A few months ago, in May, it was announced that the UAE Cabinet has approved “steps that would allow for 100% foreign ownership of UAE based businesses”. This article takes a closer look at this announcement and aims to provide an outlook on what to expect.
A. The Announcement
As so often in the UAE, the actual announcement was rather brief and left the audience behind with more questions than answers. However, the information that was provided indicates that a new “Investment Law” is being prepared, which will, at least in principle, allow foreign investors to operate businesses in the UAE without having to make use of a UAE national “sponsor”. This will be limited to “certain industries”, so the new Investment Law will not completely abolish the general rule whereby companies with limited liability (LLC), the most common business vehicle for foreigners, have to be majority owned by a UAE national person or a corporate body that is fully owned by UAE nationals.
B. What to expect
Foreign investors hope for the complete abolishment of the sponsorship requirement, of course, and would much prefer being allowed to fully own their legal entity. The announcement has left no doubt that this is not going to happen. Instead, 100% foreign ownership will only be allowed for companies operating in “certain industries” without such industries having been specified.
In order to be able to better gauge the extent to which the local ownership requirement might be liberalized, a closer look at what is at stake for the Emirati economy may be helpful. What would a complete liberalization actually mean for the Emirati economy?
I. Impact on Emirati Sponsors
The first thing that comes to mind is all the individual Emirati sponsors who would lose a more or less substantial part of their income, would they no longer be required to act as sponsors. Abolishing the sponsorship requirement would affect some UAE nationals more than others and I dare saying that the absolute number of UAE nationals who would lose their main source of income would still be small. For most Emiratis, acting as mandatory majority shareholder in commercial entities is more a side than a bread and butter business.
II. Impact on UAE Free Zones
The main impact of any abolishment of the sponsorship requirement would be on the numerous UAE free zones. In essence, the free zones’ very reason to exist is that foreigners are allowed to fully own free zone entities. If foreigners were allowed to fully own their entities anywhere in the UAE, why would anybody still set up in a free zone where the validity of the license is limited to the geographic area of the free zone in question?
Free zones would most probably lose their appeal, which is something the UAE government is highly unlikely to risk. The UAE free zones are too profitable and provide employment to too many UAE nationals that the UAE government would possibly risk destroying the foundation on which the free zones are built.
Things may change in the future, of course. Should further taxes be introduced, such as corporate and/or income taxes as is currently being discussed, those operating or working in one of the many free zones could be exempt from such taxes, thus making free zones more attractive again. All this is nothing but pure speculation, however. For the time being it just seems to be safe to state that expectations of a complete abolishment of the sponsorship requirement are not very realistic.
Taking the above considerations into account, the most likely scenario is such that the sponsorship requirement will not be relaxed for companies operating in industries that are “covered” by any of the UAE free zones, so mainly local and international trade, media, healthcare and information technology in all their forms.
It seems equally unlikely that any companies engaged in “trade related” activities (which applies to the vast majority of UAE based commercial entities) will be exempt from the sponsorship requirement. Not only would this affect too many individual Emirati sponsors, but it could also have a negative impact on companies acting as commercial agents for foreign manufacturers. Those foreign manufacturers that, so far, deemed appointing a UAE national commercial agent the more acceptable alternative over taking care of distribution themselves, but with a mandatory majority shareholder in “their” commercial entity, would now most probably rethink their options.
The most likely scenario is that only those companies will be exempt from the sponsorship requirement, which offer the biggest benefit to the UAE economy as such. Hence, companies that promise creation of things the UAE economy currently lacks the most, being manufacturing. Compared to other countries, the manufacturing sector in the UAE is rather small. A large manufacturing industry is very beneficial to the economy as such, however. It requires comparatively large investments in order to put the manufacturing capacity in place, is difficult to move and thus, relatively sustainable and is likely to create a fairly large amount of jobs.
The UAE government’s announcement to allow for 100% foreign ownership in certain industries is interesting and will be welcome news to business operators in the UAE. However, examining the announcement further reveals that most probably only those companies will benefit from this rule that promise the biggest benefit to the UAE economy as such, which we believe to be companies that engage in local manufacturing of products, ideally not only for local use, but also for export to other countries.