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Fresh proposals to allow overseas companies full ownership of their business in the UAE were announced last week. Amid falling oil revenues the move would open the door to much needed foreign investment. Alex Delmar-Morgan reports.

Last week’s comments from the UAE government about allowing foreign companies full ownership of their businesses would certainly have been music to the ears of regional entrepreneurs and businessmen. At a time when corporate sector growth has been stymied by the global economic downturn, the remarks by the UAE’s Minister of Economy Sultan Al Mansouri only reinforced the idea that such a move is seriously being considered — a move that experts feel is crucial for attracting foreign investment into the country.

Analysts say the current system, where an overseas company wanting to set up in the UAE — and operate outside of a free zone — must find a local sponsor who then owns 51 percent stake in the firm, is a deterrent to business and a drag on the country’s economy. Any changes to legislation that would allow 100 percent foreign ownership of companies by expatriates would open the door to capital investment, a benefit to Gulf countries as they expand their economies beyond the hydrocarbon sector.

“The ownership issue by itself is a concern but if you manage to modernise and make it easier for foreign firms to come here and have full control of their operations, it would be a significant development that would attract foreign investment,” says Marios Maratheftis, head of research at Standard Chartered Bank in Dubai.

Al Mansouri said that the UAE would be particularly interested in attracting ‘high value’ firms in the hi-tech sector, an industry that the country is keen to tap into. At the start of the month, Abu Dhabi’s state fund ATIC offered to buy Singapore chipmaker Chartered Semiconductor in what would be a $3.9bn deal.

In Dubai , the number of FDI (foreign direct investment) projects last year grew 59 percent on 2007 levels and capital investment in the city jumped 123 percent between 2007 and 2008 from $9bn to $21bn, according to a study by the Financial Times FDI Intelligence published in April.

But changing the ownership structure of companies in the UAE, especially small and middle sized enterprises (SMEs) in the trade and retail sector, would be a significant step, according to analysts.

“For me, the bigger bang for the buck would come in allowing foreign ownership in small businesses such as retail,” said Robert McKinnon, managing director of research at Dubai-based investment bank Al Mal Capital.

“That’s where the heart of most economies are in terms of employment and creativity. For example, Apple started in a garage. It started as a small business. If you allow entrepreneurial guys who have an idea to start a business and to own it 100 percent, that would encourage a lot more innovation and investment,” he adds.

The status quo with foreign ownership rules make it costly and cumbersome for international firms to start up and operate in the UAE.

“It’s not just the ownership and the agency fees that make it slower for them to operate,” says Maratheftis at Standard Chartered Bank.

“Firms find it difficult to shut down and close their operations — and one of the reasons is the ownership structure and that there are sleeping partners in the company. The ownership issue is a problem and it’s a problem for SMEs.”

SMEs contribute more than 70 percent to the UAE’s non-oil GDP and have been recording double digit growth over the past few years, according to Standard Chartered. Of the 260,000 trading and industrial companies in the UAE, 208,000 — or 80 percent of them — are SMEs, according to the Ruwad Establishment, a division of the Sharjah Chamber of Commerce.

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READERS' COMMENTS

Company ownership structure
Posted by James, Dubai, UAE on Tuesday 13 October 2009 at 08:24 UAE time


I do not see how the ‘analysts’ come to their conclusions. There are a huge number of companies moving to Dubai Free zones now and this number is increasing. Most free zones are lowering their property prices as they compete with each other to attract new licensees and this will continue. Surely in general (Including free zone areas) it is more likely to decrease commercial property values if the Government allows 100% foreign ownership across the board.

Another point is that the article seems to assume that Free zones will no longer have boarders and that the country will offer a level playing field for foreign companies looking to set up. This is not the case and Free zones will still offer unrivaled benefits for the majority of companies seeking zero tax guarantees for the years ahead, industry sector grouping that clustering provides, specialized and informed regulation and a fast and efficient Authority to have dialogue with.

In my opinion there are companies that need to be in Dubai itself for business and others that are more suited to free zones. I do not believe that by allowing100% ownership it will change how free zones operate or their value proposition but I do believe that competition is good and if it helps Dubai grow into the City it is promising to be then all the better for us all.

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