UAE law changes provides a new dawn for foreign investors

The emirates enters a new era as investors, residents and overseas students as the UAE changes the law on foreign ownership and visas - promising a new era of creativity and business continuity
UAE law changes provides a new dawn for foreign investors
By Jeremy Lawrence, Bernd Debusmann and Lubna Hamdan
Thu 07 Jun 2018 11:57 AM

It is perhaps one of the most significant changes to the UAE economy since the 2002 freehold law allowed foreigners to fully own property.

The announcement late last month by the UAE cabinet that foreigners will be able to set up businesses outside of free zones and own them 100 percent, and that 10-year residency visas will be made available for specialist workers in fields such as technology and academia, along with five-year visas for students in the country, has been greeted with a wave of optimism about the economic effects it could unleash.

According to Aramex founder and Wamda Capital managing partner Fadi Ghandour, the new ownership rules are “truly a game-changer any way you look at it”. Here, we look at the areas of the UAE economy that most stand to benefit in the years ahead.

FDI

PNC Menon, chairman of Sobha Group, says ownership and visa changes will lead to a “massive” inflow of Indian capital

The UAE’s surprise announcement that it will allow full foreign ownership of companies and grant-long term visas to select investors and professionals is a “revolutionary” move that will likely lead to a massive inflow of Indian capital, according to Sobha Group chairman PNC Menon.

Menon believes the greatest value of the rule changes will be that increased confidence will lead to more investors coming to the UAE. “All sorts of businesses will benefit. A tremendous amount of capital will flow in, especially from India and the rest of Asia, as well as Africa,” he said. “A lot more business houses in India will have a very serious presence here.

“I’m not saying it will happen overnight, but this will definitely give a boost to Indian entrepreneurs, and especially the large ones doing more than $500m in turnover,” he adds. Menon also notes that this large inflow of capital will lead to the UAE, and particularly Dubai “needing more residential space”.

Menon’s remarks are echoed by Faisal Durrani, head of research at Cluttons. “Longevity of residence is going to be a game-changer as the population’s historically transient nature gives way to semi-permanency,” he tells Arabian Business.


Innovation

Mohammed Khammas, CEO of Al Ahli Group, discusses the vital impact of the proposals on intellectual property and entrepreneurship

On intellectual ownership: “The UAE is ahead of the curve in the region with regards to companies owning their businesses. However, it’s not just about ownership of capital. Ownership of intellectual property is one of the most important aspects of business. If this law allows individuals to own their ideas then we have gone into unchartered territory as far as the UAE is concerned – and the region, for that matter. And that will have very positive attributes in attracting businesses here, from start-ups all the way to global businesses. If we shift our focus to protecting those ideas then we will attract the minds of investors and not just the capital.

“Right now, a sponsor to your business immediately owns part of your IP without the least amount of work, which is not fair. If the value of intellectual property was separate to the investment itself then it would be evaluated very differently. It would allow everybody to own their idea first and for businesses to come and invest and partner in them later.”

If we shift our focus to protecting those ideas then we will attract the minds of investors and not just the capital”

On student visas: “In terms of longer visas for students, these changes are very helpful. It shows a very proactive government that works in favour of its residents irrespective of whether they are UAE nationals or expats. When a graduate finishes university, they go on a soul-searching mission to figure out what career they most identify with. So for them to be able to not worry about a technical requirement will allow them to enjoy that journey versus the current uncertainty right before they get a certificate. Why should they worry about it when they’re in a country where the expat community is one of the largest contributors to our economy? It would help people think of the UAE as their home rather than just a place to find work.”

On the government efforts to promote innovation: “We have a proactive government and an active business community that looks at society’s requirements from every angle, and not just what local businesses want. The UAE federal government wants to be proactive in assisting businesses to stay and to grow locally, regionally and internationally. The UAE is no longer just a regional hub; it’s an active participant in the global economy and you can only grow in that direction if you respect people’s desire to control their own fate. If that happens within the boundaries of respecting the laws of the land and respecting general business ethics, then I think the government will be more than happy to pass as many laws as necessary to assist with this continued growth.”

