United Arab Emirates
The Government of the United Arab Emirates (UAE) is urgently pursuing economic diversification to promote private sector development as a complement to the historical economic dominance of the state, to lessen its reliance on an unsustainable hydrocarbon industry, and to strengthen the country’s economic resilience amid the COVID-19 pandemic.
The UAE serves as a major trade and investment hub for the Middle East and North Africa, and increasingly South Asia, Central Asia, and Sub-Saharan Africa. Multinational companies cite the UAE’s political and economic stability, excellent infrastructure, developed capital markets, and a perceived absence of systemic corruption as positive factors contributing to the UAE’s attractiveness to foreign investors.
The UAE and the country’s seven constituent emirates have passed numerous initiatives, laws, and regulations to attract more foreign investment. Notable reforms introduced since 2020 include amendments to the UAE’s citizenship law, which allow foreign investors, members of certain professions, those with special talents, and their families to acquire long-term residency, Emirati passports, and citizenship. The UAE issued Federal Decree-Law Number 26 in 2020, relaxing restrictions on foreign ownership of commercial companies. The decree also annulled the requirement that commercial companies must be majority-owned by Emirati nationals, must have a majority-Emirati board, or must maintain an Emirati agent. This effectively allowed majority or full foreign ownership of onshore companies in many sectors. The decree granted licensed foreign investments the same treatment as national companies within the limits permitted by the legislation in force and provided better protection for minority shareholders. The new decree is unlikely to apply to state-owned entities and companies operating in strategically important sectors, such as oil and gas, defense, utilities, and transport.
While the UAE implemented an excise tax on certain products in October 2017 and a five percent Value-Added Tax (VAT) on most products and services beginning in January 2018, many investors continue to cite the absence of corporate and personal income taxes as a strength of the local investment climate relative to other regional options.
Foreign investors expressed concern over a lack of regulatory transparency, as well as weak dispute resolution mechanisms and insolvency laws. In 2020, the federal Cabinet approved a resolution aimed at combating commercial fraud. This resolution established a unified federal mechanism to deal with commercial fraud across the UAE and outlined a process for removal and destruction of counterfeit products. Labor rights and conditions, although improving, continue to be an area of concern as the UAE prohibits both labor unions and worker strikes.
Free trade zones (FTZs) form a vital component of the local economy and serve as major re-export centers to other markets in the Gulf, South Asia, and Africa. While the new decree allowing 100 percent foreign business ownership neutralizes one of the most important advantages FTZs offer foreign investors, U.S. and multinational companies indicate that these zones tend to have stronger and more equitable legal and regulatory frameworks for foreign investors than onshore jurisdictions. FTZ-based firms also enjoy 100 percent import and export tax exemptions, 100 percent exemptions from commercial levies, and may repatriate 100 percent of capital and profits. Goods and services delivered onshore by FTZ companies are subject to the five percent VAT.
|TI Corruption Perceptions Index||2020||21 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||16 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||34 of 131||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2019||$17.2||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||$43,470||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment (FDI)
The UAE actively seeks FDI, citing it as a key part of its long-term economic development plans. The COVID-19 pandemic accelerated government efforts to attract foreign investment to promote economic growth. A letter issued by Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum (MbR) on January 4, 2020 outlined the ruler’s vision for the next 50 years, pledging increased government accountability and a push for greater government efficiency. In 2015, Dubai’s Department of Economic Development launched the Dubai Investment Development Agency (Dubai FDI), an agency that provides essential information and invaluable support to foreign businesses looking to invest in Dubai’s thriving economy and take advantage of its global strategic importance. The government of Abu Dhabi continues implementing its Economic Vision 2030, which aims at building an open, efficient, effective, and globally integrated economy. In 2018, Abu Dhabi’s Department of Economic Development launched the Abu Dhabi Investment Office to attract foreign investments in the local economy by providing investors with clear data and information regarding the investment environment and the competitive edge of the emirate.
