Foreign Direct Investment in the UAE – a good opportunity for international franchisors

The vast majority of foreign brands which operate in GCC markets such as the UAE do so under some form of franchise or licence arrangement. There a number of factors which make franchising the prevailing model for expansion in the region and, whilst these remain valid, the reality is that most foreign brands cannot operate a directly owned model even if they wanted to, due to restrictions on foreign direct investment ("FDI").

This position is changing, at least in the UAE, which recently updated its companies law to provide opportunities for  direct foreign investment and ownership in the UAE.

The New FDI Law

On 27 September 2020, the UAE President issued a Federal Decree (the "Decree") amending 51 articles of Federal Law No. 2 of 2015 regarding Commercial Companies (the "Companies Law"). The Decree came into force on 2 January 2021.

The most significant change which is of interest for foreign brands is the amendment to Article 10 of the Companies Law. Article 10 currently requires that any company that is incorporated "onshore" (which term is commonly used to exclude free zones) must have a UAE national, or an entity which is wholly owned by a UAE national hold at least 51% of the share capital.

Under the Decree, this minimum requirement of shareholding has been removed and that the new threshold for ownership will be determined by the Cabinet upon the recommendation of a committee. This means that foreign brands may be entitled to hold up to 100% of the shareholding in an onshore company.

It is important to note that the relaxation will not apply to any business activities that have a "strategic impact". The committee will approve a list of activities that are deemed to have a strategic impact and will publish this list. It is likely to include areas such a telecommunications, defence and oil, but consumer focussed brand (for example those in the retail, leisure and hospitality sectors) are unlikely to fall within this definition and thus should benefit from this relaxation. The extent of this list will determine how far the possibilities of foreign ownership have been developed. Where an activity of a company is not deemed to have strategic impact, the entire issued share capital could now be held by a single non-UAE shareholder.

Why does this matter?

For foreign brands which wish to develop the UAE market through a wholly owned or majority owned vehicle, this development is welcome news. A directly owned model will have its challenges, such as acquiring local operational expertise, obtaining finance and access to good sites, but for some, the potential reward will outweigh the risk.

Even if a wholly owned or majority owned vehicle is not attractive for a foreign brand, this development still presents an opportunity to take greater ownership or control over a brand's regional supply chain. Instead of licensing or partnering with a local entity to create and operate a supply chain "hub" to support franchisees, brands can now fulfil this role directly, or at least with greater control over a joint venture.

However, when assessing this new opportunity, foreign brands should be aware of an alternative model which has been available for a number of years and already allows for 100% FDI – establishing a company in one the UAE's "free zones".

Free zone companies are well suited for operating regional supply chains, but in any event businesses should carry out a careful comparative analysis of the applicable tax rates, ease of doing business factors and the costs of incorporating and operating a directly owned business, either onshore or offshore, before making this important strategic decision.

If you would like more information on this topic, please contact Gordon Drakes.