Pathway to 100% foreign ownership in the UAE
The publication of Federal Decree-Law no. (26) of 2020, in December 2020, which amended key provisions of the Federal Law No. (2) of 2015 on Commercial Companies, namely to relax the rules on local company ownership and pave the way towards the gradual loosening of foreign ownership restrictions in UAE.
Since that date there have been a number of further updates, firstly to clarify that there will be 10 specific new sectors where 100% foreign ownership is available – we expect these when announced to focus on the previous FDI guideline sectors of agriculture, services and industrial.
In a further update this month the UAE Ministry of Economy have now stated that the amendment to the Commercial Companies Law will come into effect from 1st June 2021, to allow 100 per cent foreign ownership of onshore companies in the UAE from that date.
The Abu Dhabi Department of Economic Development (ADDED) has now released a list of 1029 activities that would be eligible for 100% foreign ownership.
There are currently no further details on the additional requirements to obtain 100% ownership, such as higher paid down share capital requirements for example, and there is no corresponding list for Dubai yet. We await further information on this and will update here when available.
The Key highlights from the amendment to the Law:
Which companies and activities can be 100% owned?
Companies carrying on activities with a “strategic impact” will continue to be subject to foreign ownership restrictions. We expect the issuance of a list of restricted activities that will still require local ownership, and a list of activities that will allow 100% ownership.
The power to issue decisions on the contribution of UAE nationals to the capital of companies has been assigned to the governments of individual Emirates, therefore we expect to see differing guidelines for Dubai, Abu Dhabi and the wider UAE for example.
Share Capitals and other restrictions.
It is not yet clear if the 100% owned companies will need to contribute a higher share capital or if there will be higher government licencing fees or other restrictions on these 100% owned companies versus standard 51%:49% mainland LLCs. The previous UAE Foreign Direct Investment (FDI) Guidelines (which have now been superseded by this new amendment) did require an increased level of paid-up share capital, with certain business activities requiring paid-up share capital requirements between AED 2 million to 100 million. Certain industries such as manufacturing, manpower and real estate typically mandate larger sums of paid-up capital. We will have to wait to see what additional requirements and restrictions may come with the relaxation to 100% ownership.
Foreign Branches – removal of the NSA
The amendment to the law specifically stated the removal of the requirement for a foreign branch office to appoint a UAE National Service Agent (NSA) with effect from 30 March 2021. As yet there is no practical way to do this yet, and a Foreign Branch currently still needs an NSA in place for example to set up the licence and the renew the licence with Department of Economic Development (DED) and Ministry of Economy (MoE). We expect this to be updated in due course and the Ministry of Economy and the DED in each Emirate will update their systems to allow the adjustment in NSA. The NSA transfer process will still require a Notarised transfer document and for the client to be update in both MoE and DED.
From Freezone to Mainland
Once the 100% allowance is fully clear in mainland UAE it may be that UAE Freezone companies that have operated in the freezone whilst doing business in mainland UAE may wish to move to a full mainland entity, once full ownership is allowed and practical. A mainland set up provides much more flexibility on commercial space location and staff visa allocation, allows the company to fully work in the UAE and with UAE companies and government, as well as allowing a higher ICV score for government tendering processes.
Additional Corporate Governance Requirements
With this amendment to the law all companies in the UAE (including limited liability companies) will be subject to enhanced corporate governance standards to be issued by the government at a future date
Changes to the process of convening and holding general meetings including:
- Increase in the notice period to 21 days for holding a meeting;
- One or more shareholders holding not less than 10% of the share capital may request a general meeting to be called; and
- Allowing for meetings to be held and called using modern means to technology.
Timelines for 100% ownership
According to the amendment to the law, existing companies are required to ‘adjust their positions’ by 2 January 2022 (one year after the entry into force of the Amendment on 2 January 2021). This will require LLCs to amend their Memorandums of Association to bring some of the relevant changes in for example quorum and notice and meeting requirements into line with the Amendment.
This latest update now suggests that we will have something more concrete on 1st June 2021. In practical terms we should see the release of restricted list and/or the positive list at this time, however the practical mechanism to become 100% owned, or to remove the NSA will take some time put in place, with the various departments both Federal (Ministry of Economy, Immigration, Ministry of Labour) and Emirate specific (DED).
Pathway to 100% - what should companies do now?
We recommend that companies who are already established in the UAE and are considering aiming to transition to 100% ownership to review their current local partner arrangements to ensure that they have a smooth pathway to 100% ownership if they want it.
The 100% ownership will require the 51% shareholder to attend the notary and execute a Share Transfer Agreement in order to affect the change, so the LLC will have to enter into a commercial discussion with their local partner or local agent on this and agree the transfer among the shareholders.
Companies that are considering setting up a new LLC or a new Foreign Branch in the UAE but may be tempted to wait until there is more clarity on the situation are urged not to wait, as it may be some time until the practical process for 100% ownership is fully in place and propagated across all the relevant government departments in UAE. Instead, companies can continue to set up with a local partner but ensure that the legal documentation provides a mechanism for the company to buy back 51% of the shares and progress to 100% if it wishes to.
PRO Partner Group has developed a clear Nominee Partnership Platform to provide a specific pathway to 100% ownership.
Pathway to 100% ownership – key points
- PRO Partner Group (PPG) provide a corporate nominee platform as the UAE National Shareholder to hold 51% of the shares as a Corporate UAE Local Partner, or to act as the National Service Agent for Foreign Branches.
- PPG structure the fee for this service as a fixed fee payable on a quarterly basis with a clear 60 day exit/sale/transfer strategy, for any reason the client (the 49%) can serve notice and swiftly undertake a share transfer or NSA transfer or termination. This is done at no penalty and the shares sold back at nominal value to the client. The client can transfer the shares to another local partner or if they can own 100% of the shares, they can buy these back themselves.
- Once the mechanism in in place and the foreign party can own 100% of the shares in the onshore LLC, PPG will ensure that the client can swiftly buy back these shares at nominal value, and PPG will assist with the Share Transfer Agreements, AMOA notarisation and process, and adjustments to the Trade Licence and MOL and Immigration files.
- PPG can optionally stay on as the registered PRO (Public Relations Officer / Government Liaison Officer) if required to continue to assist the company with staff and family visas, company licencing, regulatory matters and company secretarial and HR Services.
- PPG will provide a full pro-rata rebate on any fees up to the date of share transfer, and ensure swift payment, rebate and settlement.
- PPG will work with the company’s legal documents to provide a clear pathway to 100% if the client wishes and is able to provide a standard pack for this service – provide a POA for the shares, proxy for voting rights, loan agreement for the nominal value of the shares, share pledge if possible, and trust agreement / nominee agreement for 100% of the P&L, assets, IP etc for the LLC.
How can Pro Partner Group help?
PRO Partner Group (PPG) can assist companies in setting up a new LLC or Foreign Branch in the UAE and can advise if your activity is eligible to allow 100% ownership. PPG can also act as nominee shareholder in the interim period to ensure there is a clear pathway to 100% ownership if required. PPG can also assist and advise in relation to existing share transfer and NSA transfer arrangements to allow companies to progress to 100% ownership.
If you need assistance with any of these issue or for any other related company setup, restructuring, local partner or PRO support matter in Abu Dhabi, Dubai, the wider UAE, Oman, Qatar and Saudi Arabia, then please do get in touch with us on +971 (0)4 456 1761 for Dubai or +971 (0)2 448 5120 for Abu Dhabi, email us at firstname.lastname@example.org or complete the contact form below and we will be delighted to assist you.