Over the years, the UAE government has made huge efforts to facilitate doing business in the country. Although the UAE is a perfect destination to set up many types of businesses through the free-zones, it has been quite complicated to set up a business in the mainland. Not least because an investor had to look for a local partner or sponsor who would own a majority stake of 51%, with the ensuing loss of autonomy.
To address this, in late 2020, the UAE amended federal law no. 2/2015 on commercial companies to issue federal decree law no. 26/2020 (the ‘decree’) in an attempt to open the economy for foreign direct investment (‘FDI’). The amendment in federal law is in line with the UAE’s intention of making the country an ever more attractive destination for foreign investments.
The new decree will facilitate doing business by foreign investors through onshore companies. The key changes brought by the decree are:
elimination of the requirement for Emirati participation to hold a majority stake in many UAE onshore companies;
full foreign ownership for certain UAE onshore companies depending on their activities;
delegation of power to local authorities of each Emirate to set guidelines for onshore companies in terms of Emirati shareholding percentage, board representation and any other requirements;
allowing joint stock companies to sell up to 70% of their shares through an IPO as compared to the earlier percentage of 30%;
shareholders now have the power to undertake legal proceedings against the company if any activity undertaken results in loss;
expatriates are allowed to chair meetings of onshore companies;
expatriates are no longer prohibited from sitting on the board of onshore companies;
executive officers or the chairs of onshore companies may be removed as directors in case of any abuse;
annual general meetings are now allowed to be held via electronic voting.
These amendments came into effect on 1 December 2020 but the major amendments pertaining to the ownership of the company and the board of directors became effective on 1 June 2021. Existing companies will be granted a grace period of one year in order to make the necessary changes in their corporate documents to reflect the updated legislation.
The Department of Economic Development (‘DED’) of each Emirate has the responsibility to issue a list of all the activities which will lead to a critical impact on the economy of the country, along with the licensing requirements for carrying out such activities. Activities which are deemed to have a strategic impact might still require some level of Emirati participation. Therefore, not all types of businesses qualify for 100% foreign ownership and each Emirate will issue specific guidelines.
In addition, in certain sectors local involvement will continue in other forms. The Abu Dhabi guidance highlights that certain businesses are required to employ at least 5 sector specialists in the case of the technology sector in particular. There will also be minimum share capital requirements attached to 100% foreign owned companies which, dependent upon the Emirate and activity, will potentially vary from AED 7.5 million up to AED 100 million.
From a start-up perspective, high minimum share capital and specialist employee requirements can be operational constraints, especially for early stage businesses, and may even act as a barrier to entry for some. For existing onshore companies, the change of rules would mean that their current local ownership arrangements under the previous rules could be terminated. Their existing arrangements might be costly and create complexities in business operations, therefore, onshore businesses are likely to benefit from a lower cost of business and smoother operational processes.
To benefit from the new amendments, existing investors will need to restructure their companies, whereas new investors in the market of the UAE have an advantageous position, with respect to the ease of setting up of their business. Existing onshore investors will have to reassess their contracts with local Emirati partners and agents. They will also have to review their company structure in order to comply with these changes which will have to be followed with an update in corporate documents such as the Memorandum and Articles of Association.
A move to 100% foreign ownership is likely to make external fundraising easier for onshore companies. Investors from more developed venture ecosystems were not too comfortable to share ownership with an Emirati who may have had no specific involvement with the running of the business. In this period of global economic strain caused by the pandemic, this change is likely to boost the UAE competitive edge.
These changes will be most attractive for foreign direct investments in the UAE where the intention is to provide goods or services directly on the mainland outside of the free-zones. For existing UAE onshore companies, these changes will significantly improve their position in terms of business growth and for fund raising.
The setting up and business operation of onshore companies will still involve certain administrative procedures given the requirement to complete such formalities in front of a local notary. Foreign investors may not be comfortable with the speed of company set up and execution of transactions especially for venture capitalist where deals tend to be of dynamic nature.
Despite the various advantages of the new rules, and the benefits this will bring to companies wishing to operate in the mainland, it is likely that the popularity of free-zone companies will persist, given the ease of doing business through the Dubai International Financial Centre (‘DIFC’) and Abu Dhabi Global Market (‘ADGM’).
Probus Consultants Limited is part of the Probus Group and is registered with the DFSA as a DNFBP. Probus Consultants Limited is a specialised corporate service provider based in the DIFC. We have been advising and assisting private individuals in the setting up of their corporate structures in the various UAE free zones and in the mainland through our valued partners. For more information, please contact Probus Consultants Limited team on +971 4 305 8000 or by email to firstname.lastname@example.org and email@example.com.