign company/branch).

In asset purchase transactions, depending on the nature of the assets, there may be requirements to register the change of ownership of assets (eg, vehicles) with an appropriate UAE authority.

The UAE cabinet has issued a list of strategic impact activities and the rules for licensing companies that engage in any of the listed strategic impact activities. These strategic impact activities have certain restrictions on foreign ownership. The Cabinet Resolution identifies the following broad strategic impact activities:

  • security and defence activities and activities of a military nature;
  • banking, money exchange, finance company and insurance activities;
  • printing currencies;
  • telecommunications;
  • Hajj and Umrah services;
  • activities of Quran memorisation centres; and
  • fisheries-related services.

 

For each strategic impact activity, depending on its nature, a specific UAE authority has been identified as the regulatory authority. For example, the Ministry of Defence and the Ministry of Interior are the relevant regulatory authorities for the activities in the security and defence sector. Each regulatory authority has been provided with a broad range of powers to determine the percentage of permitted FDI and enact rules and conditions applicable to the strategic impact activities under the purview of the regulatory authority.

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 of Economy (Ministry), and following this 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 UAE has adopted the Economic Substance Regulations, which are applicable in the whole of the UAE. The Regulations apply to all entities that earn income from one or more relevant activities (identified in the Regulations). Entities that do not conduct a relevant activity are outside the scope of the Regulations. Each entity will need to assess its activities (by following a substance over form approach) and come to a conclusion as to whether or not it undertakes any relevant activities. If an entity does earn income from one or more relevant activities during its financial year, it will be required to meet the requirements under the Regulations and file an economic substance return and a report on an annual basis.

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 resolution from the Minister of Interior and federal bodies bound by international agreements or obligations pertaining to the purchase transactions carried out by these bodies.

The Property Law prevents foreign ownership of real property with the exception of areas designated by the respective governments of particular emirates.

The Bankruptcy Law has introduced a regime that allows for protection and reorganisation of distressed businesses. Other key features of the 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 Bankruptcy Law abolishes the criminal provisions relating to non-fraudulent bankruptcy, eliminating the perceived stigma under the prior law. Despite this, the 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 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.

Finally, free zones enable 100 per cent foreign ownership. Most free zones in the UAE have their own company law and regulations, and the provisions of the Commercial Companies Law are generally not applicable to companies incorporated in free zones. Companies established in a particular free zone are limited to conducting their business from the designated geographic area of the free zone and are thus prevented from engaging in commercial activity from the UAE outside the relevant free zone.

Definitions

How is a foreign investor or foreign investment defined in the applicable law?

There is no statutory definition of a foreign investor or foreign investment. Generally, a foreign investor will be a physical or legal person not holding the nationality of the UAE and investing funds in the UAE.

Special rules for SOEs and SWFs

Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

There are no formal laws or regulations addressing FDI by SOEs or SWFs in the UAE.

Relevant authorities

Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

There are no specific government agencies or authorities responsible for reviewing or authorising transactions on the grounds of national interest per se.

The Ministry of Economy (Ministry) is the supervisory and regulatory authority responsible for implementing, monitoring and enforcing the Competition Law, whereby 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. The Ministry has also established a Competition Committee, which is tasked with the day-to-day enforcement and development of the Competition Law. This Competition Committee has been formed and is operational. To date, many merger control filings (and resolutions related thereto) have been made. Failure to seek the Ministry’s approval in relation to this transaction will result in a fine of up to 5 per cent of annual turnover. Applications must be made at least 30 days prior to the proposed date of a relevant transaction taking place, after which the Ministry must respond to the request within 90 days, or 135 days if additional information had been requested as part of the approval process.

Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The various economic departments of each emirate have fairly broad discretion to accept or reject any acquisitions of entities licensed by these departments. Though national interest is not specified, a transaction may be rejected on this basis. However, there are no regulatory rules or guidelines in this regard.



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