The recent federal cabinet announcement regarding the future of the 51 per cent local ownership requirement has taken the UAE business sector by surprise.
Trading conditions in the region continue to be difficult, but there has been a series of measures announced in recent months to improve the business environment in the UAE. These range from new investments being planned for Abu Dhabi, particularly in the oil and gas sector, to targeted VAT relaxation and efforts to reduce the costs of doing business. As such, the latest announcements are consistent with government efforts to promote a more pro-business environment.
Unfortunately, for now, we have no further detail as to whether the announcement heralds an across-the-board removal of the 51 per cent ownership requirement or whether it is the start of a process of gradual relaxation of local ownership requirements. The implementation steps have been promised by the end of this year.
The ‘new’ UAE Federal and Commercial Companies law was passed in 2015. In its draft stages, it contained investment protection measures that were largely removed as the law passed through the Federal National Council.
Instead, a new investment law is being prepared. It was anticipated that this new law might see the first steps by the UAE to reduce or dilute the 51 per cent local ownership requirement. This could still be the case. The federal cabinet has the ability under the 2015 Commercial Companies law to grant exemptions from the 51 per cent local ownership requirement and has already done so in a limited number of cases.
It is clear that the federal government is listening to the business sector. It has signalled that change is in air. Notwithstanding this, the expectation was that the 51 per cent local ownership requirement would be relaxed, either on a sector by sector basis, by a staged reduction (perhaps to 30 per cent as in Oman) or by a combination of both. It has been suggested that any such changes could coincide with the introduction of corporate taxation, which should be linked to foreign ownership (as is the case in Saudi Arabia and other countries in the GCC).
With regards to the construction industry, companies in the UAE have generally set up on-shore entities to undertake projects in the large and competitive on-shore market. Should a removal or relaxation of the ownership provisions be passed into law, it would allow foreign-owned construction companies the freedom to establish on-shore entities and retain a shareholder majority. This will be welcomed by international contractors already based in the UAE and may stimulate an increase in the number of new firms looking to enter the UAE’s construction market.
A reduction or dilution of the 51 per cent ownership requirement would be hugely significant. There are a large number of business structures and relationships in the UAE that are built on this requirement. There will be potentially significant costs in restructuring these arrangements. One party’s cost savings could be another party’s loss of revenue. For that reason alone, we expect there will need to be significant lead times before changes come into force.
In the meantime, this should be flagged within your organisation, but with a degree of caution. It is likely to be a medium-term issue or opportunity depending on your circumstances.
For now, dust out those structural agreements and familiarise yourself with their terms and workings. Talk to your local partners about their perspective of such changes. Consider whether you would or should seek to increase the percentage of foreign ownership in your corporate structures just because you can. What would the real cost be of such a restructure? What would be the impact on your historic relationships across a range of restructuring options? Will there be a link to taxation or operational costs?
The better prepared you are for dialogue – both internally and externally – the better your outcomes are likely to be.
By Niall O’Toole, corporate partner, and Matthew Heywood, construction partner at Clyde & Co