UAE Cabinet Resolution May 2018 – 100% Ownership for Intentional Investors

UAE Cabinet Resolution May 2018 – 100% Ownership for Intentional Investors

UAE Cabinet Resolution May 2018 – 100% Ownership for Intentional Investors

 

The UAE cabinet on Sunday 20 MAY 2018 has announced the passing of a resolution which included changes in the ownership structure of onshore companies in the country, in addition to changes to the residency system. The new changes will affect how investors will plan their investment’s shareholding structure in both mainland and free zones. We will outline the differences between the current business formation and residency laws, and the new changes which the resolution has approved.

 

Company formation in mainland (onshore companies) is governed by the UAE Commercial Companies Law No. 2 of the year 2015, which states in Article 10 that a UAE national should hold at least 51% of the company’s shares or can be multiple UAE nationals which their shares combined satisfies the 51% requirement. This restriction led many investors and multinational corporation to set up branches in mainland instead of setting up Limited Liability Companies, however this approach was not applicable in the case of trading companies, as branches of foreign companies are not allowed to conduct trading activities in mainland.

 

The passing of the resolution by the UAE cabinet on the 20th of May 2018 means that such restrictions are going to be relaxed, however no details have been announced about the criteria which should determine who can benefit from this decision, and whether it will be applied to all kinds of companies or only for specific sectors or certain commercial activities. According to a statement by the government, there shall be a further announcement later in 2018 which shall shed more light on the matter, including details as well about granting 10 years residency visas for investors and certain professions in the medical, scientific, research and technical fields along with their families, as well as scientists and people working in creativity related industries. The UAE cabinet also stated that the government will conduct a review to the residency system with a view to extending residency permits for those sponsored by their parents after completing their university studies to facilitate their future plans to reside in the country.

 

How this news is going to affect doing business in the UAE?
Foreign investors who wanted to set up Limited Liability Companies often enter into an agreement with the UAE majority shareholding party to protect their investment in the LLC – the minority shares. In light of the recent announcement, those investors may be able to take full control over their companies in the UAE, which indeed will raise questions about the interest of the UAE majority shareholder to transfer his shares to the foreign party, a proper advice will be required to reach a satisfactory commercial agreement between both parties.

 

There is also a question regarding the number of shareholders required for the successful formation of a limited liability company, as the current regulations states that a minimum of 1 foreign and one local party is required for the formation of LLC, with the exception of LLCs owned by a single UAE national. Should this requirement remain then it is not clear whether a single foreign investor can own 100% of the shares in a limited liability company.

 

Subject to the regulations which should be announced later in 2018, foreign investors may find it more beneficial to set up LLCs rather than branches of foreign companies in the UAE, and also it may open the door to convert the current branches of foreign companies to limited liability companies, as branches does not have a limited liability statue in the UAE but rather they are an extension of the parent company and not a separate entity.

 

Will this change affect free zones?
Currently many investors choose to set up a free zone company instead of onshore LLC to benefit from the 100% ownership the free zones offer. Another benefit of free zone companies is the exemption of customs and duties fees, this of course comes with a restriction that free zone companies are only allowed to trade within the boundaries of the free zone. It is yet to be seen whether the new changes will affect the set up of free zone companies over LLC onshore companies.

 

It is still early to assume how this will change the business scene in the UAE however such an announcement is a huge step for the UAE and will definitely open the door for more investments, which will result in more economical growth.