Enhancing its reputation as an investment-friendly jurisdiction, the UAE recently enacted several landmark changes. One of these measures includes significant amendments to the UAE Commercial Companies Law (CCL) i.e. Federal Law No. 2 of 2015 (Erstwhile CCL), via the issuance of Federal Law No. 26 of 2020 (Amended CCL) in September 2020.
The specific details of this development are as follows:
- The Amended CCL, issued 27 September 2020, abolishes the required minimum UAE ownership percentage (i.e. 51%) in UAE mainland companies, which was previously required in Article 10 of the Erstwhile CCL. This means that mainland UAE companies (existing and new) are now allowed to be 100% foreign-owned, effective 1 June 2021, subject to obtaining specific approval from the relevant authorities in each emirate.
- The Amended CCL repealed Federal Decree-Law No. 19 of 2018 i.e. the Foreign Direct Investment (FDI) Law.
- Under the Amended CCL, certain ownership restrictions/additional licensing controls will be applicable to companies that engage in specific business activities. These so-called ‘activities with a strategic purpose’ are expected to include companies operating in the oil and gas, telecommunications and utilities sectors, among others.
- Further details, such as the list of ‘activities with a strategic purpose’ and the relevant application processes in each emirate are yet to be released.
- The Amended CCL also removed the requirement for a foreign company operating through a branch in mainland UAE to appoint a UAE national agent, with effect from 30 March 2021.
Implications for businesses
Changes brought about by the Amended CCL will undoubtedly affect the business landscape in the UAE.
In the past, foreign investors who sought to retain 100% legal and economic control in a UAE-based entity would opt to set up their entities in a free trade zone (FTZ). However, this often posed challenges, as entities set up in UAE FTZs are generally only permitted to carry out activities for which they are licensed—either within the FTZ where they are registered or outside the UAE (subject to the laws of the countries concerned). Under the Amended CCL, foreign investors can now take advantage of setting up their wholly owned companies in the mainland, which could provide more flexibility in carrying out business operations.
Existing mainland companies with local/Emirati shareholding may also explore converting their companies to 100% foreign-owned entities, whilst managing their business ties with the local partner(s).
Although the removal of the foreign ownership restrictions is a much welcome change, certain key aspects need to be considered by UAE companies, such as:
- Pursuant to Article 3 of the Unified Economic Agreement between the Countries of the Gulf Cooperation Council (GCC), manufacturing entities are required to have 51% shareholding held by citizens of GCC member states in order for the goods manufactured by such entities to qualify as GCC-origin goods. From this perspective, it is not clear whether the goods manufactured by 100% foreign-owned entities in mainland UAE will be granted duty-exempt circulation throughout the GCC by other GCC member states.
- Where converting existing mainland companies (with local/Emirati shareholding) into 100% foreign-owned entities involves the transfer of assets to new entities, the parties involved will also have to consider the VAT implications of the transaction and whether VAT arises or, whether any reliefs may apply such as ‘transfer of going concern’ relief to streamline the process. Similarly, where any new entities are being set up in the UAE, the VAT registration and compliance obligations of the entity will need to be assessed to determine the correct VAT treatment of the activities and to register for VAT in a timely manner where appropriate.
- Valuation for the underlying business may also need to be considered in cases of converting an existing mainland company (with local/Emirati shareholding) into a 100% foreign-owned entity, considering that the two partners would need to agree on the valuation to be bought out or sold out. Such situations could also lead to disclosure of the valuation of the business with third parties.
- UAE mainland companies which are either over stretched due to operations or due to high leverage may also explore restructuring in the UAE.
- Further, as specific approval from the relevant authorities in each emirate would need to be sought by mainland companies (existing and new) for such companies to be 100% foreign-owned, it is still uncertain at this stage whether a consistent approach will be adopted across the UAE.
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