I have the pleasure of interviewing Joseph Giblin, the Vice Consul and Economic Officer at the Consulate General of the United States in Dubai for the project I’m working on with the Department of Economic Development (DED).
Joseph had great insights and his input on our initiative with the DED, which also reflected some of the difficulties faced by American business owners in Dubai. Some of these issues are also common amongst other entreprenuers from various industry groups.
As part of my research, I found the UAE Investment Climate 2015 Statement of the United Arab Emirates prepared by the Department of State quite useful in case you’re looking for a “broad snapshot” of investment conditions here in the UAE.
Here are a few excerpts that I found particularly useful, for existing and prospective investors:
- Overview: The UAE maintains a position as the major trade and investment hub for a large geographic region, which includes not only the Middle East and North Africa, but also South Asia, Central Asia, and Sub-Saharan Africa. The country ranked 12th of 143 economies in the World Economic Forum’s 2014-2015 overall Global Competitiveness Index, and 22nd of 189 on the World Bank’s 2015 Ease of Doing Business report, moving up seven places and one place respectively from the previous year. Multinational companies cite the UAE’s political and economic stability, rapid population and Gross Domestic Product (GDP) growth, fast growing capital markets, an absence of corporate and personal taxes, and the absence of evidence of systematic corruption, were all positive factors contributing to the UAE’s attractiveness to foreign investors. Despite regional headwinds attracting Foreign Direct Investment (FDI), UAE’s inward FDI held at USD 10.1 billion in 2014 according to the United Nations Conference on Trade and Development (UNCTAD), slightly down from USD 10.5 billion in 2013.
- Foreign Direct Investment: The UAE generally is open to foreign direct investment (FDI) citing it as a key part of its long term economic plans. The UAE Vision 2021 strategic plan aims to achieve FDI flows to the UAE of five percent of Gross National Product (GNP), a number one rank for the UAE in the global index for ease of doing business, and a place among the top 10 countries worldwide in the Global Competitiveness Index. UAE investment laws and regulations are evolving in support of the goal of creating an environment more conducive to foreign investment. However, current frameworks still favor local over foreign investors. While recently updated UAE laws validate the practice of foreign owned free zone companies operating “onshore,” and permit majority GCC ownership of public joint stock companies, there remains no national treatment for investors in the UAE and foreign ownership of land and stocks is restricted. Non-tariff barriers to investment persist in the form of restrictive agency, sponsorship, and distributorship requirements.
- Laws/Regulations of Foreign Direct Investment: The Federal Commercial Companies Law (Law No. 02, 2015) was issued on April 2015 and applies to all commercial companies established in the UAE and to branch offices of foreign companies operating in the UAE. The new law, with which all companies must come into compliance by July 1, 2016, will provide a stronger, more up to date basis for corporate regulation in the UAE. Companies established in the UAE are currently required to have a minimum of 51 percent UAE national ownership. Regardless, profits and management control may be apportioned differently and often are negotiated at fixed amounts. Branch offices of foreign companies are required to have a national agent with 100 percent UAE national ownership unless the foreign company has established its office pursuant to an agreement with the federal or an emirate-level government. The new commercial law allows companies to offer between 30 and 70 percent of shares upon undertaking an initial public offering (IPO) and eliminates the requirement to issue new shares at the time of IPO. The law also eases the process for forming a limited liability company by requiring between 1 to 75 shareholders (the prior requirement was between 2 to 50 shareholders). Under the new law, when a public joint stock company lists, 51 percent UAE ownership is not required, although there is a 51 percent Gulf Cooperation Council (GCC) ownership requirement. UAE nationals must chair and be the majority of board members of any public joint stock company.
- Provisions to the New Commercial Law: Provisions in the new commercial law which would have relaxed the foreign ownership limit, were rejected by the UAE Federal National Council (FNC) and will be addressed in a separate investment law that is currently still in draft form, according to the FNC spokesperson. A provision to allow 100 percent foreign ownership outside of free zones would reportedly be restricted to certain sectors, such as high technology projects, and would require Cabinet approval on a case-by-case basis.
- Limits on Foreign Control: Foreign companies or individuals are limited to 49 percent ownership/control in any parts of the UAE not in a free trade zone, pursuant to law. There have been reports of waivers of the application of this law by decree of the ruler of an individual emirate. There have also been reports that companies owned by primarily GCC citizens have been de facto permitted to operate in the UAE outside of free trade zones. This was codified recently in the updated Commercial Companies Law
- Investment Trends: According to UNCTAD, the overall economy received a further boost in November 2013, when Dubai gained the right to host the World Expo 2020. As a result, investors in the UAE are among the most confident of all those surveyed in the Schroders Global Investment Trends Report 2014. More than 72 percent said they were more confident about investment prospects in 2014 versus 2013, with 61 percent saying they intended to increase the amount they invested within the next 12 months.
