The UAE’s global appeal among entrepreneurs and foreign investors is steadily growing as the government has recently implemented progressive decisions based on sound regulatory and legislative mechanisms. The decision to allow 100% foreign ownership in mainland Limited Liability Companies (LLC) is such a reform poised to revolutionise the process of business setup in the UAE. A foreign investor setting up an LLC in the UAE mainland is no longer required to appoint a UAE National Sponsor holding 51% of shares in the company.
After undergoing several rounds of discussions and amendments, the law will be finally implemented on 1st June 2021. As this historic moment begins to unfold, business setup consultants in Dubai looks at the likely effects and benefits. Read ahead.
A Positive List of Activities
Back in December 2020, the UAE government released a Positive List, highlighting the activities that 100% ownership is applicable to. It was a list of 122 broader categories of economic activities encompassing sectors such as the Agriculture, Manufacturing and Services Sector. However, the business community expects that the government will set up a committee to release a Strategic Impact List showing the specifics of this 100 % foreign ownership, including permissions around commercial activities and also perhaps additional approvals.
Also, the Abu Dhabi Department of Economic Development (ADDED) released a list of 1105 economic activities in May 2021 that are eligible for 100% foreign ownership. However, the investors should wait till other DEDs release a list of economic activities to understand the implications of the amended law in each emirate.
No More Negotiations with Local Sponsors
The new amended Federal Law has removed the long-standing requirement for mainland companies to have UAE shareholders holding at least 51% of the issued share capital of the company. The new development is a big relief for the foreign investors as they no longer need to be bothered about negotiating or entering into arrangements or schemes with the local sponsors.
At present, many investors rely upon arrangements such as Side Contracts to circumvent the restrictions on ownership and to control their financial interests in the UAE LLC companies. Through a side contract, the UAE national agrees to transfer his entitlement and control of the 51% shares in the company to the foreign shareholder. There were instances of Local Sponsors approaching competent courts to declare he is not entitled to the mandatory 51% shareholding.
Arrangements such as side agreements were the only solution for foreign investors to defend themselves in the court during ownership disputes. Now, the foreign investors are free of such intricacies associated with setting up an LLC in the UAE. This amended law is considered as a welcome change as it would inspire more investors to take up the process of business setup in the UAE mainland.
Abolition of National Service Agent
The new Law has abolished the previous requirement for appointing a UAE national service agent (NSA). The appointment of an NSA was a requirement for the foreign company’s branch or representative office to be incorporated in the UAE. The appointment of National Service Agents was also a mandatory requirement for sole establishments and professional activities. However, unlike the Local Sponsorship, a National Service Agent is not entitled to any shareholding in the company. A National Service Agent only takes care of administrative duties for a fixed remuneration.
Less Dependence on Free Zones
Setting up a business in the UAE mainland is the most profitable option for entrepreneurs and foreign investors. A mainland company is a perfect choice for investors seeking to sell their products directly to the lucrative UAE market. Foreign investors who wish to cater to a large number of clients often register an LLC in the mainland despite the previous restriction on ownership.
Investors who preferred full ownership opted for opening a company in any of the forty-plus active free zones in the UAE. However, free zones have a major limitation: companies can cater to either international clients or clients within the free zone. The new law provides more flexibility to investors as they can now have both full ownership and the right to trade anywhere in the UAE.
Ripple Effect on Real Estate
Once 100% company foreign ownership law takes effect, there would be a medium to long term surge in demand for office space in key markets such as Dubai and Abu Dhabi. The law is likely to have a positive impact on the office market, especially for smaller offices sized between 1,000 to 2,000 square feet. Further, a boost in demand for shared and flexible office space is expected.
Apart from the office spaces, the residential real estate sector would also experience the ripple effect of the law. As more investors register their companies in the UAE mainland, an inbound flow of talented professionals is likely. These professionals would require places to live in which will, in turn, be a shot in the arm for the residential sector. At present, demand for both office spaces and residential remain subdued due to the COVID-19 pandemic.
What’s Next for the Investors?
The foreign investors now need to wait till 1st June to gain more clarity on the law. The DEDs of each emirate will also come up with their own internal decisions regarding the implementation of the law to make the process of business setup in the UAE more flexible. The existing companies that wish to change their ownership status also need to wait to see if there is any further amendment. In meantime, the investors can consult with the top buisness setup consultants in Dubai such as Jitendra Business Consultants (JBC) to make their transition into the new ownership regime smooth. JBC a would advice the entrepreneurs on the activities and documenting the changes in ownership.