100 percent foreign shareholding in UAE on-shore companies will come! Probably, for some companies, in certain sectors, sometime

The much discussed United Arab Emirates Federal Decree 19/2018 on Foreign Direct Investment (FDI Law) has now entered into force. The principle aim of the FDI Law is to creat a investor friendly regulatory regime and, thereby, increase the flow of direct foreign investment to the United Arab Emirate (UAE). The most talked about feature of the law is it paving the way for a formalized regime whereby foreign shareholding in UAE on-shore companies of up to 100 percent may be permissible.

Foreign ownership in UAE on-onshore UAE companies was restricted to 49 percent (Art 10 Federal Law 2/2015 on Commercial Companies). However, certain exception from this rule have been made on a case-by-case basis by specific regulatory decree. This practice was now formalized. A first step was taken in late 2017 when Federal Decree 18/2017 was issued, which granted the UAE Cabinet the discretion to allow foreign ownership of more than 49 percent in certain economic sectors and for companies engaged in specific activities. The FDI Law now introduces the framework under which the UAE Cabinet will exercise this authority.

Increasing foreign shareholding

The FDI Law establishes two lists: (i) a negative list which sets out certain sectors which are "unavailable" for foreign investment; and (ii) a positive list stipulating the economic sectors and activities available for foreign investors, both of which may be amended by the UAE Cabinet.

The sectors currently listed on the negative list include:

• exploring, prospecting and producing oil;
• Investigation, security and military sectors and the manufacturing of weapons;
• banking and funding activities such as payment systems and cash dealings;
• insurance;
• labour services such as recruitment of personnel;
• utility services;
• post, telecommunications and audio-visual services;
• air and land transport services; and
• medical retail trade including private pharmacies.

The FDI Law does currently not include or otherwise define the positive list. The Ministry of Economy stated that the UAE government aims to publish such a list during the first quarter of 2019. Still, the FDI Law provides that the UAE Cabinet will determine the degree of foreign ownership in UAE on-shore companies engaged in sectors included in the positive list. While the degree of foreign shareholding may be increased for up to 100 percent, different limits may be set for different sectors included in the positive list. Furthermore, different limits may be defined for the different Emirates.

Furthermore, the FDI Law authorizes the UAE Cabinet to stipulate additional conditions for foreign shareholding to be increased to more than 49 percent, such as:

• the type of corporate entity;
• the minimum share capital of the company; and
• Emiratisation requirements such as minimum number of UAE citizens employed by the company.

In addition, the FDI Law deals with the increase of shareholding in existing companies. It sets out the application procedure which foreign investors will need to follow to request increase of their shareholding in the relevant company as well as appeal procedures in case of an application being rejected. It remains to be seen whether agreements between foreign investors and their local partners whereby the foreign shareholder may compel the local partner to transfer his shares or part thereof in case increased foreign shareholding should become permissible will be treated by the competent authorities. The expectation is that such agreements would be upheld. However, for lack of documented administrative and judicial practice some ambiguity remains.

Foreign direct investment projects

A foreign investor may also apply for permission to own more than 49% of the shares in a foreign direct investment project provided that the project is not executed in an economic sector that is included in the negative list. Where permission is granted, the foreign investor may establish a foreign investment company under the provisions of the FDI Law to execute the project.