UAE’s changing foreign ownership laws could threaten free zonesKWSME
UAE game changing investment law promises a new dawn for foreign investors and residents but is it beneficial for UAE free zones? Let’s explore this here.
In a recent announcement by UAE Cabinet, they are drafting a law which will allow 100% ownership to foreign investors in some specific onshore business sectors and a 10-year residency visas will be made available for specialist workers in the fields such as technology and academia. This means that foreign investors can setup business in UAE outside of free zones and own them completely. The law is expected to be introduced in the final quarter of 2018.
Although the purpose of the law is to boost FDI inflows and attract large investments in infrastructure thereby supporting economic growth; UAE free zones will struggle to survive under this new legislation. Why? Because the main and bestselling proposition of UAE free zones is 100% foreign ownership.
At present, any entrepreneur looking to setup business in UAE Mainland cannot own more than 49% of his UAE firm unless he incorporates a Free Zone Company in a specialized UAE free zone. This initiative is therefore a very aggressive move to diversify Arab world’s second biggest economy but according to some experts, this change threatens free zones existence.
Some consider this move as harmful for Dubai free zones
According to Dr Habib Al Mulla, Chairman of Dubai law firm Baker & McKenzie, foreign investors’ setup their free zone company primarily so they can enjoy 100% foreign ownership but if this option is available to them in UAE mainland and at a more reasonable cost, they will definitely go there.
Free zones will have to find for themselves another niche so that they can attract foreign investment. Although logistics and manufacturing free zones will prove to be more resilient but others will have to innovate be it in terms of cost or changing their processes such as shifting towards online portal or becoming specialized in some area. UAE free zones will have to offer investor something that mainland doesn’t otherwise they will slowly fade.
While some analysts see bright future for free zones despite the announcement…
There are however some analysts who disagree with the above perspective. As free zones are backbone of UAE start-up community and the number of free zones in UAE is gradually increasing towards 50, this means that they are here to stay. Also, each free zone targets a specific segment to serve and offers not only ownership benefits but also low cost business setup and low tax makeup that particularly suits UAE business startups. Therefore the new move does not threaten their existence.
Abeer Jarrar, Corporate Managing Associate at international law firm Linklaters also sees bright future for UAE free zones despite the legislation. According to him, free zones are significant contributors to the UAE economy and will continue to remain so because apart from ownership, they facilitate entrepreneurs and foreign investors for their company formation in terms of infrastructure and legal environment. Free zones are well known as “one-stop shop” for company formation in UAE. They provide ease of doing business as one does not have to go to Ministry of Labor or hunt around for different documents. So, the demand will only get better as free zones have welcomed this new change and will re-focus their efforts on attracting companies.
How is the new law going to affect the business sector of Dubai?
The new law is expected to pave the way for greater foreign investment and economic diversification. Company formation in the UAE mainland would definitely see a boost following the commencement of the law.
But, whether the law aims to support certain industries or is a widespread change; we will have to wait till the end of this year. Whatever the outcome, this should be a useful reminder to all the international companies looking to expand in UAE to carefully consider what area they would choose and what structure they would adopt for a particular market and ensure that their agreement with existing partners provides them the flexibility to adhere to new foreign ownership rules.