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Legal Framework of Foreign Direct Investment in the UAE

 Legal Framework of Foreign Direct Investment in the UAE

Introduction

Foreign Direct Investment (FDI) plays a key role in driving the economic development of the United Arab Emirates (UAE). In 2022, the UAE achieved the highest FDI inflow, totalling USD 22,737 billion, marking a 10% increase from the previous year, surpassing all other Gulf Cooperation Council (GCC) countries.
Positioned as a rapidly growing global business hub, the UAE has established a comprehensive legal framework to regulate and promote FDI. This article offers an overview of this regulatory framework and the key considerations for foreign investors when considering FDI in the UAE.

Background and Legal Framework


Pre-2015

Prior to 2015, foreign investors were limited to 49% ownership of a company, with the remaining 51% ownership required to be held by a UAE national or a company wholly owned by UAE nationals. 

2015

In 2015, the UAE introduced Federal Law No. 2 of 2015 on Commercial Companies (“CCL 2015”). This law continued the restriction on foreign investors, allowing them to own only 49% of a company. However, an amendment to CCL 2015 provided a pathway for increased foreign investment, by granting the government the authority to increase foreign ownership in specific industries.

2018

In 2018, a stand-alone law focusing on FDI, Federal Decree No. 19 of 2018 on Foreign Direct Investment (the “FDI Law”), was enacted in the UAE. The FDI Law introduced two lists:

A “Negative List” outlining economic sectors and activities off-limits to foreign investors. This list includes activities such as petroleum exploration, military-related activities, banking, insurance, Hajj and Umrah services, utilities such as water and electricity, fisheries related activities, postal and telecommunication services, land and air transport services, printing and publishing, commercial agency services, medical retail trade, for example private pharmacies, and facilities such as poison centres, blood banks and quarantine centres.

A “Positive List”, issued through Cabinet Resolution no. 16 of 2020, covered 122 primary activities categorised into sub-activities. These activities allowed significant foreign investment subject to meeting specific conditions. The Positive List also specified a minimum capital requirement for each sector, requiring companies to submit financial statements and auditors reports as evidence of their financial capabilities.

2021

Federal Decree-Law No. 32 of 2021 on Commercial Companies (“CCL 2021”) has replaced the FDI Law and the Commercial Companies Law of 2015 (“CCL 2015”). The current law allows foreign investors to own 100% shares in UAE companies without requiring a UAE national partner, except for specific business activities and sectors. Each Emirate’s Department of Economic Development (“DED”) has a list of approved business activities for foreign companies.

The UAE actively encourages investment in growing sectors, such as fintech, e-commerce, agritech, healthcare, education, tourism, space, logistics services, ICT, manufacturing, medical tourism, renewable energy, media and entertainment, creative industries, gaming, and smart cities. However, full ownership of companies within these sectors is subject to regulations of the respective governing bodies.

 

Key Considerations  

  • Treatment of Foreign Companies

Foreign companies, whether wholly or partially owned, are not subject to increased fees or different capital requirements compared to local-owned companies. Additionally, the CCL allows discretion to the relevant DEDs to grant 100% foreign ownership in specific activities.

  • No need for local service agent

As per the CCL 2202, foreign companies are not obligated to appoint a local service agent to represent them locally.

  • Tax regime

Companies with a net annual income exceeding AED 375,000 are subject to a 9% corporate tax. Certain categories of income originating in the UAE and disbursed to non-residents may be subject to a 0% withholding tax.

  • Dispute Resolution

Mainland (onshore) companies have the option to resolve their disputes using several alternative methods, including going through the local courts or opting for arbitration. However, there are specific types of urgent disputes that must be resolved through local courts or authorities, and they cannot be subject to arbitration. These disputes typically involve matters related to tenancy, real estate, and employment. 

  • Sanctions

In accordance with Cabinet Decision No. 102/2022, regarding the issuance of the regulation on the administrative penalties for violations of Federal Decree-Law No. 32/2021 on Commercial Companies, foreign companies or their branches operating in the UAE may face a fine of AED 100,000 if they fail to register, obtain a license, or neglect to submit their annual financial documents to the DED or the Ministry of Economy, as applicable. Similarly, representative offices of foreign companies involved in commercial activities within the UAE may face a fine of AED 50,000.

Conclusion

The UAE committed to attracting FDI through its welcoming and business-friendly environment. Foreign investors can find reassurance in the nation’s forward-thinking policies that promote economic expansion and new prospects.

The authors of this Galadari Insight are Bassem ElAzhary and Ishwarya Singh.
Bassem is a Senior Associate on the Corporate Commercial team at Galadari. He has almost two decades of experience in general corporate, commercial, and M&A transactions for listed companies across the MENA region
For more information on Galadari’s Corporate Commercial Practice, please contact Bassem directly.

Bassem ElAzhary
Senior Assoicate
E: bassem.elazhary@galadarilaw.com

Ishwarya Singh
Paralegal
E: ishwarya@galadarilaw.com