Al Ahli Holding Group recently announced plans to create Nomad, an entrepreneur and media hub in Dubai that will help grow, incubate and fund talent in the region.


Real estate

The new investment and visa laws have been celebrated by the real estate sector as a “game changer” for sales and investment

“The decision to grant residence visas up to 10 years for investors and highly skilled professionals in select categories will go a long way in boosting investor confidence and helping liberalise the socio-economic environment where foreigners play a larger role in local and regional economies. This will boost the real estate market in a big way. Families assured of a 10-year residency will be able to call the UAE their home and will be encouraged to invest in freehold homes. This will also help developers and mortgage providers to offer better options now that the visa tenure has been extended to cover a longer period.”
Atif Rahman, director and partner, Danube Properties

“It is a timely and strategic move by the UAE, which will have economic and social impact. The UAE is already a magnet for international investors. This new law will further boost investor confidence, especially in real estate and construction sectors. I expect an influx of new businesses and new investors coming to UAE. The 100 percent business ownership law and 10-year residency for investors will definitely attract FDI to Dubai’s real estate sector.”
Imran Farooq, CEO of Samana Developers

“This policy will mark the beginning of the next economic wave. This is a game-changing initiative that will boost investor confidence and add rocket fuel to the UAE economy. We have been predicting an inflection point this year and this could very well be it for the UAE.”
Avin Gidwani, CEO of BNC Network, Dubai

“It is a timely and wise decision by the visionary leadership of the UAE, which will have a positive impact on all sectors of the economy. The real estate sector will get direct benefit as property buyers, along with their families, will have the comfort of a 10-year guaranteed stay in UAE. It will also help sell properties and clear the backlog of large chunks of inventory currently available in the market. It will encourage developers to invest more in the sector. The decision will not only improve market sentiment, but also will have a chain effect to accelerate investments in general.”
Sudhakar R Rao, chairman of Gemini Property Developers


Talent

Murtaza Khan, partner in  immigration specialists Fragomen Worldwide, assesses the impact on the UAE’s ability to retain key talent

These new laws are very much in line with the National Strategy Vision 2021 to develop world-class healthcare and education, and build a competitive knowledge economy. We know from top universities like NYU in Abu Dhabi or the University of Birmingham, the first British top 100 university scheduled to open in the UAE, that this will help attract students by creating a conducive environment for graduates to find jobs. It’s also attractive to companies that work in medical and scientific fields as they will be able to attract experts to settle here.

The question now is whether this is tied to an employer or if it is a skills-based sponsorship process. That has quite a significant bearing in the medical or scientific research fields. Many experts may prefer to work in multiple academic institutions, research facilities, hospitals and medical centres.

If it does change, this would be an interesting development that is similar to countries such as Australia and Canada where there they attract people with specific skills by opening up specific programmes.

The bigger picture is getting people to commit to the UAE. Having a long residency period and the ability to have 100 percent foreign ownership outside of the free zones would take that to the next step in terms how they view their position here and that can only be good for the economic development of the country.


Businesses

Andrew Morris, partner at UAE legal consulting firm Banks Legal, looks at the implications for existing and future LLCs

This decision has been welcomed with immense interest from the business community and is one of the most significant decisions to impact foreign direct investment in the UAE, following a number of legislative improvements in recent years.

The scope of the decision will not be apparent until implementation has concluded. However, there is a general consensus that it will be a staged implementation, with certain sectors opened up to 100 percent foreign ownership before others. There may be additional conditions for qualifying sectors to meet, in order to take advantage of the decision.

At present, only companies based in UAE free zones can be entirely foreign owned. Introducing 100 percent foreign ownership will encourage investment from those deterred from committing investment into the UAE, due to the requirement of having an Emirati partner holding a minimum of 51 per cent of the company’s shares.

