Is FDI for storage

Facilitating Foreign Direct Investment in the United Arab Emirates

On September 23, 2018, a long-awaited law on the admissibility of foreign direct investments, the Federal Decree Law No. 19 of 2018 on Foreign Direct Investment ("FDI Law"). The purpose of the FDI Law is to further diversify the Emirati economy by strengthening the attractiveness of the location for foreign investors. To this end, the FDI Law loosens the principle previously applicable in UAE company law that foreign shareholders are only allowed to hold a maximum of 49% of the shares in companies based in the UAE. Specifically, the so-called positive list adopted in July 2019 now allows foreign participation of up to 100% for 122 activities from 13 economic sectors.

1. Which investments does the FDI Law cover?

For a long time, it was characteristic of UAE company law that foreign investors wishing to operate in the UAE could hold a maximum of 49% of the shares in a company established there. The remaining 51% were in the hands of Emirati co-shareholders. Foreigners were only able to hold all shares in the free trade zone companies.

With the FDI Law, foreign investors are now allowed for the first time to hold a stake of up to 100% for selected activities in certain sectors in the state territory of the UAE. To determine the sectors and activities for which a shareholding greater than 49% is possible, the FDI Law and the associated secondary legislation distinguishes between the negative list and the positive list.

a. Negative list

In the negative list, the FDI Law lists sectors and activities in which, for reasons of national security and services of general interest, it will be mandatory for the Emirate to hold sole or majority stake in the future. Foreign participations are either excluded or limited to a maximum of 49%.

The negative list can be changed at any time by a cabinet decision. It currently includes the military and security, petroleum exploration and production, banking and finance, insurance, water and electricity, fisheries, mail and telecommunications, land transportation, aviation, publishing, commercial agency, medical retail, poison centers, blood banks and quarantine facilities.

b. Positive list

Unlike the negative list, the positive list is not contained in detail in the FDI Law, but was adopted by a cabinet decision in July 2019 at the suggestion of the newly established Foreign Direct Investment Committee. The cabinet is authorized to adjust the positive list on a regular basis.

The positive list currently names 122 activities from 13 sectors, which are now theoretically open to foreign participation of up to 100%. 19 activities belong to the agricultural sector, 51 activities to the industrial sector and 52 activities to the service sector. In addition to agriculture and production, there are also hospitality and gastronomy, space travel, renewable energies, logistics and storage, information and communication, scientific and technical activities, administrative services, education, health care, art and entertainment and construction as examples.

However, it remains to be seen whether foreign investors will actually be able to realize a 100% stake in all of the activities named in the positive list. Because in the course of the adoption of the positive list it was announced that the seven Emirates of the UAE are authorized to individually set the maximum permissible amount of foreign participation for each of the 122 activities. The result is that, in the absence of national guidelines, different emirates could implement different specifications for the same activity as regards the permissible foreign participation rate. Foreign investors are therefore well advised in the future to obtain information about the current administrative practice at the desired location before the final choice of company headquarters.

2. What conditions do investors have to meet?

The FDI Law stipulates that foreign investors must meet additional conditions in return for a sole or majority stake in a company located in the territory of the UAE.

These include hiring emirate workers and participating in the Tawteen Partners Club of the Ministry of Human Resources and Emiratisation. In addition, they must create technical and innovative added value with the investment project in some activities.

In addition, the FDI Law sets stricter requirements for the minimum share capital for activities in the agricultural sector (AED 7.5 to AED 10 million) and for activities in the industrial sector (mostly AED 15 to AED 100 million). In these areas, the settlement of larger foreign companies is clearly the aim. For small and medium-sized foreign companies, investments in the service sector are likely to be more interesting, as the minimum share capital requirements that have been in effect so far will largely continue to apply for the time being.

3. Which applications have to be made?

Foreign investors seeking sole or majority stake in activities from the positive list must submit various applications.

This includes the usual application for prior approval of the license from the Department of Economic Development in the respective emirate. Subsequently, an application for higher foreign participation according to FDI Law must be submitted to the relevant emirate authority. The application must be approved within five working days. If the authority does not make a decision within this period, the application is deemed to have been rejected. If the application has been rejected or is deemed to have been rejected because the deadline has expired, an objection can be lodged with the authority within 15 working days. The objection is to be modest within 10 working days. If the objection is rejected or the decision is not made in due time, an action can be brought before the competent court within 30 days of notification or expiry of the deadline. However, in legally regulated exceptional cases, such as endangering national peace or national security through the investment project, both objection and legal action are excluded.

If the application is accepted and FDI approval is granted, the addition "Foreign Direct Investment" must be added to the company name to identify the increased foreign participation and the company must be registered in the so-called Foreign Direct Investment Registry.

If foreign investors wish to engage in activities that are not part of the positive list, they can nevertheless apply to the competent authority for approval for a higher participation. In such a case, however, a notice of rejection is binding.

4. Which questions remain?

For the first time, the FDI Law enables foreign investors to set up a company in the UAE for certain activities in selected sectors without an Emirati majority shareholder. It remains to be seen, however, how investor-friendly the FDI Law will actually be implemented in practice by the individual emirates. This concerns in particular questions of the permissible level of foreign participation, the number of emirate workers to be employed and the assessment of the technical and innovative added value of investments.

It is also of interest to what extent the authorities will also apply the FDI Law to the restructuring of companies that were founded before the FDI Law came into force. This would enable foreign minority shareholders to increase their share, which was previously limited to a maximum of 49%.

A step in the right direction is likely to be a recent report, according to which a global group from the food industry recently increased its stake in a company licensed in Dubai from 49% to 100%. It would be desirable if decisions like these, which are in favor of foreign investors, become the norm in the future.

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Facilitating Foreign Direct Investment in the United Arab Emirates