100% FDI ruled out in 14 key sectors

dubai — The long-awaited 100 per cent foreign ownership law has come into effect in the UAE following its publication in the Official Gazette.

According to legal firm Clyde & Co, the “negative list” contains 14 industries where full foreign ownership is not permitted. They include oil exploration and production; investigation, security, military; banking and financing activities; insurance; pilgrimage and Umrah services; certain recruitment activities; water and electricity provision; fishing and related services; post, telecommunication and other audio visual services; road and air transport; printing and publishing; commercial agency; medical retail (including pharmacies); and blood banks, quarantines and venom/poison banks.

Omar Momany, head of the UAE corporate and commercial practice of Baker McKenzie Habib Al Mulla, said activities on the “negative list” will not be allowed 100 per cent foreign ownership.

8%

Rise recorded in FDI inflows into the UAE last year

However, the UAE government will be issuing a “positive list” later, specifying the activities and sectors, including emirates, in which foreign direct investment (FDI) will be allowed.

The UAE has been pushing for the 100 per cent foreign ownership law for a long time in order to attract higher FDI. According to the UN Conference on Trade and Development (UNCTAD), the UAE attracted nearly $11 billion worth of FDI last year, an increase of 8 per cent. The outflow of FDI also jumped 8 per cent to $14 billion in 2017. The country accounted for 36 per cent of FDI inflow into the Arab region last year. The UNCTAD ranked the UAE 21st worldwide for FDI outflows and 30th for FDI inflows for 2017. “The FDI law sets out, at a high level, the procedure which foreign investors will need to follow in order to apply for permission to take advantage of the increased levels of foreign investment that may be permitted in sectors of the economy that are in the ‘positive list’”, said Benjamin Smith, partner, Clyde & Co., in a note.

Momany said the FDI Law did not define in terms of sectors or the percentage of foreign ownership to be allowed for each activity or sector. “The anticipated Cabinet Resolution will identify the activities across the various sectors that will go on the ‘positive list’ and the level of foreign ownership allowed for each activity.”

“The percentage of foreign ownership permitted under FDI Law is yet to be determined by the Cabinet Resolution. The Resolution will specify whether 100 per cent of foreign ownership will be permitted under Article (7) of the FDI law, or whether a lower percentage [and thus a local joint venture partner] will be required,” Baker McKenzie Habib Al Mulla said in a note released on Monday.

Highlighting the benefits of the FDI law, Baker McKenzie Habib Al Mulla noted that it affirms the customary benefits and guarantees related to freedom of repatriation of funds. It also protects against expropriation of assets for public interest, guarantees the continuous use of real estate by the foreign investor and prohibits the seizure of assets of the FDI project except by judicial decision.

The law will expedite procedures for the approval of any FDI project, whereby the relevant authorities will take only 5 days to approve the application. The FDI law also provides for an appeal mechanism for rejected applications. While acknowledging the aspects of confidentiality, the law imposes severe penalties — including imprisonment and fines up to Dh10 million — on whoever discloses sensitive information regarding the technical, financial and economical aspects of the FDI projects.

The legal firms said there were still some important details that need to be addressed such as the ‘positive list’ of sectors and commercial activities, the permitted corporate forms, foreign ownership percentage per sector, Emiratisation requirements and other potential exemptions from the Commercial Companies Law.

Momany said the law doesn’t specifically provide a designated process for existing mainland entities to switch their status. “Further guidance will be required on whether or not they can apply for FDI designation and how they may benefit from the new FDI law… The Law indicates that certain conditions may be imposed such as capitalisation and Emiratisation requirements, but further information will be set out in the Cabinet Resolution.”

The FDI Law also establishes two government bodies — Foreign Direct Investment Unit and a Foreign Direct Investment Committee.