The good news is that Federal Decree No. (19) of 2018 regarding Foreign Direct Investment (the “FDI Law”) which has been long awaited, is now in force. This FDI Law has an objective of creating a rational and balanced business environment which helps in increasing the flow of FDI coming into the UAE by permitting up to 100 percent foreign ownership of companies, which are functioning in certain sectors. In this article, we are going to talk about the main principles of the Foreign Direct Investment Law and the possible impacts and implications that this law would have on all global investors in the UAE.
Before the FDI Law was passed or announced, the foreign ownership of all the companies in the UAE was only allowed up to 49 percent as per the Article 10 of Federal Law No. 2 of 2015 on Commercial Companies. But post the passing of Federal Decree Law No. 18 of 2017 this limit has been relaxed and the UAE Cabinet has been given the freedom to enhance the foreign ownership limit in all the economic sectors and also for businesses involved in certain activities. The FDI Law has now come up with a new framework or guidelines, according to which the Cabinet of UAE can exercise the powers that are given to it as per the Federal Decree Law No. 18 of 2017.
The FDI Law has established the following two lists: (i) a negative list that is meant to set out some sectors, which are termed “unavailable” for foreign investments; and (ii) a positive list which stipulates the sectors and business activities that are available for the foreign investors.
The Negative List
The specific sectors in the UAE economy, which figure out on the negative list currently are:
- Exploration, prospecting and then production of oil;
- Investigation or security agencies, military sectors, and also weapon manufacturing;
- Financial activities such as banking or funding like payment systems or any cash dealings;
- Insurance sector;
- Labour-based services like recruiting of personnel;
- Water, electricity services;
- Postal, telecommunications and all kind of audio-visual services;
- Land and air transport services; and
- Medical sector-related retail trade, which includes private pharmacies.
The UAE Cabinet has the powers to make amendments to this list and add more or remove any current sectors, which are there on the negative list.
The Positive List
Contrary to the negative list, the FDI Law does not give any details of any particular sectors in the UAE economy regarding the positive list. Though the Economy minister has said that the government will soon be publishing this list by the first quarter of next year. The FDI Law permits the authority to the cabinet of the UAE to add any sectors it deems fit, on the positive list and to:
- Authorize the level or percentage of foreign ownership that is allowed in such a sector, which not necessarily has to be 100 percent but could be anything more than 49 percent;
- In case less than 100 percent of ownership is allowed in a particular sector, the government needs to change the foreign ownership level that is permitted depending on the Emirate where this business is set up and functions;
- Mention the limitations and requirements on the legal entity’s form which might carry on the business activities;
- Set a minimum requirement of capital for all the legal entities that are functioning in such sectors; and
- Impose or necessitate the mandatory Emitarisation requirements regarding businesses which are operating in such sectors (that is, instruct that some specified percentage of the UAE residents include the total strength of employees in the business).
The FDI Law has listed the application procedure that all the global investors need to follow if they are requesting for an increase in foreign ownership in a specific sector on the positive list. Not only that, but the FDI Law also describes the appeal procedure in case of a rejected application.
Foreign Direct Investment Projects
A foreign investor can apply to get permission so that they can own over 49 percent of ownership or shares in FDI project provided that the project’s sector is not listed on the negative list. In case the foreign investor gets the permission, they are allowed to set up a foreign investment company (as prescribed under the FDI Law) to hold their interest in the particular project.
Administration
There are two government bodies that have been set up as per the FDI Law to make sure accurate administration and also an implementation of this FDI Law:
- The Foreign Direct Investment Unit, which is called the “Investment Unit”, and
- Foreign Direct Investment Committee, called the “Committee”
Investment Unit’s primary role is to make suggestions and execute (post getting approval from the cabinet of the UAE) FDI policies in the UAE and also to observe and appraise the performance of this foreign direct investment that is permitted.
The Committee is basically responsible for first studying and then submitting their recommendations to the cabinet about the inclusions on the positive and the negative lists. The Committee is also accountable for giving recommendations to the cabinet of UAE on approving of all the license applications of FDI projects, which are still not on the positive list.
Some other provisions
The FDI also lists the provisions and details about how to settle disputes, if any, administrative sanctions, any penalties, fees (which is decided by the UAE cabinet) and rejecting or restraining the total ownership percentages of a global shareholder.
Though the FDI Law has been implemented successfully, it is still subject to interpretation and in the near future, many more clarifications are expected to come, including the sectors which will be on the positive list.
IMC assures you of the expertise and experience it brings to the table in form of a dedicated team of investment specialists who can advise the global investors on topics such as corporate structuring and other such issues in the UAE. If you need any assistance or have any queries related to setting up your business pursuant to the FDI Law, do get in touch with [email protected].