Federal Decree Law No. 26 of 2020 repealed the FDI Law (Federal Law No. 19 of 2018) effective January 2, 2021 and amended significant provisions of the Commercial Companies Law (Federal Law No. 2 of 2015). As a result, onshore UAE companies are no longer required to have a UAE national or a GCC national as a majority shareholder. UAE joint stock companies no longer must be chaired by an Emirati citizen or have the majority of its board be comprised of Emirati citizens. Local branches of foreign companies are no longer required to have a UAE national or a UAE-owned company act as an agent. An intra-emirate committee will recommend to the Cabinet a list of strategically important sectors requiring additional licensing restrictions, and companies operating in these sectors, likely including oil and gas, defense, utilities, and transportation, will remain subject to the above-described restrictions. Analysts expect this list will be similar to the list of economic sectors in which foreign investment is barred under the recently abolished FDI Law. The decree also grants emirate-level authorities powers to establish additional licensing restrictions. These amendments will become effective six months after the publication of the law in the official gazette and require the publication of the Strategic Impact List to be implementable. Until this happens, existing requirements for UAE or GCC majority shareholding still apply.
Federal Decree Law No. 26 of 2020 introduced provisions to protect the rights of minority shareholders. It lowered the ownership threshold required to call for a general assembly and introduce agenda items. It expedited the process for shareholders to assist a company in financial distress. It extended mandates of external auditors. It added additional flexibility in the IPO process to allow new investors to participate. It also calls for additional regulations from the Ministry of Economy to address governance and related-party transactions.
Federal Law No. 11 of 2020 amended the Commercial Agencies Law (Federal Law No. 18 of 1981), which allowed UAE companies not fully owned by Emirati citizens to act as commercial agents. These companies must still be majority-owned by Emirati citizens.
Non-tariff barriers to investment persist in the form of visa sponsorship and distributorship requirements. Several constituent emirates, including Dubai, have recently introduced new long-term residency visas and land ownership rights to attract and retain expatriates with sought-after skills in the UAE. In October 2020, Ras Al Khaimah Real estate developer Al Hamra, in partnership with Ras Al Khaimah Economic Zone, began offering investors a 12-year residence visa and a business license when they purchased a residential property in Al Hamra Village or Bab Al Bahr.
Limits on Foreign Control and Right to Private Ownership and Establishment
As documented above, Federal Decree-Law Number 26 annulled the requirement commercial companies be majority-owned by Emirati citizens, have a majority-Emirati board, or maintain an Emirati agent effectively allowing majority or full foreign ownership of onshore companies in many sectors. The annulment will not apply to companies operating in strategically important sectors.
Neither Embassy Abu Dhabi nor Consulate General Dubai (collectively referred to as Mission UAE) has received any complaints from U.S. investors that they have been disadvantaged relative to other non-GCC investors.
Other Investment Policy Reviews
The UAE government underwent a World Trade Organization (WTO) Trade Policy Review in 2016. The full WTO Review is available at: https://www.wto.org/english/tratop_e/tpr_e/s338_e.pdf
UAE officials emphasize the importance of facilitating business investment and tout the broad network of free trade zones as attractive to foreign investors. The UAE’s business registration process varies by emirate, but generally happens through an emirate’s Department of Economic Development. Links to information portals from each of the emirates are available at https://ger.co/economy/197. At a minimum, a company must generally register with the Department of Economic Development, the Ministry of Human Resources and Emiratization, and the General Authority for Pension and Social Security, with a notary required in the process. In response to the pandemic, UAE authorities temporarily reduced fees, permits, and licenses to stimulate business formation in the onshore and free zone sectors.
In February 2021, Dubai launched the Invest in Dubai platform, a “single-window” service enabling investors to obtain trade licenses and launch their business quickly. In August 2020, the Dubai International Financial Centre (DIFC) introduced a new license for startups, entrepreneurs, and technology firms, starting at $1,500 per year. In October 2019, Dubai introduced a ‘Virtual Business License’ for non-resident entrepreneurs and freelancers in 101 countries. In 2019, the Dubai Free Zone Council allowed companies to operate out of multiple free zones in Dubai through a single license under the “one free zone passport” scheme. In 2017, Dubai’s Department of Economic Development introduced an “Instant License” program, under which investors can obtain a license valid for one year in minutes without a registered lease agreement. In November 2020, the Abu Dhabi Department of Economic Development issued a resolution permitting non-citizens to obtain freelancer licenses allowing them to engage in 48 economic activities. The licenses were previously limited to UAE nationals only. In 2018, Abu Dhabi announced the issuance of dual licenses enabling free zone companies to operate onshore and to compete for government tenders. In 2018, Sharjah announced that foreigners may purchase property in the emirate without a UAE residency visa on a 100-year renewable land lease basis.
The UAE is an important participant in global capital markets, primarily through its sovereign wealth funds, as well as through several emirate-level, government-related investment corporations.
