Is the 100% foreign ownership flexibility a question mark on the UAE’s free zones

Is the 100% foreign ownership flexibility a question mark on UAE's Free Zones?

100% foreign ownership allowed – how exciting it sounds for any country. The UAE government made this change effective from June 1, 2021. This will have a great impact on the existing businesses in mainland UAE as well as new investors. This rule will also affect the appeal of free zones in the UAE.

Let us explore how this rule affects the growth of free zones in the UAE. If you are planning to invest in a business in a free zone, do read further. You will get to understand the impact this rule will have on your plans.

The change

In January 2021, the UAE government introduced a new foreign ownership decree. This decree repealed the FDI Law of 2018. The decree introduced more economic activities in the ‘Positive List.’ The ‘Positive List’ includes economic activities where the government allows 100% foreign ownership.
Earlier, businesses in the UAE needed to have a local shareholding of 51%. This decree eliminated this need. Now, it is not compulsory to have 51% ownership by UAE nationals in every company. Only the activities that have a ‘strategic impact’ are not allowed 100% foreign investment.
The government defines the ‘strategic impact’ activities in a separate notification. These activities include financial services, telecommunication, defense, and many others. These companies need to apply for approval for any ownership change. The relevant Federal regulatory authority may accept or reject their application.
This rule became effective from June 1, 2021. The investors intending to form a company in mainland UAE are happy with this change. They do not have to look for a local partner for an ownership stake in their company. The existing businesses with 51% local shareholding will need to change their business structure.
The rationale behind the change
The key rationale behind the change in law was to develop the economy further. This will happen if the performance of several industry sectors improves. For years, the UAE was dependent on revenues from oil exports. But, in the 20th century, the government started making strategies to diversify the economy.
This law change is one of these strategies. The government aims to shift from dependency on only oil assets of the country. This is because a reduction in oil prices has led to a decline in the country’s revenues. Its goal is to achieve development and growth in various industry sectors. The openness of the economy will help the government to realize its benefits.
With 100% foreign ownership allowed, foreign investors can enter the country. With lenient FDI regulations, foreign investors will be attracted to invest in the country. They will not need to appoint a local UAE partner. This will make the process of company formation in UAE easier and simpler.
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The impact of the change on free zones of UAE

We will have to wait for some time to see the actual results of this law change. Still, we can look at some of the expected changes for free zones:
Free zones might lose their appeal
It will affect the business of free zones in the UAE for sure. Earlier, investors preferred free zones to onshore UAE because of permission to have 100% foreign ownership. Now, with the same benefit available in mainland UAE, free zones might lose their exclusive appeal.

Also, there is another key constraint in free zones. Companies in free zones cannot cater to companies in mainland UAE. So, they do not have the flexibility to trade in UAE, losing revenue opportunities. This is the area where they lose some business in comparison to onshore companies.
Rise of other factors of the attractiveness of free zones
Now, the competition of free zones with onshore will not depend only on the foreign ownership factor. Businesses or investors looking to form a company in UAE will consider many other factors. Even the free zones will start enhancing their game in other ways to lure investors.

These factors in which free zones can start differentiating will include:

  • Increase the number of support services to businesses to ease the formation of a company
  • Offer an easy way of carrying out ancillary services to relieve businesses’ stress
  • Create more jobs or create different types of employment opportunities
  • Offer more options in office spaces, duration of the contract, budgets, etc.
  • Become more niche in few sectors to attract the relevant sector’s businesses
  • Attract investors to ‘strategic impact’ sectors that need local shareholding in onshore UAE
  • Explore other benefits that investors would find attractive enough to invest

  • Free zones can differentiate in any possible way. This may bring a change in their attractiveness to investors. It will give free zones another competitive advantage over onshore.
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    So, free zones and onshore will continue to run parallel in UAE. Both of these will contribute to the UAE’s appeal as an attractive destination for businesses. But, we still need to wait and watch to know the actual impact of the new law. The new regulatory change has created a certain uncertainty about free zones’ growth. 

    But, with the above details, you can achieve clarity on the situation of free zones. This understanding will enable you to decide where to set up your company in UAE. If you are still considering the options and have confusion, contact us.

    About Business Setup HQ

    Business Setup HQ is a leading provider of company formation services in the UAE. If you intend to establish your business in onshore or free zones of the UAE, we are there to help you. We will help you with all the procedures to ensure a smooth company formation process for you. If you intend to change your business structure, we can ensure a smooth switch for you.

    We have the expertise and longstanding experience in handling company formation consultancy. Our consulting and business setup support services help businesses to enter UAE. Our business consultants and industry advisors will select the best option for you. We will ensure a detailed picture of both – free zones and onshore to enable a comparative analysis for you.

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