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Legal Update: Foreign ownership restrictions in the UAE

The foreign ownership restrictions that currently apply to UAE limited liability companies are expected to be relaxed in 2018.

Background

Most companies established “onshore” in the UAE are limited liability companies (or “LLCs”).

Under Federal Law No. 2 of 2015 (the “Commercial Companies Law”), an LLC must be at least 51% owned by UAE nationals (or entities owned by UAE nationals). There is also scope in practice for LLCs to be exclusively owned by GCC nationals (or entities owned by GCC nationals), even where this 51% test is not satisfied.

Sultan bin Saeed al Mansoori, the UAE’s Minister of Economy, announced in October 2017 that the UAE’s foreign ownership laws would be liberalised in 2018 (see here for more). Shortly after this announcement, Federal Law No. 18 of 2017 (the “Amendment Law”) came into force. The Amendment Law grants the UAE Cabinet of Ministers the power to introduce new legislation liberalising the Commercial Companies Law’s restrictions on foreign ownership.

Comment

The Amendment Law is a statement of intent, and paves the way for the UAE’s foreign ownership restrictions to be finally relaxed in 2018 through a new UAE Investment Law.

This long-awaited development will be welcomed by foreign investors. It is to be stressed, however, that the liberalisation of foreign ownership restrictions is likely to be a gradual process and will in any event be limited to certain strategic industry sectors.

A foreign investor currently holding a minority position in an LLP would be well advised to monitor developments, as the liberalisation process may present an opportunity to negotiate a buy-out of its local partner. Indeed, many existing LLP joint venture arrangements will expressly permit a foreign investor to acquire its local partner’s shares to the maximum extent permitted by foreign ownership restrictions in force from time to time.

An LLP structure may also become more attractive to foreign investors seeking to establish operations in the UAE, or to foreign investors seeking to replace an existing agency/distribution arrangement in the UAE and/or branch structure with an LLP structure. In reviewing these arrangements, foreign investors should be aware that:

  • the Amendment Law does not pave the way for a relaxation of the foreign ownership restrictions applicable to registered agents and registered distributors, who will still need to be UAE nationals (or entities owned by UAE nationals); and
  • registered agency/distribution agreements can be difficult and costly to exit (in part on account of the UAE Agency Law, which confers significant protections on local agents and distributors).

The UAE contains numerous “free zones”, which already allow 100% foreign ownership. Some of the better-known free zones include the Dubai International Financial Centre, Abu Dhabi Global Markets, the Dubai Creative Clusters Free Zone (which houses Dubai Internet City, Dubai Media City and Dubai Outsource City, amongst others), and the Jebel Ali Free Zone. A key distinction between onshore and free zone companies, however, is that free zone companies generally cannot conduct their business onshore in the UAE (i.e. outside the free zone in which that free zone company has been established).

 

Disclaimer: This article is produced for and on behalf of White & Black Limited, which is a limited liability company registered in England and Wales with registered number 06436665. It is authorised and regulated by the Solicitors Regulation Authority. The contents of this article should be viewed as opinion and general guidance, and should not be treated as legal advice.

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