Background:

There is no doubt that the United Arab Emirates (“UAE”) has been one (1) of the most important investment centers and a venue for all the investors around the world. In 2018, the UAE was ranked the 1st Arabian country with respect to the ability of Foreign Direct Investments (“FDI”), and acquired 33.3% of the total attributed to the Arabian countries. Moreover, the UAE was ranked the 27th worldwide in this regard.

The Federal Decree-Law No. 26 of 2020 (the “Amendment”) was issued to revoke the FDI Law No. 19 of 2018, and to amend the Federal Commercial Companies Law No. 2 of 2015 (“CCL”), in order to overcome the investments’ milestones and to consolidate the concept of encouraging FDI through fundamental and key amendments to the CCL.

The Amendment was published in the Official Gazette on 27 September 2020, to be effective as of 02 January 2021. However, the amendments pertaining to the FDI Articles Nos. 10, 151 and 329 (the “FDI Articles”) shall be effective after six (6) months of the publication of the Amendment in the Official Gazette. In this regard, the companies abiding to the CCL shall regularize their situation in light of the Amendment by no later than one (1) year of its effective date, that may be extended by the Council of Ministers (the “Cabinet”) for a similar term.

Overview:

According to the FDI Articles, foreign investors shall have the right to incorporate UAE onshore companies owning 100% of its capital, with no need of any national shareholders, partners and/or local agents, except for the sectors that have a pivotal and strategic impact and/or nature, knowing that the Cabinet shall form a committee of the Department of Economic Development (“DED”) to determine the said pivotal and strategic sectors in each Emirate.

The Amendment, without prejudice to the pivotal and strategic business activities that shall be determined by the Cabinet and DED of each Emirate, hereby provides the ease of doing business, facilitates carrying-out corporate governance and protects minority rights of partners and shareholders.

Insights:

First: Pivotal and strategic sectors:

In accordance with the FDI Articles, the Cabinet shall issue decree(s) equivalent to and replacing the decree No. 16 of 2020 with respect to the pivotal and strategic sectors regulations and restrictions for the FDI in the UAE.

We would like to highlight that the said decree(s) will play an important role in complementing the main target of the Amendment; represented in evolving and attracting FDI. That is being said, the aforementioned decree(s), it is to be believed that the said decree(s), shall not limit the investment opportunities before foreign investors, or to prohibit foreign investors from doing business in many sectors, in order for the Amendment to be effective.

In light of the above, the Cabinet, the Securities and Commodities Authority (“ESCA”) and DED of each Emirate shall coordinate among each other to issue a detailed list of strategic sectors allowing the enhancement of FDI in the way that develops the Gross Domestic Product (“GDP”); without prejudice to the consideration of a reasonable minimum issued capital for companies operating and carrying-out pivotal business activities in the UAE.

We believe that the achieving the major target of the Amendment herein will depend on the ability of the Cabinet, ESCA and DED of each Emirate to maintain the balance of evolving FDI and protecting the character and structure of national GDP.

Second: Capital and licensing of UAE onshore companies:

On incorporation a new company, the capital of that company is deemed to be one (1) of the major concerns for investors. In this regard, the Amendment provided that the authorized capital is no longer a requirement on incorporating public joint stock companies.

According to Article No. 193 of the CCL, stating that:

“The issued capital for public joint stock companies shall not be less than AED 30M, and the Cabinet may review this cap as per the opinion of chairman of ESCA”.

Nevertheless, we would like to highlight that the minimum issued capital for strategic business activities, methods of releasing the said capital and dividends distribution, should be essential factors in attracting FDI.

On the other hand, the FDI Articles stipulated that the Cabinet and DED of each Emirate shall issue their decree(s) with respect to regulating issuing licenses for incorporating onshore companies, in accordance with the business activity of the said companies.

We believe that the Cabinet and DED of each Emirate shall not only be keen on attracting foreign investors to do business in the UAE by maintaining a reasonable minimum of companies’ capital, but also on providing the ease of expanding their investments.

Third: Percentage of national contribution in the capital and the board of directors:

The broad discretionary power granted to the Cabinet and the DED of each Emirate to determine the percentage of national contribution in the board of directors and the capital of the companies abiding by CCL could be a double-edged weapon. Whereas, each Emirate has its vital role in contribution in each Emirate’s GDP.

We believe that the percentage of foreign ownership may vary from one (1) Emirate to another by virtue of the Amendment; in accordance with the importance of the business activity, as previously stated. In such case, foreign investors may be attracted to an Emirate rather than the other in order to do a specific business depending on the vital nature of each Emirate, and how far would it serve the business activity.

Conclusion:

In a nutshell, the decrees and resolutions that will be issued by the Cabinet, ESCA and DED should comply with the approach adopted by this Amendment to allow FDI and national investments to grow wider and smoothly in the UAE.

In our opinion, the DED of all Emirates shall coordinate the percentages and sectors stipulated by their decrees in order to avoid overlap and confusion, and to benefit from the Amendment and the subsequent decrees in light of their collaboration with the Cabinet and ESCA.

Written by:

Mohamed Metawea