Alert On New UAE FDI Law

The United Arab Emirates (UAE) has adopted a new Foreign Direct Investment law (the “FDI Law”) which constitutes a significant change to the foreign ownership restrictions currently in force in the UAE. 

Prior to the introduction of the FDI Law, foreign investors could not own more than 49% of the equity interests in “onshore” companies (i.e., non-free zone companies) which all had to have a local Emirati shareholder owning the majority of the share capital. 

In spite of the widespread market practice of having nominee arrangements and other beneficial ownership arrangements in place (in effect, giving the foreign investor control over 100% of the capital), foreign ownership restrictions have always been seen as a major concern for foreign investors, especially large corporates investing in the UAE. Most companies which did not want to have nominee arrangements in place opted instead to set up their UAE presence by way of a company established in one of the numerous free zones, where 100% foreign ownership is allowed. 

A recent notable exception was the tech giant Apple Inc., which obtained an exemption and was able to set up an onshore company without the need for a local nominee shareholder. The UAE government has always endeavored to create the most business-friendly environment in the Middle East, and it has recently introduced a series of measures designed to increase foreign investment into the country. 

The FDI Law provides the framework which will enable the UAE Cabinet to enact implementing regulations, and establishes two new government bodies (the Foreign Direct Investment Unit and the Foreign Direct Investment Committee) to support foreign direct investment in the UAE. 

“Negative List” and “Positive List” of sectors 

The FDI Law establishes the principle of both a “negative list” and a “positive list” of economic sectors. 

The negative list identifies specific sectors which will not be open to foreign ownership, which are: 

• Oil exploration and production 
• Investigation, security and military 
• Banking and certain other financial activities 
• Insurance services 
• Pilgrimage services and recruitment activities 
• Water and electricity services 
• Fishing and related activities 
• Post, telecommunication and other related services 
• Road and air transportation services 
• Printing and publishing 
• Commercial agencies 
• Medical retail, including pharmacies, and 
• Blood banks and quarantine facilities. 

The FDI Law has given the authority to the UAE Cabinet to identify all economic sectors which would appear in a “positive list” of sectors in which a greater level of foreign investment will be allowed. In addition, the FDI Law authorizes the UAE Cabinet to make changes to the “negative list” by adding or removing economic sectors from that list. 

When adding an economic sector to the “positive list”, the UAE Cabinet may require that certain conditions be met in order to allow a greater level of foreign investment in that specific sector, such as: (i) the legal form of the proposed foreign investment project, (ii) the permitted foreign ownership level (which could be 100% or less), (iii) the minimum capital requirements, (iv) the minimum required local employee workforce, and (v) the privileges awarded to such a foreign investment project. 

Over the next few months, the Dechert team will continue to monitor the enactment of implementing regulations, which will provide more details on the scope and requirements associated with the liberalization of the UAE FDI regime.