Licensing procedure of Foreign Direct Investments projects in the UAE
Background of this new development-
Prior to the implementation of the FDI law, UAE law stipulated that foreign investors may only own up to 49 percent of a UAE mainland corporation, with several exceptions. One or more UAE nationals or a corporation entirely owned by 1 or more UAE citizens required to own at least fifty-one percent of equity in a UAE mainland company. This meant that the constitutional records of a UAE mainland company must state both the name of the domestic shareholder, as the legal owner of not less than 51 percent, and the name of the international shareholder, as the legal owner of not more than 49 percent, making the foreign shareholder a minority stakeholder.
Furthermore, some economic industries like as oil and gas development and extraction, finance, insurance, military and defense, water, power, entertainment, printing, telecommunications, transport service, and labor supply were restricted to UAE nationals or firms controlled entirely by UAE citizens. As a result, foreign investors are prohibited from engaging in such operations or investing in businesses that engage in such operations.
- The development in the law
Following the publication of UAE Federal Law No. 19 of 2018 on Foreign Direct Investment, the UAE Cabinet has officially published the entire Positive List of activities encompassed by the Foreign Direct Investment Law, including that of the prerequisites & shares requirements within each sector, which are classified into three parts: agriculture, services, and industries. This positive list and recommendations are currently in effect.
The list of 122 authorized operations in each category will be qualified for 100 percent Foreign Investor ownership, an effort that will open doors for Foreign Investors looking to access the Mainland market of the country.
Among the activities primarily are:
- Administrative & support services
- Agricultural sector
- Arts & entertainment sector
- Constructional activities
- Medical care
- Hospitality & culinary services
- Communication & information
- Economic, scientific, and technological activities
- Sustainable power
- Transportation & warehousing sector
- Conditions and criteria for complete ownership (100% )
- Requirements for Share Capital
Share capital needs might range between Two & One hundred million Dirhams based on the sector and activities of the organization. Sectors such as healthcare activities, for instance, will necessitate a Share Capital of Aed.100 million
Several industries, such as manufacturing, have different share capital requirements based on the kind of manufacturing, whilst the manufacturing of machines and equipment would necessitate a share capital of AED.100 million .
- Key Advantages of this include
- Complete Ownership
- Licensed FDI firms are treated the same as UAE national firms.
- Obtain financial project returns from outside the nation.
- The ability to switch partners, transfer ownership, and alter legal form.
- Procedure for Licensing an FDI Project under the Positive List
Application for FDI License
The application procedure for acquiring an FDI License in the UAE changes depending upon whether foreign investor's desired activity is particularly anticipated by the Federal Positive List or not.
It should be observed that major developments that have an impact on the life of Foreign Direct Investment Company (e.g., amendment of founding provisions or legal form, introduction of new partnerships or shareholders M&A) require the written permission of the appropriate Competent Authority, revealing UAE's intention to keep a close eye on the identities of the parties involved. This is not the situation for ordinary, non-FDI enterprises, to whom these criteria do not apply.
If an investor wishes to carry out an activity that is specifically qualified for an FDI License in the UAE, they must first choose the legal form of the business, then establish the registered capital (which must not be less than the minimum capital for the relevant activity), then register a trade name (which must be supplemented by the phrase “Foreign Direct Investment (FDI)”), and finally submit an application. This is done in order to obtain preliminary clearance for the FDI project.
The application for the initial permission must include a draft articles of association & memorandum of association (AoA & MoA ) of the FDI Company, a feasibility analysis, and any other previous permissions that are particularly necessary for the business to be carried out. After receiving preliminary permission, the investor can proceed to pick a place for the conduct of its company and then file an official application for FDI project license, including the signed MoA & AoA. Any particular permission necessary for the business from a licensing body which would not have been received up until this point must be sought.
The investor must next seek to obtain membership of the Tawteen Partners Club, a Ministry of Human Resources and Emiratization-established organization. The relevant Authority would then issue its conclusion once these stages have been completed. If the judgment is positive, the foreign investor must proceed by paying the fees for the said FDI Company's commercial license, opening a bank account in the FDI Company's name, completely paying up at least 20% of the FDI Company's capital, registering the FDI License with the Ministry Of Economy and as welll as the Chamber of Commerce, and lastly obtaining a notice of starting of business.
