Starting 1 June, 2021, a large number of commercial activities can be pursued without a mandatory UAE national majority shareholder. The aim of this article is to take a look at first impressions and provide an outlook of what to expect and what to do going forward.
A. Background
100% foreign ownership is something that foreign investors in the UAE have been dreaming of for a very long time. It can be argued that this dream has now become a reality about a month ago, on 1 June, 2021.
B. The Status Quo
In the second half of 2020 Federal Decree Law No. 26 of 2020 was issued, which amended various provisions of the UAE Commercial Companies Law (Federal Law No. 2 of 2015). Arguably the most important change relates to Article 10 of the UAE Commercial Companies Law, which used to manifest the rule that not less than 51% of all shares in companies with limited liability need to be owned by one or more UAE nationals. The newly phrased Article 10 now effectively leaves it up to the Departments of Economic Development of each of the Emirates to decide which activities require which level of UAE national ownership.
Up until now only the Abu Dhabi and Dubai Departments of Economic Development appear to have acted upon this amendment. Both departments have issued lists of roughly 1,100 activities each. Interestingly, both lists have been issued just as such, without providing any additional context in which they are to be interpreted. While – apparently – the activities listed are being treated as not requiring any local participation, as of now (28 June) no executive regulations appear in place, which would expressly confirm this.
Furthermore, both lists are by no means “complete”. The Abu Dhabi list does not appear to contain any trading activities while on the Dubai list many services cannot be found, such as the provision of restaurant services, for example. This gives rise to the question which rule applies to those activities that are not mentioned on either list? Does the 51% rule still apply to them, but if so on which basis, given that the UAE Commercial Companies Law after its amendment no longer contains such requirement.
C. Where do we stand
The current sentiment is characterized by excitement and confusion. The fact that at least quite a few commercial activities can now be pursued without local participation is a dream come true for many and understandably so. Yet, businesses require certainty in order to flourish and certainty is a rare commodity in the absence of dependable legislation. However, it can be expected with reasonable certainty that comprehensive regulations putting things into perspective will be put in place at some stage “soon”.
D. What to look out for
The next thing to think about is possible consequences of the now more relaxed attitude towards foreign ownership. Nothing has been announced at this point, but recent changes in the taxation regulations in KSA show that companies with and without local participation can very well be subject to different tax regimes. Will this – or something similar – be introduced in the UAE as well?
Whether or not consequences such as those described above, other consequences or even no consequences will follow the liberalization of foreign ownership in the UAE remains to be seen.
E. What to do now: converting majority to minority
Technically speaking, the best thing to do right now is… nothing. In the absence of any compelling reason (such as excruciating sponsorship fees, for example) the best thing to do right now is to wait and see. In the current scenario the risk of causing lasting damage by severing ties with the sponsor haphazardly is significantly bigger than the benefits that could be derived from doing so. The sponsorship fee of most sponsors will be somewhere in the region of AED 10,000 to AED 50,000. While this is by no means an insignificant amount, severing ties will in most cases come at some cost also, so why rush into it at a time when the possible consequences remain largely unknown?
Something that could certainly be considered, however, despite the current uncertainty, is reducing the sponsor’s shareholding just slightly. A shareholding of 51% makes the sponsor the majority shareholder, which automatically gives the sponsor a predominant position in the company as such. This, in turn, often makes it difficult, if not impossible, for many international players to fully integrate their UAE subsidiary into their overall group of companies. Such integration often requires the subsidiary to be majority owned by the group and not a sponsor.
That said, asking the sponsor to transfer not all, but just 2% of the shares he holds in the company to the foreign investor is highly unlikely to upset the sponsor. At the same time, however, such minor change converts the foreign investor from a minority into being the majority shareholder, which is a significant change as it gives the foreign investor “control” over his entity and enables him to fully consolidate it into his group at the same time.
The benefit of making such small change only for the time being is multifold:
F. Summary and conclusion
The relaxation of the foreign ownership rules in the UAE is under process, but not complete. This calls for smart, not drastic steps to be taken. The best step to be taken in the current circumstances is to reduce the UAE national shareholding from the previously mandatory 51% to just 49%. This not only signals the way forward, but gives foreign investors control over their subsidiaries without risking doing too many changes that could be regretted later.
For any further questions please don’t hesitate to contact us directly under +971(0)4 – 33 17 110 or via e-mail under michael@meyer-reumann.com.
