His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, who chaired the UAE Cabinet's meeting, instructed the Ministry of Economy to implement the changes by the end of 2018 and, in the meantime, for the Ministry to keep the UAE Cabinet informed of developments including by submitting an update report on the developments so far in Q3 of 2018.
Until the changes are implemented, 100% foreign ownership of establishments in the UAE is only allowed in free zone areas, such as the Dubai International Financial Centre and the Jebel Ali Free Zone, or branches which do not have a separate legal personality from the company of which they are a branch. Each of the UAE’s wealth of free zones has its own nuances, in terms of the types of businesses that could be established there - often indicated by the name of the free zone, such as Healthcare City - and sometimes even with its own laws, such as in the Dubai International Financial Centre, which even has its own courts.
“On-shore” entities, those being entities that are registered on the mainland (not in a free zone) and which are regulated by the relevant Department of Economic Development, currently have to be at least 51% owned by an Emirati, who is usually referred to as a local sponsor. The arrangement between a foreign investor and the local sponsor is usually documented in a set of sponsorship agreements, the key provisions of which include the payment of a sponsorship fee to the local sponsor in return for their assistance to, and cooperation with, the foreign investor in the governance and control of the business. Despite the split in ownership, foreign investors still make use of the existing on-shore company ownership model, as opposed to opening a branch, in order to benefit from the entity having a separate legal personality and separate limited liability.
Free zone entities are limited in the scope and geographical reach of the businesses based within them; certain business types are limited to certain free zones, and a free zone entity is not permitted to trade with the markets outside of the free zone within which the entity is based. That said, the pull factor to a foreign investor of 100% ownership of his business, among the other benefits of a free zone entity such as 100% free transfer of funds and repatriation of capital and profits, has maintained the interest of foreign investors. The change in the law will undoubtedly attract further foreign investment into the UAE by way of on-shore investment, at the potential cost of a reduction in need for local sponsors.
It is possible that the new law will provide that a National Service Agent will be required for on-shore foreign-owned entities; this is the case with branches that are based on-shore and which are a branch of a foreign entity, as branches bear no separate legal personality. However, the details of the new rules are not yet known – information of how new foreign-owned on-shore entities will be governed will develop over the coming months as the new rules are implemented.