6. Financial Sector
Capital Markets and Portfolio Investment
UAE government efforts to create an environment that fosters economic growth and attracts foreign investment resulted in: i) no taxes or restrictions on the repatriation of capital; ii) free movement of labor and low barriers to entry (effective tariffs are five percent for most goods); and iii) an emphasis on diversifying the economy away from oil, which offers a broad array of investment options for FDI. Key non-hydrocarbon drivers of the economy include real estate, renewable energy, tourism, logistics, manufacturing, and financial services.
The UAE issued investment fund regulations in September 2012 known as the “twin peak” regulatory framework designed to govern the marketing of investment funds established outside the UAE to domestic investors and the establishment of local funds domiciled inside the UAE. This regulation gave the Securities and Commodities Authority (SCA), rather than the Central Bank, authority over the licensing, regulation, and marketing of investment funds. The marketing of foreign funds, including offshore UAE-based funds, such as those domiciled in the DIFC, require the appointment of a locally licensed placement agent. The UAE government has also encouraged certain high-profile projects to be undertaken via a public joint stock company to allow the issuance of shares to the public. Further, the UAE government requires any company carrying out banking, insurance, or investment services for a third party to be a public joint stock company.
The UAE has three stock markets: Abu Dhabi Securities Exchange, Dubai Financial Market, and NASDAQ Dubai. SCA, the onshore regulatory body, classifies brokerages into two groups: those that engage in trading only while the clearance and settlement operations are conducted through clearance members, and those that engage in trading clearance and settlement operations for their clients. Under the regulations, trading brokerages require paid-up capital of $820,000, whereas trading and clearance brokerages need $ 2.7 million. Bank guarantees of $367,000 are required for brokerages to trade on the bourses.
In June 2020, the SCA amended the decision on issuing and offering Islamic securities, to ensure SCA legislation is in line with the principles of the International Organization of Securities Commissions (IOSCO). In July 2020, SCA embarked on a project to restructure the legislative system for broker classification to keep pace with global practices and enhance the confidence of domestic and foreign investors. According to the restructuring project, the following five licensing categories were introduced: dealing in securities, dealing in investments, safekeeping, clearing and registration, credit rating, and arrangement and counseling.
The SCA’s decision on Capital Adequacy Criteria of Investment Manager and Management Company stipulates that the investment manager and the management company must allocate capital to constitute a buffer for credit risk, market risk, or operational risk, even if it does not appear as a line item in the balance sheet.
On the issue of Real Estate Investment Fund control, the SCA stipulates that a public or private real estate investment fund shall invest at least 75 percent of its assets in real estate assets. According to the SCA, a real estate investment fund may establish or own one or more real estate services companies provided that its investment in the ownership of each company and its subsidiaries shall not be more than 20 percent of the fund’s total assets.
Credit is generally allocated on market terms, and foreign investors can access local credit markets. Interest rates usually closely track those in the United States since the local currency is pegged to the dollar. However, there have been complaints that GREs crowd out private sector borrowers to the detriment of mostly local SMEs.
Money and Banking System
The UAE has a robust banking sector with 48 banks, 21 of which are foreign institutions, and six are GCC-based banks. The number of national bank branches declined to 541 by the end of 2020, compared to 656 at the end of 2019, due to bank mergers and the transition to online banking.
Non-performing loans (NPL) comprised 6.2 percent of outstanding loans in 2019, compared with 5.7 percent in 2018, according to figures from the Central Bank of the UAE (CBUAE). Under a new reporting standard, the NPL ratio of the UAE banking system for the year-end 2018 stood at 5.6 percent, compared to 7.1 percent under the previous methodology. The CBUAE recorded total sector assets of USD 868 billion as of December 2020.
The banking sector remains well-capitalized but has experienced a decline in lending and a rise in NPL as a result of the pandemic. These factors have significantly reduced reported profits as banks have made greater provisions for non-performing loans. On March 15, 2020, the CBUAE announced the USD $ 27.2 billion Targeted Economic Support Scheme (TESS) stimulus package, which included USD $13.6 billion in zero-interest, collateralized loans for UAE-based banks, and USD $13.6 billion in funds freed up from banks’ capital buffers. In November 2020, The CBUAE extended The TESS to June 2021.
There are some restrictions on foreigners’ ability to establish a current bank account, and legal residents and Emiratis can access loans under more favorable terms than non-residents.
