FDI regime in the United Arab Emirates

The UAE is a federation of seven emirates established in 1971 under a written constitution. Each individual emirate has its own Ruler as well as rules and regulations applicable only to the relevant emirate. The individual emirates have also established several economic "free zones" to encourage economic development with distinct business-friendly laws relating to foreign ownership, taxation and regulation. The free zones have the freedom to enact their own rules and regulations, but the federal and emirate-specific laws still apply in those areas which have not been specifically regulated.

There is no specific FDI screening regime in the UAE where foreign investors will be required to obtain specific approval for investments or acquisitions in UAE-based entities. Instead, there may be certain restrictions on allowing 100% foreign ownership in UAE entities for certain earmarked activities. These foreign ownership restrictions apply to incorporations as well as acquisitions of existing entities in the UAE.

In this article, we will explore the foreign ownership restrictions for a foreign company when having a business presence in the UAE. 

Historic foreign ownership restrictions

The UAE’s legal and licensing landscape requires that when an entity embarks on doing business (trading or performing business activities or transactions) in the UAE, it is essential to pursue these activities through legally sound and permissible pathways. In the UAE’s thriving economy, where innovation meets tradition, a company seeking to engage in commercial activities must have a licence and be established with a strong legal presence. There are a number of methods for a foreign company to conduct business activities in the UAE, including indirectly, by entering into a commercial agency or distribution relationship with a UAE agent or representative, or directly, by establishing a permanent legal business presence by:

1. incorporating a limited liability company onshore/mainland in one of the emirates; 
2. registering a branch or a representative office of a foreign company onshore/mainland in one of the emirates; or 
3. registering in one of the free zones in the UAE (either as a branch or a limited liability company).

Foreign businesses wishing to operate in onshore/mainland UAE usually do so either through a limited liability company (LLC) or a branch/representative office of a foreign company (Branch). For LLCs, the 51/49 rule applied, which meant that at least 51% of the shares had to be registered in the name of one or more individuals holding UAE nationality or companies wholly owned by individuals holding UAE nationality and that a foreign investor was limited to a maximum shareholding of 49%. Similarly, for a Branch, it was necessary to formally appoint a UAE national individual, or a company wholly owned by individuals holding UAE nationality as national service agent. Although there were many arrangements which were commonplace to bridge the above foreign ownership restrictions, the legality and enforceability of these by a foreign company before the UAE courts was always questionable.  

In contrast, the free zones (special economic designated zones) always allowed for 100% foreign ownership and there was also no requirement to appoint a UAE national as a local service agent when registering a branch office of a foreign company in one of the free zones. The general concern with a free zone licence has been that it would permit the free zone entity to "conduct business within the free zone" or similarly "in and from the free zone" and was prohibited to carry out any of its activities onshore on mainland UAE or in another free zone. 

These restrictions applied to foreign companies when setting up a presence or when investing in or acquiring an existing entity in the UAE. 

Changes to the FDI regime in the UAE in recent years

The UAE has in recent years taken steps to gradually relax the restrictions on foreign ownership and investments in the mainland. In 2018, a framework was introduced through the Federal Decree-Law No. 19/2018 On Foreign Direct Investment (FDI Law) allowing foreign investors to apply to own more than 49% of the shares in a UAE onshore company operating in certain industry sectors in the UAE and subject to certain conditions. However, the FDI Law was repealed in late 2020 when Federal Law No. 2/2015 (Old Companies Law) was amended to abolish the requirement that at least 51% of the shares have to be held by a UAE national and the removal of the requirement for a Branch to appoint a national service agent. 

The most significant amendments made over the past few years to the FDI regime in the UAE include the abolition of the requirement that at least 51% of the shares have to be held by a UAE national and the removal of the requirement for a Branch to appoint a national service agent. Consequently, foreign investors will benefit from much greater flexibility and simplicity when doing business in the UAE. 

The UAE Companies Law now (Federal Decree-Law No. 32/2021 On Commercial Companies (UAE Companies Law) which applies to most businesses undertaking economic activities in the onshore/mainland UAE allows for 100% foreign ownership in all activities except in activities that are classified as “Activities of Strategic Effect”. In practice, each emirate has issued a list of activities where 100% foreign ownership is permitted or vice versa and have earmarked certain activities (such as certain strategic impact activities) that are only available for companies with 51% or more UAE national ownership. If the licensed activities of an entity are permitted for 100% foreign ownership by the respective emirate, no other special FDI procedure needs to be followed as the FDI approval for such activities is automatic.

Concluding remarks 

One of the main attractions for a foreign investor to set up a legal entity in a free zone has traditionally been the ability to retain 100% ownership and control of the entity. It is, however, important to note and remember the many other advantages that free zones offer their clients when setting up their businesses within a free zone, compared to if the business was to be established in onshore UAE. Some of these advantages for a foreign company may include:

1. Some free zones provide exemptions from customs duty and certain exemptions from value added tax and corporate tax (subject to meeting the specified conditions).
2. Many free zones cater to specific industries and grant ready access to the knowledge, expertise and collaboration opportunities of other related operations in the area or sector, for example, the airport free zones, the media free zones and the industrial/manufacturing free zones with port access.

The free zone regulator serves as a one-stop-shop for all government-related interactions and documents to be submitted to the free zones can be in English only (and are not required to be in Arabic).

While the free zone option still remains plausible, the relaxation of foreign ownership restrictions in the mainland/onshore regime through amendments to the UAE's companies law marks a transformative moment in the country’s economic landscape. By opening its doors to global investors, the UAE is positioning itself as a beacon of opportunity and a hub of economic activity. This move showcases the country's commitment to economic liberalization, fostering innovation, and strengthening its competitiveness on the global stage.

If you need more information or further guidance in this area, please contact Surabhi Singhi and Abdulla Alhashili.

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