United Arab Emirates: Consolidation Of Economic Status

Last Updated: 28 November 2018
Article by STA Law Firm
Most Read Contributor in United Arab Emirates, May 2019

With the changes and developments in the world, especially in the Middle Eastern region, we face numerous challenges from an economic standpoint. In general, most of the Middle Eastern countries are developing countries, looking to consolidate their financial position in the region and also in the world.

This race for economic growth is an endless one, for every country looks to emerge as a strong economic power. The winner in this race often does not retreat from its economic position; rather it is an endless race for in which there are no breaks or slower moments. Since the winner will have large amounts of contracts and agreements with investors that must be honored, they need to prove that the country is the ideal investment location so that the investors are not at risk. For example, the United States of America has long assumed its position as the most powerful economic entity in the world, and since then, the place has not been obtained by other major countries. For example, China is a large country and is a permanent member of the Security Council. Though its industries have overshadowed many Countries of the world, China still fears US economic sanctions, which would hurt the Chinese economy.

Neighboring Countries (GCC) of the United Arab Emirates

The geographical scope of the GCC countries is full of oil wealth, which constitutes a substantial return on the income of the GCC countries. Some GCC countries also make up the oil revenues, which are the primary source of revenue for GDP.

Non-oil revenues in some of these countries are almost non-existent or very few, and even if non-oil revenues are found, most of these revenues are taxes, customs duties and state fund investments in projects that are mostly in foreign countries (such as the real estate market). For example, the volume of Saudi Arabia's investments in the United States has exceeded $ 1 trillion. This came on CNN International. In contrast, US investments have recently reached 10 billion dollars, to improve the Saudi economy and attract more foreign investment. We can imagine the big difference between the investments of both countries. The support of an investor and their investment in a country increases the state revenues and results in the rise in GDP thereby promoting various fields such as manufacturing, real estate market, tourism, technology and many more.

The trend now for the Gulf Cooperation Council countries to channel the income earned from oil to non-oil revenues, and build strong infrastructure, and stimulate investment in these countries expanded recently, with the sharp decline in oil prices in the world. This has resulted in a large deficit for countries whose economy depends on most of the sale of oil and now steps are being taken to avoid these difficulties in the world energy markets.

In 2016, the oil industry faced a sharp decline, which led to a reduction of the rate of a barrel to less than 40 US dollars. This resulted in a decrease of more than 60 percentage; therefore one can imagine the situation of countries whose oil income accounts for more than 70% of the total revenue of this country. The fall of oil prices caused a large deficit to some countries that primarily rely on oil such as Kuwait and Saudi Arabia.

These countries must work on economic reforms to face these dangerous conditions, for example:

  1. Saudi Arabia has come up with a system of major reforms via the Saudi economy Vision 2030;
  2. The State of Kuwait has introduced a major reform of the Kuwaiti economy;
  3. The imposition of the value-added tax in all GCC countries; and many others

Hence we emphasize that most of these reforms focus on increasing investment in these countries, and to bring capital and incentive with infrastructure development and the enactment of laws to stimulate investment in various areas of industrial, tourism, service and real estate sector.

The role of the United Arab Emirates in supporting investment

Being one of the leading countries in the GCC system in terms of motivating the investors, the United Arab Emirates has enacted laws suitable for foreign arrival and investment. This has led to a great harvest in the state budget and the income statement. In the 1970s, oil was more than 90% of the total government revenues of the United Arab Emirates. However, in the year 2016, the contribution of non-oil sectors reached more than 70% of total government revenues.

Since its inception, the UAE government has been diversifying the country's revenues and not just relying on a single source of income, and this has helped in avoiding dangers that are faced by the collapse of the oil prices.

One of the most prominent areas achieved in the United Arab Emirates is the remarkable development of the value of foreign investment in the country.

UAE legislates a law allowing foreigners to own the entire share of the company or its affiliates:

Article 10

The rate of National Contribution

  1. With the exception of Joint Liability Companies and Simple Commandite

    Companies, where all the joint partners of any of such companies shall be UAE nationals and such a company established in the state, shall have one or more UAE partners holding at least 51 percent of the share capital of the company.
  2. Notwithstanding the provisions of Clause 1 of this Article, the Cabinet may be based on the proposal made by the Minister in coordination with the competent authorities, issue a Decision setting the class of activities to be exclusively exercised by UAE nationals.
  3. Any transfer of the title to any share of a partner that may affect the percentage as set out in Clauses 1 and 2 of this Article shall be invalid.

By the end of 2018, foreign investors will be allowed to own all or part of the company's shares in the UAE. Currently, there should be a local investor who owns most of the company's shares, i.e., at least 51 percent of the company's shares. This requires all foreign investors to give up the largest proportion for the benefit of the local investor, making it difficult for the foreign investor to invest and abandon most of the company's share even if he does not need a real partner. One example that shows us the reluctance of some foreigners to invest in the UAE, but they have a desire to invest in it is the success of the free zones in the UAE.

Free zones in the UAE attract a lot of foreign investors, and some international companies have set up their companies inside the UAE but within the borders of the free zone and there are more than 30 free zones in the UAE. The ones located in Dubai are examples of these free zones: Jebel Ali Free Zone, Dubai Silicon Oasis Free Zone, Dubai Airport Free Zone, and Dubai Healthcare City.

These free zones impose some conditions and some advantages for companies operating in them. One of the most critical features is foreign ownership of the entire share of the company (does not require any UAE national as a partner). One of the essential conditions applied to these companies is that they cannot practice outside the free zone and are strictly prohibited from dealing with state and government institutions.

The new law will allow foreign investors to own the entire share or about 90 percent of the company's share in the UAE and can operate anywhere within the UAE borders and can make contracts with all government agencies and institutions, which will bring investors willing to work in the country. It also allows the investor to take all decisions in the company without the participation or interference of its management.

However, there will be some conditions for the foreign ownership of the entire share or annex:

  1. This law will apply to the areas such as energy and technology, which the state requires. For example Apple, Samsung, and Google. These companies will add a lot to the country's economy and develop its infrastructure.
  2. There must be approval from the Council of Ministers for several things:
  3. There will be support for UAE nationals in these companies. These companies will provide many job opportunities for the youth of the UAE through which they will raise their competencies and learn many of the experiences of international companies that have achieved great success in their fields.

This decision will stimulate the investment sector by a large percentage of the state budget and will exceed one trillion UAE dirham. With this decision, one can imagine the proportion of investors and international companies. The UAE has become a global center for the region and the increase in the economy of the UAE has played an active role in stimulating many vital sectors such as technology, energy, electricity many more.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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