Businesses across the Arabian Gulf, and wider afield, will be watching the UAE with keen interest following the recent reports suggesting a new investment law, permitting 100 per cent foreign ownership, could be promulgated before the end of the year.
If this goes ahead, it will signify a radical move away from the current position whereby foreigners are entitled to no more than 49 per cent ownership in companies registered outside of the various free zones. But just what impact will this have in the market, and why now?
Currently, the law requires that foreign persons or businesses looking to become member shareholders of a UAE company will need to involve a UAE national, or a company owned entirely by UAE nationals, as a shareholder partner holding not less than 51 per cent of the UAE company.
Although in practice this rule is slightly different if all shareholder members are from the GCC, the fact that for nearly three decades the law has prescribed that foreign investor companies are unable to hold any more than 49 per cent of a UAE company has undoubtedly held back many potential foreign entrepreneurs as well as inward investors.
In reality, certain shareholder partners have attempted to work around the provisions of the law, by using side agreements to vary the terms on, in particular, governance and profit share that the ownership percentages might otherwise suggest.
To some extent, this has given rise to a practice of permissiveness by the UAE authorities. But equally, legislation such as the anti-fronting law has been introduced in recent years in an attempt to prevent unintended practices from developing too far in the wrong direction. As such, care must be taken to ensure that any new law is drafted in such a way as to support both inward investment as well as entrepreneurialism.
For a number of years now, the market has heard rumours of a possible new commercial companies law, which could have sought to vary these existing rules on the foreign ownership of businesses. It was suggested that perhaps an initial step might be to permit greater than 49 per cent foreign ownership, but to restrict that only to certain defined industries.
However, any substantive attempts in the past to revise existing rules on foreign ownership have gone unrealised, as economic committees from across the Emirates were unable to agree on the extent or benefit of the proposed legislative changes.
Furthermore, news reports emerged this year that the Government had determined that it would be inappropriate to reflect any changes to the foreign investment rules in a new draft companies law. Rather, it was thought that such matters would be more appropriately addressed in a new investment law. This led many to think that the changes in this area might have been deferred for an indefinite period.
However, Sultan Al Mansouri, the Minister of Economy, announced the draft new investment law last month and declared that the Government is pushing for it to be passed before the end of the year. It seems a rational next step in terms of economic policy, to facilitate and encourage more investment into the Emirates, as well as enhancing the number of new business start-ups. The new law could further bolster the country's economic performance, which some say is enjoying an economic revival on the back of stronger levels of trade and tourism.
Consequently, if this revival is to be measured by a renewed level of foreign interest in investing in the UAE, then a relaxing of the current limitations on foreign investment can only provide a solid platform for continued growth as well as greater confidence in the market. Implementing such changes now could have timely and quite significant advantages for the UAE.
It is additionally possible, given the fact that the 51/49 rule on foreign ownership is common to other GCC countries, that a change in the UAE could mark the beginning of wider changes across the region.
The new draft investment law is expected to contain clauses and conditions that serve the economy of the UAE, introducing job opportunities in line with Emiratisation strategies and serving certain key industries well, such as the aluminium sector, among others.
The new law also sets clear responsibilities for boards of directors, managers and auditors to ensure they can be held to account. It would give the Securities and Commodities Authority more power of scrutiny and would remove the previous minimum of Dh150,000 capital to start a limited liability company and will set up a single nationwide register of company names.
This is a sensible approach to a modern investment law that has the dual purpose of encouraging investment, as well as growth, while at the same time ensuring the wider economic and social issues of the UAE are intelligently, and fairly, protected. If this is what the new law aims to achieve, then a more fruitful, sustainable and win-win playing field will be created for UAE nationals and foreign owners alike.
From a wider legal perspective this is exactly the type of regulatory evolution that has been credited as one of the key reasons behind recent growth in countries such as Singapore, and which could fundamentally change investment strategies in the region.
Increased foreign ownership of UAE companies would demonstrate a willingness by the UAE Government to relax a legal framework that has been in place for nearly three decades. The coming months will be critical to ensure the law is drafted to reflect its chief objectives and we strongly hope it is implemented quickly to encourage yet more investment into the UAE.
Abdul Aziz Al Yaqout is the regional managing partner and Tim Watkins is the legal director of DLA Piper Middle East
Critical time in debate on foreign ownership
Businesses across the Arabian Gulf will be watching the UAE with keen interest following the recent reports suggesting a new investment law, permitting 100 per cent foreign ownership, could be promulgated before the end of the year.
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