How Amendments to UAE Companies Law Are Creating New Opportunities for Businesses
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How Amendments to UAE Companies Law Are Creating New Opportunities for Businesses
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By Laureen Fredah, Intern, Botho Emerging Markets Group
October 17, 2021
With the entire world still grappling with the impact of the COVID-19 pandemic, businesses all over are in overdrive to stay afloat. Most governments have supported the private sector by implementing amendments to the legal framework to make doing business easier. In the UAE, the national government has proposed and implemented a number of changes to improve the operating environment for the country’s private sector. One such proposal is an amendment to the UAE Bankruptcy Law (Federal Decree No.9 of 2016) which aims to support viable businesses that are experiencing financial difficulty in the context of an “Emergency Financial Crisis”, a situation that affects trade and investment in the UAE and expressly includes the ongoing pandemic.
The most significant of these changes include a series of amendments to the Companies Law (No. 2 of 15) regarding 100% foreign ownership of commercial companies. Among other changes, these amendments remove the requirement for onshore companies to have a major UAE shareholder and abolish the provision mandating that a UAE national or UAE-owned company serve as an agent. In addition, companies are no longer required to ensure their boards are made up of a majority of UAE nationals and chaired by an Emirati. This change in regulation stands to benefit more than 1,000 commercial and industrial activities in the contraction, oil & gas, trading and agricultural sectors.
The Implications Of Ownership Amendments On The Uae’s Fdi
As Gulf Cooperation Council (GCC) countries aim to diversify their economies in the face of fast-depleting oil reserves, the race for regional supremacy in the region is at an all-time high. These proposed changes in Emirati law will not only increase the economy’s growth; foreign investments are expected to rise up to 35% in 2021 as a result of the amendments which will position Dubai a leader in the region and a fertile ground for new foreign investment opportunities. These new requirements set Dubai apart since all GCC countries impose restrictions on the level of foreign ownership and control in local businesses. For example, the new legal framework has opened up more than 1,000 prospective activities in commercial and industrial sectors in the UAE. Meanwhile, although neighboring Saudi Arabia relaxed its restrictions on foreign ownership in 2016, this move was only limited to the wholesale and retail trade sector. Additionally, these amendments are expected to encourage individual investors and residents to invest, especially in the small and medium enterprises sector, which is a critical link in production chains. Sectors of vital importance to the economy such as manufacturing, engineering, entertainment, and consulting services are poised to be the biggest winners from these changes as these amendments give them a strong incentive for long-term investments while reducing their operating costs and providing them with additional capital to finance their growth.
What Implications Will These Amendments Have On Free-Trade Zones?
There are more than 100 free-trade zones (FTZs) in the GCC region. More than 40 of those are in the UAE alone. Dubai’s free zones have long been used to set up offshore companies while avoiding the red tape of securing a local partner or sponsor. With this hurdle removed, one might assume that there is no more use for free zones or that the new amendments pose a threat to their existence. However, it is a common major misconception that people only use FTZs to gain 100% foreign ownership of local companies. In reality, FTZs provide additional benefits to businesses, such as the lack of duties on importing and exporting. Exemptions from customs duties and other taxes are also benefits of FTZs, particularly as dual licensing arrangements mean companies can effectively operate onshore from their offshore base.
Setting up a business entity in a free zone is less bureaucratic compared to setting up an onshore company as it does not require getting office space, getting a sponsor/partner, visa and work permits and yet offers foreign investors the choice to retain 100% legal and economic control in a UAE-based entity. However, there are limitations of which most investors are not aware. One such limitation is that entities set up in UAE FTZs are generally only permitted to carry out activities for which they are licensed—either within the free zone where they are registered or outside the UAE. For example, a business entity set up in the Dubai International Financial Centre (DIFC) and licensed to carry out one activity can only operate in the DIFC area doing that activity. Under the new legal framework, foreign investors can now take advantage of setting up their wholly owned companies on the mainland in multiple locations with multiple activities, which increases the flexibility to carry out business operations. The jury is still out on whether this could mean the start of the end of free zones.
Common Law in a Civil Jurisdiction: A Marriage of Convenience?
The changes in the legal framework are not only applicable to the amendments in the UAE law. In an effort to compete with international global markets, the UAE has curved out a way to merge different legal jurisdictions to cater for its continuous increasing number of international investors/expatriates. The general legal system of the UAE is based on the civil law system with influences from Islamic, French, Roman, and Egyptian laws. Despite popular misconceptions, the UAE penal code (criminal law) is not based on the Islamic Sharia law but rather derives elements from it. Despite its civil law background, the UAE has provided an environment to open up financial centres that apply common law rules, particularly the DIFC in Dubai and the Abu Dhabi Global Market (ADGM) in Abu Dhabi. This has made it possible for businesses to apply international laws of other major global financial centres like London, Hong Kong and Singapore to cater to international markets.
The DIFC launched in accordance with UAE Federal Decree No. 35 of 2004 as a part of Dubai’s strategic vision to diversify its economic resources and attract capital and investments in the region. It is an independent jurisdiction within the UAE, empowered to create its own legal and regulatory framework for all civil and commercial matters. The UAE has been strategic in its quest to compete favorably in the region. Aside from the many Free Zones, financial centres like the DIFC and ADGM in Abu Dhabi elevate the UAE’s position among global financial hubs. For example, in 2019, Dubai was ranked eighth in the Global Financial Centres Index, the only financial centre in the Middle East and South Asia to appear in the top 10 rankings alongside financial hubs such as London, New York, Hong Kong and Singapore. Such rankings validate the vision of Emirati leaders to frame the UAE as a progressive legal jurisdiction and an ideal business center.
It is clear from the above assessment that UAE is on the right track to effectively position itself as a major economic hub not only in the Gulf region but also in the world. These recent amendments to the country’s legal framework are taking place both at the national level as well as in financial centres operating under common law jurisdiction; they aim to make it more favorable for investors and companies to do business in the country. For example, ADGM offered temporary relief for ADGM regulated entities through reductions or waivers of fees and extensions to filing deadlines while DIFC introduced short-term measures between April and June 2021 to help companies in the DIFC address challenges raised by the Covid-19 pandemic through changes to fees and filing rules. All these changes have greatly impacted business in the UAE as evidenced by the 2.1% growth in 2021 despite the slowdown of business caused by the COVID-19 pandemic.
By Laureen Fredah, Intern, Botho Emerging Markets Group