The Law does not provide a deadline for the approval or denial of the Investment License; nonetheless, it stipulates that the Appropriate Authority must issue its approval of the FDI License application in 5 business days after the application submission and fulfillment of all required requirements, paperwork, and processes. While this looks to be a favorable timeframe, the application also must go through a preliminary approval procedure, which is not time-bound. If the 5-day period passes without some kind of decision from the Competent Authority, the FDI License application is deemed to be refused.
As a result, the short timeline may wind up being detrimental to foreign investors and difficult for the regulators, particularly knowing that the process for obtaining an FDI License is new and will require time to acquire experience and precedence. If the business is not on the Federal Positive List or in the AD Positive List but is also not forbidden under the Negative List, the investor can apply for an FDI License to the Qualified Authority, that has the power to reject the request or, after consultation with the applicable licensing authority and the Government in the appropriate Emirate, to approve it and then to send it to the FDI Committee, which is in charge of researching and delivering FDI suggestions to the cabinet of United Arab emirates. If the FDI License request is successful by the UAE Cabinet, the Competent Authority will advise the foreign investor of the documentation information & data, required to complete the application. The relevant Authority will then approve the FDI License within five business days of the foreign investor completing the appropriate paperwork and processes. If a proposal is rejected, the decision is final and cannot be appealed.
The procedure can be summarized as follows-
- Choose a Positive List Business Activity and a Legal Form it can be a limited liability company or a joint stock company. The Capital must not be below the minimum criteria.
- Submit an application form for a Foreign Direct Investment License for authorization.
- Trade Name Reservation
- Obtain authorization from entities involved in FDI firm activity. II. Produce evidence of submission for membership in the Tawteen Partners Club (an organization formed by the Ministry of Human Resources & Emiratization).
- After paying a fee, obtain permission and obtain an FDI license.
- Creating a bank account on behalf of the firm
- Registering with the Ministry of Economy For FDI License
Applications from categories on the Positive List have a maximum approval time of 5 business days.
- In case an Existing business that wants to become an FDI company
An established company may convert to an FDI firm if its legal form is one of those specified for FDI firms, namely Private Joint Stock Company or a mainland UAE Limited Liability Company.
- A License for a project that is not on the Positive List
It is also possible to apply if the project License is not on the positive list, such as commercial retail , property, food and beverage, and hotels. The foreign investor must send their application to the Relevant Authorities of FDI for evaluation. If the proposal is submitted to the Foreign direct investment Committee for review, The request will then be forwarded to the UAE Cabinet.
- Applications in Dubai under the FDI 100 percent Foreign Ownership Law
Presently, the application procedure in Dubai is straightforward, with the FDI managing applications in collaboration with the Department of Economic Development and Ministry of Economy.
- Implications for the current businesses
It is unknown how much foreign ownership limits will be relaxed until more regulations are announced. It is also ambiguous how the shift to remove the National Service Agent (NSA) or the regional shareholder would be carried out, & what practical advantage there may be in maintaining the National Service Agent or Local Partner outside of the mandated duties list.
Existing corporations must ‘adjust their positions' by January 2, 2022, according to the Amendment (1 year after the entry into force of the Amendment on 2 January 2021). To bring quorum, Limited Liability Companies may need to change their MoA (Memorandums of Association)
- Legal ramifications
The UAE government is supporting economic diversification and taking international investment seriously. The FDI Law demonstrates this, and it is a great step toward enhancing diversity across industries and boosting the UAE's desire to become a world leader in attracting foreign investment.
Companies are recommended to implement future-proofing measures in light of the new FDI Law in preparation of the changes ahead.
Companies would now
- Consider if current UAE on-shore firms should be converted to FDI businesses, keeping in mind that any conversion from an LLC to an FDI firm may open the door to additional shareholder talks, especially if the conversion results in a buy-out of current shareholders. Contract audits should be performed by companies to assess the impact on major trade connections as well as any change of control provisions that may be activated in major contracts of business as a consequence of any conversion.
- Recommend using corporate service providers for investment projects, keeping in mind that such providers are familiar with the current environment and understand the need of international investors to pursue contractual safeguards via side agreements.
- Take into account inserting future-proofed terms in investor agreements – Based on the parties' negotiating position, some contracts also include terms that would allow the international investors to a pro-rata reimbursement of any service costs incurred to the domestic shareholder if the agreement was terminated due to a change in law.