The UAE’s new companies law explained

In a historic move, the UAE will allow companies to be fully owned by foreigners

Adnoc awarded exploration rights for Abu Dhabi’s Offshore Block 3 to a consortium led by subsidiaries of Italy's Eni and Thailand's PTT Exploration and Production Public Company Limited. Reuters

The UAE recently relaxed its residency rules and expanded its 10-year golden visa scheme to include a larger group of professionals, as well as introduced reforms to the Commercial Companies' law that allows 100 per cent foreign ownership.

A few months ago, the country provided a positive list of more than 100 categories of businesses in which foreign investors were able to own 100 per cent of a company without the need of having local UAE participation in the business.

This enabled more than 100 categories of business activities to be owned fully by foreign investors. However, since these activities were still subject to certain capital requirements and other conditions, the UAE went a step further last week and increased the ease of doing business in the country.

By amending the Commercial Companies’ law (No 2 of 2015) last Monday, the UAE has abolished the positive list enacted by the Cabinet and introduced a much more robust approach to attract and encourage foreign ownership of businesses in the UAE. The amendments include the following:

A branch of a foreign company in the UAE in the past required a local agent. Not a partner, but a local service agent was to be named in the license to enable branches of foreign companies, with the exception of a few, to operate their business in the Emirates. This has been the norm for most foreign businesses in the past, apart from those businesses that were established in free zone areas. However, the new amendments revoked Article 329 of the Commercial Companies' law, and there is no longer a need for a foreign-owned company that wishes to establish a branch or a representative office in the UAE to have a local service agent.

The requirement of a minimum of 51 per cent UAE national ownership in most of the businesses in the country has been abolished. The law has actually reversed the rule.

Now, all businesses in the UAE are open for full foreign ownership. However, there are exceptions for a few businesses operating in sectors that are strategically important to the UAE, in which the Cabinet may impose a requirement for local UAE participation by way of, for example, a joint venture.

As a result, it is likely that many businesses will no longer need to be established in free zones unless they want to be in one for VAT purposes, customs or other business needs or concerns.

However, certain requirements and restrictions might be enforced by individual emirates when it comes to the application of the law. It is not yet clear what kind of restrictions will be applied by the emirates, although the law seems to have given some authority to each to regulate certain businesses.

The companies law has also relaxed the requirement of UAE nationals to be on the board of directors of joint stock companies. This provides flexibility and diversified expertise. In addition, it seems that the law has further enhanced directors’ liabilities provisions to include the senior management of joint stock companies. Moreover, the new regulations allow shareholders to sue a company in civil court over any failure of duty by its directors that results in loss or damage.

The law also addressed the requirements of joint stock companies to have proper corporate governance that provides a process within the company to ensure transparency and adequate levels of corporate governance. It also furnishes them with the right to bring in non-shareholder professionals onto the board of directors of the company, who are independent from the shareholders. In addition, the law now allows companies wanting to go public to sell up to 70 per cent of their shares after assessment through an initial public offering, as opposed to the current 30 per cent. Furthermore, the law allows private joint stock companies to be owned by a single corporate shareholder.

The UAE’s new company law is extremely unique and a one-of-a-kind in the region. It is likely to further open up the UAE for foreign investment and possibly encourage the listing of international companies on and draw investors to the local stock market, as well as boost manufacturing industries. It will also encourage greater transparency and proper corporate governance in companies.

This law will come into force on January 2, 2021, except for the removal of the local agent for foreign branches and the ownership of companies without the need of a UAE national partner, which become effective six months after the publication of the law in the official gazette.

Parallel to the amendment to the companies’ law, the UAE also has eased the criminalisation of bounced cheques and also relaxed the laws regarding the consumption of alcohol and cohabitation of unmarried couples.

These were removed from the criminal law and have been relaxed to encourage investors to live in the UAE, as well as encourage tourists to visit. It is likely that there will be other relaxations of similar laws to encourage investment and tourism in the next few months.

Essam Al Tamimi is the chairman of Al Tamimi and Company