Foreign Exchange and Remittances
Foreign Exchange Policies
According to the IMF, the UAE has no restrictions on making payments and transfers for international transactions, except security-related restrictions. Currencies trade freely at market-determined prices. The UAE dirham has been pegged to the dollar since 2002. The mid-point between the official buying and selling rate for the dirham (AED or Dhs) is fixed at AED 3.6725 per USD.
The Central Bank of the UAE initiated the creation of the Foreign Exchange & Remittance Group (FERG), comprising various exchange companies, which is registered with the Dubai Chamber of Commerce & Industry. Unlike their counterparts across the world that deal mainly in money exchange, exchange companies in the UAE are primary conduits for transferring large volumes of remittances through official channels. According to migration and remittance data from the World Bank, in 2019, the UAE had migrant remittance outflows of USD $44.9 billion. Exchange companies are important partners in the UAE government’s electronic salary transfer system, called the Wage Protection System. They also handle various ancillary services ranging from credit card payments to national bonds, to traveler’s checks.
As part of its focus on improving Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) systems within the UAE, in September 2020, the CBUAE introduced a mandatory registration framework for Hawala providers or informal money transfer service providers that operate in the UAE.
Sovereign Wealth Funds
Abu Dhabi is home to four sovereign wealth funds—the Abu Dhabi Investment Authority (ADIA) and Mubadala Investment Company are the largest—with estimated total assets of approximately USD $814.6 billion as of February 2020. Each fund has a chair and board members appointed by the Ruler of Abu Dhabi. President Khalifa Bin Zayed Al Nahyan is the chair of ADIA and Abu Dhabi Crown Prince Mohammed Bin Zayed Al Nahyan is the chair of Mubadala. Other rapidly expanding Abu Dhabi sovereign funds include: ADQ, with investment portfolios in food and agriculture, aviation, financial services, healthcare, industries, logistics, media, real estate, tourism and hospitality, transport and utilities; and EDGE, which covers weapons, cyber defense and electronic warfare and intelligence, among others. Emirates Investment Authority, the UAE’s federal sovereign wealth fund, is modest by comparison, with estimated assets of about USD 44 billion. The Investment Corporation of Dubai (ICD) is Dubai’s primary sovereign wealth fund, with an estimated USD $301 billion in assets according to ICD’s June 2020 financial report.
UAE funds vary in their approaches to managing investments. ADIA generally does not actively seek to manage or take an operational role in the public companies in which it invests, while Mubadala tends to take a more active role in particular sectors, including oil and gas, aerospace, infrastructure, and early-stage venture capital. According to ADIA, the fund carries out its investment program independently and without reference to the government of Abu Dhabi.
In 2008, ADIA agreed to act alongside the IMF as co-chair of the International Working Group of Sovereign Wealth Funds, which eventually became the International Forum of Sovereign Wealth Funds (IFSWF). Comprising representatives from 31 countries, the IFSWF was created to demonstrate that sovereign wealth funds had robust internal frameworks and governance practices, and that their investments were made only on an economic and financial basis.
7. State-Owned Enterprises
State-owned enterprises (SOEs) are a key component of the UAE economic model. There is no
published list of SOEs or GREs, at the national or individual emirate level. Some SOEs, such as the influential Abu Dhabi National Oil Company (ADNOC), are strategically important companies and provide a major source of revenue for the government. Mubadala established Masdar in 2006 to develop renewable energy and sustainable technologies industries. Some SOEs, such as Emirates Airlines and Etisalat, the largest local telecommunications firm, have in recent years emerged as internationally recognized brands. Some, but not all, of these companies have competition. In some cases, these firms compete against other state-owned firms (Emirates and Etihad airlines, for example, or telecommunications company Etisalat against du). While they are not granted full autonomy, these firms leverage ties between entities they control to foster national economic development. Perhaps the best example of such an economic ecosystem is Dubai, where SOEs have been used as drivers of diversification in sectors including construction, hospitality, transport, banking, logistics, and telecommunications. Sectoral regulations in some cases address governance structures and practices of state-owned companies. The UAE is not party to the WTO Government Procurement Agreement.
There is no privatization program in the UAE. There have been several listings of portions of SOEs, on local UAE stock exchanges, as well as some “greenfield” IPOs focused on priority projects. However, several state-owned enterprises have allowed partial foreign ownership in their shares. For example, Abu Dhabi National Oil Company for Distribution, many national banks, some utility operators and the telecom operators, Etisalat and du, now allow minority foreign ownership.