Earlier this year, the UAE government announced that foreigners will be allowed to retain 100% ownership in UAE mainland companies. Federal Decree Law no. 19 of 2018 on Foreign Direct Investments (“FDI Law”) has finally been issued and introduces the process by which the UAE authorities will govern foreign direct investments.
Below we have highlighted the main provisions of the FDI Law as it currently stands.
As per Art. 6 of the FDI Law, a new Foreign Direct Investment Committee (“Committee”) is to be set up, and which shall be governed by the Ministry of Economy (“Ministry”). This Committee shall be in charge of the following:
- Issuing the Approved Activities List for foreign direct investors (see below)
- Making amendments to the Negative List for foreign direct investors (see below)
- Approving licensing applications
- Deciding the benefits for foreign direct investment projects
Upon carrying out its obligations, the Committee must take into consideration certain criteria such as the competence and experience of the foreign direct investors, the UAE strategic plans, and potential job opportunities for UAE nationals.
Article 7 of the FDI Law provides a list of economic sectors where foreign direct investment is not allowed (“Negative List”). The Ministry reserves the right to amend the Negative List as it deems appropriate. These sectors are as follows:
- Oil production and exploration
- Military related services
- Banking and finance activities
- Hajj and Umrah services
- Water and electricity services
- Fisheries and fishing related services
- Postal services and telecommunication
- Road and air transportation
- Printing and publishing services
- Commercial agencies
- Medical trading activities such as pharmaceuticals
- Poison banks, blood banks and quarantine centers
Approved Activities List
Unfortunately, the FDI Law does not provide for an approved list of commercial activities (“Approved Activities List”) where foreign direct investment will be allowed. However, the Committee has been authorized to issue such a list, make amendments to the list, and has the right to further approve activities which are not included in the Approved Activities List.
As per Art. 7(5) of the FDI Law, where the Ministry approves a sector to be included in the Approved Activities List, it shall have the right to decide the legal form, the percentage of foreign ownership, share capital requirements, Emiratization quota requirements, and the nature of the projects allowed.
An application has to be submitted to the relevant licensing authorities by the foreign investor in order to apply for an activity mentioned in the Approved Activities List. The relevant authorities must approve the application within 5 days from the date of application or from the date which it receives all the required documents. The application is to be deemed rejected if it has not been approved within 5 days. The name of the company shall end with “Foreign Direct Investment”.
Applications by foreign investors can also be made for activities which are not included in the Approved Activities List. There is a specified appeal procedure mentioned in the FDI Law for rejected applications.
According to Art. 19 of the FDI Law, the relevant authorities may reject an application made by a foreign investor for reasons of national security, threats to the strategy of the UAE, public health, military services, public morals, and/or any effects the application may have on foreign politics. A rejection granted for any of these reasons shall be final and may not be appealed.
Obligations of the FDI Company
As per Art. 13 of the FDI Law, the FDI company must:
- Comply with all local and federal laws in relation to environmental health, pollution management, and general public health
- Practice only the commercial activities mentioned in its license
- Comply with the Emiratization quota (details of which will be issued in a separate ministerial decision)
- Keep accurate accounting records
- Appoint authorized auditor(s) for a one-year renewable period, up to a maximum of 6 years
- Comply with the relevant authorities’ requirements regarding the FDI company’s projects which the authorities may request from time to time
- Notify the relevant authorities when the FDI company’s projects commence within 5 days
The FDI Law includes administrative penalties for not complying with the FDI Law provisions which includes warnings and cancellation of the FDI company’s trade license for repeated offences.
In addition, there is a minimum jail period of 1 year as a well as a fine which ranges from fifty thousand dirhams up to ten million dirhams for any employee who discloses commercial details or trade secrets of the FDI company.
What this Means for Foreign Companies
Art. 17 of the FDI Law states that any foreign direct investors currently operating in the UAE may continue to do so as per the UAE laws and the company’s commercial documents. In order to avail the benefits of the new FDI Law, such companies must apply to the relevant authorities.
Nonetheless, it is unclear which activities will fall under the Approved Activities List and what restrictions will be imposed on the FDI companies, if any. The most notable restrictions being the foreign ownership percentages and Emiratization quotas. We expect these decisions to be issued over the next coming months.