- Investment Disputes: There have been several contractor/payment disputes, with the government as well as local businesses. Dispute resolution can be difficult and uncertain. Disputes generally are resolved by direct negotiation and settlement between the parties themselves, recourse to the legal system, or arbitration. Small, medium, and some larger enterprises continue to fear being frozen out of the UAE market for escalating payment issues through civil or arbitral courts, particularly when politically influential local parties are involved. Some firms may feel compelled to exit the UAE market as they are unable to sustain pursuit of legal or dispute resolution mechanisms that can add months or years to the dispute resolution process. Arbitration may commence by petition to the UAE federal courts on the basis of mutual consent (a written arbitration agreement), independently (by nomination of arbitrators), or through a referral to an appointing authority without recourse to judicial proceedings.
- Investment Incentives: Incentives are given to foreign investors in the free zones. Outside the free zones, no incentives are given, although the ability to purchase property as freehold in certain favored projects in Dubai would appear to be an incentive aimed at attracting foreign investment. The federal government and the governments of the individual emirates promote a business environment largely free of taxation and exchange controls.
- Protection of Property Rights: The UAE allows each individual emirate to decide on the form in which ownership of land may be transferred within its borders. Generally, Abu Dhabi has limited ownership to Emirati or other GCC citizens, who may then lease out the land to foreigners. The property reverts back to the owner at the conclusion of the lease. Although Dubai has identified such restricted areas within its borders, traditional freeholds, also known as outright ownership, are also available. Freeholders of land own the land. Subject to very few regulations, freehold owners may sell on the open market.
- Intellectual Property Rights: The legal regime of the UAE with respect to intellectual property rights (IPR) is generally considered fair and in compliance with international obligations. Enforcement of IPR takes place generally at the emirate level. During 2014, a Dubai government agency, the Commercial Compliance and Consumer Protection (CCCP) office, reported that it had been granted the power to search and seize counterfeit goods within the emirate of Dubai, a power that the Dubai Police, Dubai Customs, and the Dubai Department of Economic Development also hold. A draft of a new anti-commercial fraud law is still pending. Interested stakeholders are watching the draft law closely, especially due to a potential conflation of counterfeit goods with substandard and defective goods.
- Efficient Capital Markets and Portfolio Investment: The UAE Government (UAEG) is focused on building infrastructure to create an environment conducive to economic growth and outside investment. It is also collaborating with its partners in the GCC to support ventures in the region. UAEG efforts to create such an environment for investments 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 an emphasis on diversifying the economy away from oil, which offers a broad array of investment options for FDI. Drivers for the economy include real estate, tourism, manufacturing, and financial services.
- Competition from State-Owned Enterprises: Some SOEs such as Emirates National Oil Company (ENOC) are strategically important companies and a major source of fiscal revenues. Mubadala Development Company established Masdar in 2006 to develop renewable energy and sustainable technologies industries. A number of Dubai’s SOEs such as Emirates Airlines and Etisalat have in recent years emerged as internationally recognized brands. Some, but not all of these companies, compete, and in a number of cases against other state-owned firms (Emirates against Fly Dubai or Etisalat against Du). While they are not granted full autonomy, they are integrated in a system where the state leverages synergies among entities it controls to foster national economic development. Perhaps the best example of such an economic ecosystem is Dubai, where SOEs have been used as a motor of diversification and are present in a number of sectors, including construction, hospitality, transport, banking and telecommunications.
- Sovereign Wealth Funds: Abu Dhabi is home to four sovereign wealth funds—the Abu Dhabi Investment Authority (ADIA), the Abu Dhabi Investment Council (ADIC), the International Petroleum Investment Company (IPIC), and Mubadala Development Company (Mubadala)—with total assets of about USD 990 billion. Emirates Investment Authority, the UAE’s federal sovereign wealth fund, has assets of about USD 15 billion. Each Abu Dhabi fund is comprised of a chair and board members who are appointed by a decree of the Ruler of Abu Dhabi. The Investment Corporation of Dubai (ICD) is the emirate’s sovereign wealth fund, with an estimated USD 70 billion of assets. UAE funds are involved in their investments to varying degrees. ADIA 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, and infrastructure, among others. ADIA exercises its voting rights as a shareholder in certain circumstances to protect its interests or to oppose motions that may be detrimental to shareholders as a body. According to ADIA, the fund carries out its investment program independently and without reference to the government of Abu Dhabi.