If, as seems to be the case, the new rules allowing 100 per cent foreign ownership will apply generally across most sectors (perhaps excluding defence and oil & gas), Sunday’s announcement is one of the most significant for the UAE economy for many years.
Recent years have seen a number of important steps in the development of the UAE’s laws, from the introduction of a new bankruptcy law and implementation of the new competition law, the modernisation of the commercial companies law and, more recently, the announcement of a new arbitration law. The law on foreign ownership is the key missing piece in this jigsaw and together the picture these laws portray is of a modern, welcoming, investor-friendly country.
The existing foreign ownership laws have undoubtedly discouraged some from investing in the UAE. The problem was not just the rules themselves, but the mechanisms that were created to get around them. Nominee, or sponsorship, arrangements became commonplace.
These corporate structures, which allowed the foreigner to receive the lion’s share of the company’s income while being capped at 49 per cent of share ownership, were unfamiliar and confusing to foreign investors.
Global companies and investors with a reputation for doing things by the book were nervous about using these structures and also had more practical concerns about what would happen if the relationship with their local partner turned sour.
The announcement does inevitably raise a question mark over the future of at least some of the many free zones in the country.
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New investors will not feel constrained to invest only in free zones and in fact may prefer to set up ‘onshore’ to avoid some of the legal uncertainties and complications associated with providing goods and services from within the free zone to the wider UAE.
The most successful free zones have reached critical mass, though, and will likely remain hubs for investment for the foreseeable future.
Some local sponsors will be disappointed and will be concerned that a reliable source of income may be about to dry up. However, clearly an assessment has been made that opening up UAE companies to full foreign ownership is, on balance, more beneficial for the economy and the country as a whole. That must be right in the long term.
Sponsors who offer more than just their citizenship should be less concerned: many investors new to the country will still seek out a trusted local partner to guide them on local business practices and provide connections.
Arguably, the greatest short term benefit from the proposed changes is more in terms of perception than practicalities. By making this announcement, the UAE is laying down a marker in the sand for all investors to see, and telling the world that it plans to remain a preferred location for investment in the region, by making it as easy as possible to invest here.
Chris Macbeth is counsel at Cleary Gottlieb Steen & Hamilton in Abu Dhabi.
