UAE legislator releases positive list for sectors open for 100 percent foreign investment

On 1 July 2019 the UAE Prime Minister announced the long-awaited positive list provided for in UAE Federal Decree 19/2018 permitting 100 percent foreign ownership in entities engaged in designated sectors onshore in the UAE. While the decree originally included a negative list of activities that are reserved for UAE nationals, the list on activities open for 100 percent foreign investment mentioned in the decree had been awaited since the decree was published in late 2018. The now issued positive list comprises 122 activities in the agriculture, manufacturing, service, education and health care sectors. However, the list also imposes significant restrictions for 100 percent foreign investment. For instances, the list includes minimum share capital requirements for specific activities as well as a requirement to register with the Tawteen Partners’ Club, a service of the UAE Ministry of Human Resources offering preferential treatment to its members.

Most notably the positive list – in principle – allows for businesses, 100 percent of which are held by foreigns, to engage in the following activities onshore in the UAE:

• hospitals, provided the operating entity has a share capital of at least AED 1 billion;
• non-specialized retail stores, provided the operating entity has a share capital of at least AED 1 billion; and
• food production (excluding bakeries, dairy products and animal feed), provided the operating entity has a share capital of at least AED 300 million.

Talk of a liberalization of the UAE onshore corporate regime to allow 100 percent foreign shareholding has gotten more concrete since early 2018, when rumors surfaced that the UAE would issue legislation abandoning the 51 percent local shareholding requirement. Speculation ran high, with some commentators suggesting that soon treatment of foreign shareholders would be equal to UAE citizens in all aspects. Reality set in when Decree 19/2018 was issued later that year: The decree made it clear that restrictions would remain in place.

To most professionals experienced in the UAE this came as little surprise. While practices circumventing the 51 percent local shareholding requirement established by the UAE corporate regime have been well established in the UAE for decades, UAE citizens have profited from the local ownership requirements acting as nominee shareholders, enabling foreign investors to maintain control over their onshore investments. The assumption was that the UAE legislator would not eliminate this source of income for UAE citizens. This assessment had been further affirmed by the application of Decree 19/2018 by UAE authorities.

To date Dubai was the only emirate that accepted applications for registration of 100 percent foreign-owned onshore companies or transfer of all shares held by UAE citizens in existing onshore companies to foreign shareholders. The Dubai Department of Economic Development (DED) – the competent regulatory authority for company formation and other corporate matters – assessed such applications on a case-by-case basis, typically taking into account the amount invested in the UAE and the number of people employed by the concerned entity. The Dubai DED also required companies applying for 100 percent foreign ownership to appoint a UAE national or a company (the beneficial owners of which are UAE nationals only) to act as a local service agent for immigration and other government related purposes.

Hence, while the Dubai authorities were quicker to adopt the changes introduced by Decree 19/2018, the Dubai DED effectively upheld the status quo. With the Dubai DED compelling all companies in which foreigners hold more than 49 percent of the shares to nominate a UAE service agent, the sponsorship system established under the old corporate regime is effectively preserved. The key difference is that now the local sponsor does not have to hold a majority share in the company, which is a welcome improvement. The contractual structures whereby control over the company was transferred to the foreign minority shareholder were never regarded as an airtight solution. Thus, foreign investors had to live with the risk of their local sponsor taking control over (certain aspects) of their UAE onshore business. While these risks could be somewhat limited by corporate and contractual structuring, the fact that now sponsors do not hold a share in the company completely abolished these risks. Still, the Dubai DED was restrictive in allowing foreign shareholding in onshore companies exceeding 49 percent. Increased foreign shareholding was only allowed for investments with a large UAE local footprint. Hence, smaller businesses or those with less significant engagement in Dubai were not able to profit from the liberalization of the corporate regime.

This trend is not expected to change with the release of the positive list. In particular, the share capital requirements will limit the scope of business for which establishing a 100 percent foreign-owned UAE onshore entity will make sense. Of course one could argue that a company’s share capital is working capital that can be used to pay for company expenses such as salaries, rent and procurement. However, the AED 1 billion (ca. EUR 250 million) investment required for some activities will not appear feasible for most businesses, as the UAE’s 9.4 million inhabitants render it a comparatively small market. Furthermore, the share capital of a company determines its shareholders’ liability for obligations of the company. Thus, shareholders of a 100 percent foreign-owned hospital operating onshore in the UAE would be liable for obligations of that hospital in the amount of AED 1 billion or more depending on the share capital of the operating company.

Whether the Dubai DED will uphold the practice of requiring a UAE service agent for largely foreign-owned onshore companies, and whether the competent authorities of other emirates will adopt this practice, remains to be seen. The requirement is not contemplated in Decree 19/2018 or the positive list now released. However, both the decree and the positive list allow the emirates some authority in designing their procedures and requirements. Still, considering how relevant the sponsorship business is for UAE citizens, there is a reasonable expectation that the Dubai DED will continue to require the appointment of UAE service agents and that the other emirates will follow. Ultimately the decisive emirate will be Abu Dhabi; if the seat of the federal government adopts the Dubai practice, then the northern emirates will likely follow suit. If Abu Dhabi should choose a different approach, we could see varying regulations throughout the UAE.