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Insight

Doing business in the UAE - changes to restrictions on foreign ownership

In the first quarter of 2018, restrictions on foreign ownership are set to change due to the passing of a new investment law permitting 100% foreign ownership of UAE companies in certain business sectors outside of the 'free zones'.

The UAE has the most diversified economy in the GCC and its most populous city, Dubai, has become an important global city and an international aviation hub.

In recent years, the UAE has therefore attracted very high levels of international inward investment, particularly from consumer-facing brands in the retail, food & beverage and hotel and leisure sectors, to name but a few.

To date, restrictions on foreign ownership of UAE companies (which are similar across the GCC) have meant that most foreign businesses have had to use franchising structures to operate in the UAE. Whilst it is permitted for non-UAE nationals to establish and own companies based in the UAE's 'free zones', albeit with certain trading restrictions, foreign investors are prohibited from owning more than 49% of "on-shore" UAE companies. It is only these companies which can enter into leases, employ staff and engage in other operational activity in the UAE.

Of course, many foreign businesses opt to choose the franchising structure as part of their international expansion strategy and any change in the status quo in the UAE will not affect that strategy. However, other businesses may well be interested to learn that in the first quarter of 2018 these restrictions are set to change due to the passing of a new investment law permitting 100% foreign ownership of UAE companies in certain business sectors outside of the 'free zones'. Although the business sectors have yet to be confirmed, such steps demonstrate that the UAE is keen to grow and welcome the new opportunities that foreign businesses can bring to the UAE.

For those businesses which are "reluctant" franchisors in the UAE, or which have entered the market under as a minority joint venture partner, perhaps with a "silent" majority partner, these developments could herald the beginning of a wave of foreign direct and wholly owned operations in the UAE. It must also pose a threat to a number of UAE nationals who have agreed to act as silent shareholders in return for a financial gain, including the professionalised "corporate nominee" sector in the UAE that has grown to accommodate this model.

We will need to wait and see what sectors these new rules apply to but whatever the outcome, this should serve as a useful reminder to brands which are expanding internationally to carefully consider which structure they use for a particular market and to ensure that their agreements with existing partners afford the franchisor the maximum flexibility to take advantage of these types of changes in foreign ownership rules.

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