Articles

Corporate Structuring under the FDI Law – Key Consideration

15 April 2020

Download Article

By: Dr. Constantin Frank-Fahle, LL.M.

On 23 September 2018, Federal Decree-Law No.19 of 2018 on Foreign Direct Investment (FDI Law) was issued. Within a year of FDI Law’s issuance, the UAE Cabinet pre-approved the highly awaited “Positive List”. The UAE Cabinet passed the “Positive List” on 17 March 2020 outlining the details of relevant activities and sectors wherein foreign investors can invest up to 100% in mainland companies in the United Arab Emirates. This article provides an overview of the key consideration for foreign investors planning to structure according to the FDI Law.

 

1. What happened so far?

Following its issuance on 23 September 2018, the Federal Decree-Law No.19 of 2018 on Foreign Direct Investment (FDI Law) was published in the Federal Gazette on 30 September 2018. According to Article 21 of the FDI Law, it came into effect on 1 October 2019, a day after it was published in the Federal Gazette. The FDI Law allows a mechanism under which foreign shareholders can own up to 100% shares of a United Arab Emirates (UAE) mainland company (Onshore Company). The underlying purpose of the FDI Law is to attract foreign direct investment to the UAE by providing exceptions to the provisions of the Federal Law No. 2 of 2015 on Commercial Companies which mandates that foreign shareholders can only hold up to a maximum of 49% of an Onshore Company’s shares.

Under the FDI Law, a foreign direct investment committee (Committee) was formed in order to recommend to the Council of Ministers a so-called “Positive List,” i.e. a list which includes the sectors and economic activities available to invest in by a foreign investor either 100% or any other lower percentage in accordance with the provisions of the FDI Law. The FDI Law also specifies a “Negative List” of sectors and activities that are not eligible for full foreign investment.

Keeping in consideration the recommendations made by the Committee, the UAE Council of Ministers passed a resolution approving the Positive List on 2 July 2019, following which, the list was published by the Ministry of Economy on 5 July 2019 in Arabic.

On 17 March 2020, the UAE Cabinet passed a Cabinet Resolution No. 16 of 2020 (Resolution) concerning the determination of the Positive List of economic sectors and activities eligible for foreign direct investment.

 

2. Can free zone companies move onshore under the FDI Law?

Free zone companies can incorporate a subsidiary in the UAE mainland or migrate to the mainland if it is allowed by the free zone. In order to be awarded government tenders and to work with the government bodies and companies, a free zone company is typically required to have a mainland license. Therefore, free zone companies with the potential to work with the government must consider incorporating in the mainland.

Free zone companies, as well as potential foreign investors, should note that only the activities listed in Positive List are eligible for 100% ownership. These activities are subdivided into three sectors, namely agriculture, manufacturing, and services sector. However, in reality, the 122 activities listed in the Positive List span across various industries such as construction, educational activities, healthcare, renewable energy, hospitality and food services, transport and storage, etc.

Although the UAE does not have a corporate income tax regime at present – unlike its counterparts the Kingdom of Saudi Arabia or the Sultanate of Oman, direct taxation could very well be introduced in the future. In light of the Covid-19 crisis and oil price crash, the pressure for the UAE government to look at alternative sources to fund the budget has undoubtedly increased. Free zone entities wishing to move onshore should keep in mind that most of the free zone authorities have granted corporate income tax breaks of up to fifty years. If the business is moved onshore (regardless of whether structured under the FDI Law or not), the tax benefits would be abandoned if a corporate tax regime is introduced.

 

3. What are the anticipated costs compared to partnering with a local shareholder?

The FDI Law requires a minimum capital investment between AED 7.5-10 million for the commercial activities mentioned in the agriculture and between AED 15-100 million for the manufacturing sector. Whereas, in the services sector, the minimum capital has mostly remained unchanged; however, a minimum capital requirement has been included at AED 100 Million, AED 70 Million, and AED 100 Million for hospital activities, other human health activities and retail sales (non-specialized sectors) respectively.

Since the FDI Law allows up to 100% ownership, nominee fee (also referred to as sponsor fees) would no longer be applicable. However, the FDI Law provides that the Ministry of Human Resources and Emiratisation (MOHRE) has the right to assign certain quotas to employ Emirati nationals. As of now, such quotas have not been issued. However, it should be noted that Emiratisation quotas will come along with additional implications such as a higher minimum salary to be paid to a UAE national employee as compared to the expatriate workforce.

Foreign investors need to keep in mind that the labour laws applicable to UAE nationals are more relaxed as compared to the ones applicable to expatriates. Amongst other things, this is reflected in the rules and regulations regarding the termination of employment. E.g., in the UAE, the dismissal of UAE nationals is restricted under the Ministerial Decree No. 212 of 2018 on the Regulation of Employing Nationals in the Private Sector. This decree stipulates that UAE nationals cannot be dismissed in accordance with Art. 120 of the Labour Law (UAE Federal Law No. 8 of 1980 – i.e., for being absent from work without a valid reason, disobeying instructions, etc.) or for reasons unrelated to their job.

 

4. What are the other options?

If for some reason, a free zone company is not able to incorporate a subsidiary under the FDI Law, it can explore other options such as incorporating a branch in the mainland or obtaining a dual license.

The operation of a branch requires the appointment of a local service agent. The branch must generally conduct the same business activities as the parent company. It should be noted, however, that additional restrictions apply with regard to trading.

Under the dual license initiative, it is possible for limited liability-free zone companies to obtain an “onshore” DED license under relaxed conditions. It should be noted that the Dual License Initiative is applicable in Abu Dhabi to all free zones. In Dubai, so far, the Dubai Department of Economic Development has allowed this option only with regard to selected free zones (e.g., Dubai International Financial Centre, Dubai Airport Free Zone, Dubai Design District (D3), and Dubai Multi Commodities Centre). From a cash-flow perspective, this is interesting for investors, as they are not required to rent out office space in the mainland to obtain the onshore license. It should be noted, however, that under the dual license, there are certain limitations to obtain visas for workers.

5. Conclusion

The introduction of the FDI Law has opened a new structuring option for existing mainland LLCs, free zone companies, and potential investors. It provides stakeholders with an opportunity to have full control over the affairs of the company. Foreign investors should, therefore:

  • consider whether they can incorporate their entities under the FDI Law;
  • carry out a cost-benefit analysis considering the minimum capital and Emiratisation requirements against the greater market reach, and consider whether they can expand their market reach via existing options such as establishing a branch company or obtaining a dual license.

 

___________________________________________________________

Dr. Constantin Frank-Fahle, LL.M.
Managing Partner | Attorney at Law
+971 (0)2 694 8562 | frank-fahle@germela.law | www.germela.law
GERMELA LAW LLP | Al Sila Tower, 24th Floor | Abu Dhabi Global Market Square | Abu Dhabi | UAE

___________________________________________________________