While it is currently a matter of speculation as to who will be able to take advantage of this decision, there are things businesses can think about now in case they are able to take advantage of it. Existing LLCs should have protective arrangements in place that include a mechanism whereby the foreign partner can take advantage of any law change permitting 100 percent ownership (or ownership above the currently permitted 49 percent) by requiring their Emirati partner to sell their shares to the foreign partner on pre-agreed terms. If these arrangements are not in place, then now would be a good time to incorporate such changes.

Regardless of the contractual arrangements in place, foreign partners will need to engage their Emirati partner at the appropriate time, in anticipation of seeking to take advantage of the decision. As with any business partnership, careful consideration should be given to how this transition can be managed smoothly and amicably.

There may well be instances where foreign partners are content with their existing arrangements”

In case it remains necessary to have a minimum of two partners in an LLC (as the existing law provides for), it may still be appropriate to have a corporate nominee, albeit this vehicle need not be Emirati-owned. While we would expect the majority of foreign investors to be interested in taking advantage of 100 percent foreign ownership, there may well be instances where foreign partners are content with their existing arrangements and the costs of restructuring could ultimately be more than existing nominee costs.

Outside looking in

While it remains to be seen whether the requirement for branches of foreign companies to have an Emirati service agent will be relaxed or removed, foreign companies may be able to “convert” their branch operations to a wholly foreign owned LLC structure. This may deliver significant benefits including ring fencing liability at a UAE level, and might also offer tax structuring efficiencies at some point.

Those who are looking to establish business operations in the UAE, or expand existing operations, will naturally be interested in taking advantage of the new resolution. As implementation may not occur for some time, and may not ultimately be available to all businesses, advice will need to be taken on whether to delay plans until the scope of the resolution is clarified, or to proceed under the existing law using a structure that makes it as easy as possible to transition to 100 percent foreign ownership.

This significant decision of the UAE Cabinet follows a number of legislative developments in recent years, including the new Companies Law, Bankruptcy Law and the VAT Law, further demonstrating the UAE government’s continued efforts to modernise legal framework in support of continued economic development.


Graduates

Suellen Tomlinson, senior client partner, Korn Ferry, looks at how the UAE may benefit from talented graduates staying in the UAE

The new law will provide more stability for the “emerging workforce” leaving university, and the development of skills that align closely with the future of work. Top students who are finding their way in the world of work will have a longer window of opportunity to find their feet early in their career and identify the right companies ready to invest in them and develop their technical skills as they transition into the workforce. For their part, employers will also have a longer window to spot talent and recruit talent that will be encouraged to remain and look for work locally.

We all know that the successful transition from student to workforce can take a number of years, whether that’s a graduate finding the right career or the right employer to support their development. With a longer runway for students leaving university, it will create a more stable ecosystem in which students can explore different career paths and experience first and second jobs before hitting their professional stride. Without the five-year visa, the risk is that students have only a few months to secure a job before having to leave to look for work. The new laws are a great opportunity for employers to retain that talent here.


Gratuities

Peter Cox, head of international pension plans, Zurich International Life, looks at how the laws impact end-of-service benefit schemes

There’s no doubt from the research that we have done that people are already staying in the UAE longer than they were a decade ago. This new visa rule just reinforces the fact that it is absolutely paramount to save; if you spend 10 years here, that could be 25 percent of your working life – years you’ve also not been accruing social security benefits in your country of origin.

From an employer perspective, longer service means higher liabilities. If we take a AED30,000 a month basic salary, over 10 years the end of service benefit entitlement would exceed AED250,000. With length of service increasing, entitlements are a big hit against a company if two or three individuals leave at the same time. This ruling brings to the fore the need for companies to put in place funding programmes.

I also think the current gratuity scheme is well past its sell-by date. It was initially designed to enable people to go home, not as a retirement plan. But with people staying for longer there should be a more robust solution. It’s better to save at source – i.e. salary deduction – and do it through your employer because it’s much more cost effective. This needs to be examined at a federal level and I know that they are doing this. There needs to be change.

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Last Updated: Thu 07 Jun 2018 12:03 PM GST

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