The United Arab Emirates (UAE) is popular among foreign investors. According to the Institute of International Finance, the UAE received USD 21.8 billion in foreign direct investments in 2021.
In fact, Dubai, one of the seven UAE emirates, is one of the world’s leading FDI destinations. Dubai attracted USD 4.3 billion in FDI capital just in the first three quarters of 2021.
There are several reasons why foreign investors are attracted to the UAE. The UAE foreign ownership initiative is one of them. To be more precise, in the UAE, foreign investors may form a company and own it wholly.
100% Foreign Ownership in the UAE Free Zones
In the UAE free zones, foreign ownership has long been the rule. You can set up your company in any of the free zones in the UAE, and you will not have to share ownership rights and control with UAE citizens.
Aside from 100% foreign ownership, free zones also provide several other benefits that make them very attractive to foreign investors.
For instance, there are no income taxes for both the investors and their employees. Free zone companies are exempt from corporate taxes for 50 years, which is renewable, so a company can potentially enjoy zero corporate taxes for life.
This benefit is particularly significant given the UAE’s decision to impose a federal corporate tax on UAE companies beginning the 1st of June 2023.
The 9% tax rate will apply to companies doing business in the UAE with taxable audited profits that exceeds AED 375,000 (USD 102,000). This corporate tax excludes smaller businesses because of the income threshold. It also notably excludes free zone companies because they do not do business in the UAE mainland.
Other free zone company benefits include full repatriation of capital and profits and no restriction on employing foreigners. There are no foreign currency restrictions and no customs dues when importing goods and equipment into the free zone (as long as it is for consumption in the free zone).
However, a free zone company is restricted in a sense that it can only do business within its free zone or overseas. In other words, it cannot trade, sell or provide services anywhere else in the UAE. Offshore companies, likewise, can only do business with people and entities outside the UAE.
100% Foreign Ownership in the UAE Mainland for Select Economic Activities
To encourage the influx of foreign direct investments, particularly from those who find the free zone and offshore arrangements insufficient, the UAE government broadened the country’s foreign ownership options.
In 2018, the UAE instituted the Foreign Direct Investment Law or Federal Decree-Law No. 19 of 2018.
In principle, this law allowed foreigners to have 100% ownership of a UAE mainland company (a company not in the UAE free zone) if it satisfies certain conditions.
Specifically, the company must be engaged in an economic activity where 100% foreign ownership is expressly allowed. The 122 economic activities where 100% foreign ownership is permitted by the FDI Law was released in Cabinet Resolution No. 16 of 2020.
100% Foreign Ownership in the Mainland Allowed
The UAE government, however, did not stop there.
To make the country even more attractive to foreign capital, the UAE passed another decree: Federal Decree-Law No. 26 of 2020. This amends the Commercial Companies Law of 2015, requiring Emiratis to own at least 51% of a UAE mainland company. In other words, foreigners could only hold as much as 49% of a UAE mainland company previously.
Under this 2020 amendment, foreigners may fully own a company in the mainland as long as that company does not engage in what the local government (the emirate of Dubai, for instance) deems a strategically critical economic activity.
For instance, a manufacturer of HDPE pipes for irrigation based in the Dubai mainland can now be owned entirely by foreign persons and entities. However, this will not be allowed if the government of Dubai tags HDPE pipes manufacturing as a strategically critical economic activity.
Federal Decree-Law No. 26 of 2020, therefore, makes foreign ownership in the mainland the default rather than the exception.
The New Commercial Companies Law
However, the UAE government is not done making changes to enhance the country’s attractiveness to foreign direct investors. The government passed another decree, Federal Decree-Law No. 32 of 2021, which came into force on the 2nd of January 2022.
Federal Decree-Law No. 32 of 2021 is the new Commercial Companies Law of the UAE. It replaces the Commercial Companies Law of 2015, the same law that Federal Decree-Law No. 26 of 2020 amended.
The new law incorporates the amendments made by Federal Decree-Law No. 26 of 2020, which considerably strengthened the UAE’s 100% foreign ownership initiative. It also introduces two forms of companies: the special purpose acquisition company (SPAC) and the special purpose vehicle (SPV).
An SPAC, established as a public joint-stock company with approval from the UAE Securities and Commodities Authority, is formed for merger and acquisition (M&A) purposes. It will have no commercial operations. Instead, it is created only for the purpose of raising capital through an initial public offering or IPO so that it can acquire or merge with another company.
Meanwhile, an SPV is a company set up for a very specific purpose.
In the UAE’’s new Commercial Companies Law, SPVs can be formed for specific financial undertakings or operations, say, bond issuances. By setting up an SPV, a company can separate the assets and obligations of a financing operation from its (the parent company’s) assets and obligations.
Aside from introducing SPACs and SPVs, Federal Decree-Law No. 32 of 2021 also makes several changes to limited liability companies and public joint-stock companies.
FDIs Welcome in the UAE
The UAE has a series of foreign ownership initiatives. In the beginning, 100% foreign ownership was allowed only in the free zones. While free zones offered many benefits, these were quite limited.
Since then, however, the UAE has introduced other decrees to improve the country’s desirability to foreign investors. These are the Foreign Direct Investment Law or Federal Decree-Law No. 19 of 2018, the Federal Decree-Law No. 26 of 2020, and the Federal Decree-Law 32 of 2021.
One hundred percent foreign ownership is now the norm in the UAE for businesses, whether in a UAE free zone or the UAE mainland. As long as a company is not involved in strategically critical economic activities, it can be owned wholly by foreign entities.
It is clear that the UAE likes receiving foreign direct investments, and it is determined to keep FDI capital inflows coming.
About the Author
Naresh Manchanda is a Partner at MBG Corporate Services, an international organization supporting clients across Asia, Europe and the Middle East and providing sustainable solutions and strategies that drive business transformation. Established in 2002 and headquartered in Singapore, MBG is a 450-strong member team that operates out of Europe, the Middle East and Asia, providing Legal, Risk, M&A, Tax, Strategy, Technology and Audit Services.