Virtuzone chairman Neil Petch explains why the changes are a good thing and should be welcomed with open arms
When it comes to starting a business in the UAE, local ownership restrictions is perhaps the number one issue that leaves foreign entrepreneurs scratching their heads. Traditionally, 100 percent foreign ownership of a UAE company was only possible under two circumstances – when setting up in a free zone, or when establishing a professional services company.
Until now, overseas entrepreneurs wishing to set up on the mainland are currently faced with the prospect of working with a local shareholder who must hold a 51 percent stake in the company. Although there is plenty of support available to help find suitable local partners, this process can be daunting for first-time entrepreneurs looking to set up in a new country.
While the reality is not nearly as extreme as it seems at face value, the thought of ‘handing over’ over half of your new business is one that takes careful consideration, and may put off many from setting up in the UAE.
However, this is set to change. An official announcement, shared via Twitter on May 20, Sheikh Mohammed bin Rashid Al Maktoum declared that following a cabinet meeting the UAE will allow 100 percent foreign ownership of companies.
While still in its early stages, this announcement appears to be great news for the UAE economy – and of course overseas investors looking to do business in the Emirates.
So let’s look at what it could mean for you.
Exactly what these changes to ownership will look like, or when we can expect to see them implemented remains unclear. As it stands, details are limited. What we do know is Dubai’s rulers are committed to rolling out a pathway for overseas investors to be able to own 100 percent of their UAE companies – but as yet, there is no exact timeline for this process.
As for who this would affect, again it’s somewhat uncertain at the moment. However, we would expect 100 percent foreign company ownership to be permitted under certain conditions. For example, it may only be available to businesses in certain industries or to companies that undertake specific business activities. There is also likely to be an investment threshold that those wishing to retain 100 percent ownership of their business would have to meet.
What could this mean for foreign entrepreneurs in the UAE?
The news of 100 percent foreign ownership of mainland UAE businesses looks set to bring about a host of benefits to overseas investors in the Emirates. For one, such a move would remove the need for foreign entrepreneurs to work with local sponsors.
The advantages here are two-fold. Firstly, it removes entirely the daunting prospect of allowing a third-party to hold a large stake in your business – something that can put foreign entrepreneurs off setting up in the UAE. Secondly, overseas investors new to the Emirates could get straight down to business, without the need to canvas for an Emirati company or individual to act as a partner.
This will likely reduce time to market, and remove the additional red-tape and documentation that comes with setting up such a business relationship.
Then there are the benefits of setting up on the mainland that at present are only available to professional services companies or those willing to work with a sponsor. Perhaps the most attractive of these is the potential for growth. While free zone companies may be restricted when it comes to staff numbers, office size and trade with the local UAE market, none of these restrictions apply to mainland companies – allowing for uncapped growth throughout the Emirates.
Mainland businesses are also able to undertake a wider scope of work. For example, if you wish to diversify your offering on the mainland it is simply a case of re-registering your new activity with the Department of Economic Development (DED) and you can trade freely. Free zone companies are often more restricted in this area, having to apply for sign-off by the relevant free zone authority – something that is regularly denied.
Mainland businesses are also able to take on lucrative government work – which is huge business in the UAE. In 2016, government tenders in Abu Dhabi totalled AED17.5bn ($4.76bn), while AED1trn worth of government contracts were awarded across the UAE in the first half of 2017 alone. These number are only set to rise. With Expo 2020 on the horizon, some AED11bn worth of government contracts are set to be fulfilled between now and 2020.
Ultimately, 100 percent foreign ownership of mainland UAE business would unlock the full potential of the UAE’s growth-machine of an economy to foreign investors. Those wishing to make their mark here in the Emirates would no longer have to contend with the hassle of cooperating with third-parties, or finding workarounds to do business. Such a move would make the UAE a truly level playing field.
This announcement has brought the options of free zone and mainland closer together, but the differences are still distinct and important for entrepreneurs to consider. Although full ownership has long been a unique and immediate benefit of the free zone, further aspects of establishing a company in one of the 50+ specialised areas still hold value.
The free zones are a proven means for a business to enter the UAE market. As any veteran knows, the period following the launch of a venture is both critical and perilous. Uncertainty mixes with long working hours and multi-tasking to threaten a new business before it secures its place in its market.
While full ownership is a previously unique benefit of the free zones, their other benefits still hold value to a fresh venture: low tax levels, affordable start-up costs and minimal involvement from the UAE government. We don’t yet know how full mainland ownership will be implemented; we do know all that has made the free zones valuable to entrepreneurs for decades.
That reliability means something, and doubly so to entrepreneurs who are seeking to push through the tentative start-up stages to establish themselves within the thriving UAE economy. And with full ownership potentially available in the mainland, free zone businesses may benefit from an even brighter future ahead in their evolution and eventual growth.
Naturally, a thriving environment for investors equates to a thriving economy for the UAE and its rulers. That’s one of the many reasons why Sheikh Mohammad is likely to be making this move. Opening up the UAE mainland to overseas entrepreneurs will undoubtedly attract more business to our shores, increasing the country’s GDP and further cementing its reputation as an investor-friendly country that is open for business.
Whatever the exact conditions of the changes to foreign ownership turn out to be, one thing is certain – this move can only benefit foreign investors, UAE businesses, and the wider UAE economy. Because anything that encourages business and allows entrepreneurs in the UAE greater freedom to trade can only be a good thing and should be welcomed with open arms.