[Opinion] UAE Company Law Amendments – A Strategical Move

[2022] 141 taxmann.com 282 (Article)

Dubai has embraced the need to develop and encourage principles of good corporate governance in the Middle East which can only help to attract foreign direct investment. Hawkamah Corporate Governance Institute, the first institute of its kind in the UAE, has been established with the mission of assisting the countries and companies of the Middle East region to develop and implement sound and globally well-integrated corporate governance frameworks. Dubai’s serious attitude to developing corporate transparency and principles of good corporate governance and anti-money laundering is a beacon for the Middle East region and is a significant attraction to the international investment and financial community.

Introduction of Dubai International Financial Centre (DIFC)

The DIFC is a world class “onshore” financial centre and was established with the aim of bridging the gap between the world’s major financial centres. It was established to be a recognized hub for institutional finance and to be a regional gateway for capital and investment. The DIFC came into existence in 2004 and has its own laws and regulations and even its own courts and facility for arbitration. It is independent of the civil and commercial laws of the UAE, but is still subject to UAE criminal law. Legislation has been enacted to govern the day-to-day requirements and operations of financial institutions, companies and individuals within the DIFC. The laws are modelled on the best practices of the world’s major financial jurisdictions and embody the best of international financial and commercial law. The laws are principle-based, allowing for the creation of subsidiary legislation such as regulations and rules. Laws have been enacted which in effect constitute a “commercial code”. These laws include the Companies Law, Contract Law, Arbitration Law and Insolvency Law, among others, administered by the DIFC Authority. Other laws deal with the application of civil commercial laws in the DIFC. The financial services legislation is made up of the Regulatory Law, the Markets Law, the Data Protection Law, and the Law Regulating Islamic Financial Business which are administered by the Dubai Financial Services Authority (the DFSA). International financial institutions and businesses have flocked to the DIFC, attracted by the thorough and, importantly, familiar laws and regulations. The DFSA’s strict attitude to anti-money laundering is also a reassuring sign to the international community that Dubai takes its ethical, social and corporate responsibilities seriously.

Key amendment introduced in the Commercial Companies Law

The UAE Government has notified the Commercial Companies Law (Federal Law No. 2 of 2015) in the country to regulate any economic entity which practice any commercial, financial, industrial, agricultural, real estate or other kinds of economic activity. The Commercial Companies Law was enacted on 1 April 2015, which came into force on 1 July 2015. The law completely replaces the Commercial Companies Law which had been in place since 1984 (Federal Law No. 4 of 1984).

The Commercial Companies Law, provides up-to-date regulations for the corporate landscape and the investment community which will stimulate the investments and protect investors. It had also introduced with several new Penal Provisions which all companies and their management operating in the UAE should consider and observe.
These amended provisions will attract Foreign Investment and will leads for Ease of Doing Business (EODB) in UAE.

1. 100% foreign ownership of companies

With an aim to boost the country’s competitive edge and to facilitate doing business in the country, The president of the United Arab Emirates (the “UAE”), Sheikh Khalifa bin Zayed Al Nahyan has issued Federal Law No. 26 of 2020 (the “Decree”) on 23rd November, 2020 to make amendments in the Commercial Companies Law (Federal Law No. 2 of 2015) to allow 100% foreign ownership of companies.

This amendment / decree has introduced landmarks reforms to foreign ownership and investment in the UAE in a continued move to liberalize the UAE economy and regulatory environment. The requirement for at least 51% UAE national ownership in UAE “on-shore” companies (i.e. companies established in the UAE other than in a free zone) has been removed now.

2. The major highlights of amendment has been provided below

i. The Previous Law imposed a restriction on foreign ownership by requiring a minimum Emirati ownership of 51% in the capital of any onshore company.
ii. In accordance with the previous text of the Commercial Companies Law – Federal Law No. 2 of 2015 (CCL) companies set-up on UAE mainland territory were required to have at least 51% UAE national shareholder (the so-called 49-51 rule). On November 2020, the Government enacted the Federal Decree Law No. 26 of 2020, amending art. 10 of CCL.
iii. On 19th May, press release from the official news agency of the United Arab Emirates (WAM confirmed that pre announced changes in CCL introduced by Federal Decree Law No. 26 of 2020, will come into effect on 1st June, 2021.
iv. The New Law repeals the restriction on foreign ownership, enabling certain foreign entities to own 100% of an entity operating onshore. The New Law also grants U.A.E. authorities the power to determine that certain economic activities with “strategic impact” will remain subject to some minimum level of Emirati capital participation. Each Emirate is expected to release a list of business activities that may be carried out by a 100% foreign-owned entity
v. The amendments to the UAE Commercial Companies Law on 30 September 2020, removed the requirement for a UAE national to own at least 51% of the shares in the capital of a UAE company, subject to some restrictions. The amendments also removed the requirement for branches of foreign companies in the UAE to appoint a UAE national agent, for most activities.
vi. The Department of Economic Development (DED) in certain Emirates have now started issuing their lists of approved activities and requirements for foreign shareholders. The Abu Dhabi DED has issued a list of 1,105 activities, with 1,000 activities listed by the Dubai DED. Both lists are heavily focused on commercial and industrial activities.
vii. The changes to foreign ownership rules are applicable equally to both new and existing companies, as long as they are carrying out activities which fall under the relevant ‘positive lists’.
viii. Some sectors and activities are specifically excluded from 100% foreign ownership, including commercial agencies; ‘strategic activities’, including the military, banking, insurance and re-insurance, and telecommunication sectors; and professional activities such as consultancies. In addition, branches of UAE freezone companies are still required to appoint a UAE national agent.
ix. In terms of a company’s incorporation, wholly foreign-owned companies will not be subject to higher fees or have greater guarantee or share capital requirements than would be the case for a UAE-owned or part-owned company.

3. Introduction of New SCA Rules

The amendments to the Companies Law through Federal Decree Law No. 26 of 2020, indicate that a number of new Securities and Commodities Authority (SCA) rules are to be issued in respect of the conditions, controls and procedures relating to capital reductions, share buyback, the “strategic investor” regime, related party transactions (including relevant definitions), the issuance of bonds, sukuk and other debentures, the evaluation of in-kind contributions and the regulation of underwriting activities.

4. Loans to Directors

Financial institutions under the supervision of the UAE Central Bank are now exempt from the prohibition on loans (or guarantees or collateral granted in respect of loans) being granted by a JSC to any member of the Board of the JSC.

5. Change in the definition of a Company

– Under the Previous Law, companies with a sole shareholder could only be owned by a UAE national (or by a company owned by a UAE national).
– Under the New Law, companies with a sole shareholder no longer need to be owned by a UAE national (or by a company owned by a UAE national).

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