CORPORATE NEWSLETTER- DECEMBER 2018
FAREWELL 2018: A GAMECHANGING YEAR
With the year-end approaching fast, there is so much to reflect on. The highlight for us was the launch of Karm Legal Consultants this year.
At a global level, this year saw the implementation of the game-changing regulation of the century- The GDPR! More on the home turf, ADGM launched its regulatory framework for regulating crypto-assets and crypto exchanges. Last month, The Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) of the Dubai International Financial Centre (DIFC), and the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) announced that they reached an agreement on facilitating the licensing of domestic funds by each authority for promotion across the UAE. As we highlighted in our last newsletter, 3 regulators also introduced their version of sandbox regimes to fintech projects.
This month we bring to you the GAMECHANGING regulatory highlights of the year 2018 in UAE. Read on this newsletter to get quick updates on:
(a) The New JAFZA Regulations; and
(b) The New UAE FDI Law;
JAFZA REGULATIONS: JAFZA OFFSHORE COMPANIES REGULATIONS 2018
Jebel Ali Freezone was one of the first economic freezones launched in UAE. The Jebel Ali Free Zone Authority (“JAFZA”) gives an option to the foreign shareholders to incorporate either ‘offshore’ or ‘freezone’ entities under its jurisdiction. Earlier this year, JAFZA issued the JAFZA Offshore Companies Regulations 2018 (“2018 Regulations”) which replace older JAFZA Offshore Regulations, 2003 (“2003 Regulations”). The 2018 Regulations aim at easing out the rules and providing more avenues to the foreign shareholders, looking to incorporate with JAFZA.
The 2018 Regulations under Article 19 provide the option to the companies to create different classes of shares. As per Article 19(1) “Shares are of one class if the rights attached to them are the same in all respects.” Under Article 19(2) “subject to the approval of registrar” a company may provide “create different classes of shares in its Articles of Association”.
Variation of Rights
Variations in Rights of Shares is a new provision under the 2018 Regulations as captured by Article 20. As per Article 20(1) rights attached to a class of shares may be varied or abrogated by an amendment to the articles of association, approved by: (a) a resolution; or (b) a resolution passed by all the shareholders holding shares of the class whose rights are being varied or abrogated.
A very significant amendment to the definition of “Resolution” in the 2018 Regulations to mean a resolution passed by 75% of shareholders by voting in person or where applicable, in proxies.
Transfer of Incorporation
Provisions for transfer of incorporation have been created by way of revised Articles 111 to 117, wherein a foreign company may (if authorized by the laws of its home jurisdiction) for transfer/ conversion of foreign company into a JAFZA Offshore company. Vice versa the provisions also make room for transfer of a JAFZA Offshore entity from the JAFZA Freezone to the foreign jurisdiction.
Similar to the above provisions have also been made for the change in the corporate form of the JAFZA Offshore entity to a freezone company under Article 118, which was earlier not permissible.
In addition to the above, the certain provisions have also been introduced/ revised for (a) mandating a company to keep its records with a registered agent; (b) holding a lease of property for use as a registered office in any designate freehold area in UAE (as approved by the authority); (Article 14.2) (c) for owning a stake in another operating company within the UAE (Article 14.2(g)); (d) allowing companies to have a nominee director (Article 33.3); (e) for creating a provision for voting by ‘show of hands’ (Article 51(g) and (f)).
FDI LAW: FEDERAL LAW BY DECREE NO. (19) OF 2018 ‘REGARDING FOREIGN DIRECT INVESTMENT
In September of this year by way of Federal Law Decree no. (19) of 2018 ‘Regarding Foreign Direct Investment’ (“FDI Law”), issued a law to consolidate the UAE’s position as a major attraction for foreign direct investment at the regional and global levels, attract and encourage foreign investment.
In relation to the foreign direct investment (“FDI”) FDI Law defines FDI Project as “any economic activity that adopts one of the legal forms of companies listed in the Companies Law, through which direct investment of Foreign Capital”. The FDI Law further defines the Foreign Investor to mean “A natural or corporate person who does not hold the nationality of the State and who invests in the State in accordance with the provisions of the (FDI Law)”
Available and Unavailable Sectors
The FDI Law further qualifies the sectors in a ‘Positive List’ and ‘Negative List’ which list down the activities available/ unavailable to invest in by a foreign investor. The Positive List allows the Foreign Investor, to invest in the FDI Projects up to 100%. Which sectors or activities form a part of the activities available for investment in Positive List is yet to be notified. However, the FDI Law under Article 7(2) includes the list of sectors and activities that are not available for foreign investment to include activities of (a) Exploration and production of petroleum materials; (b) Investigations, security, military sectors, manufacturing of arms, explosives and military equipment, devices and clothing; (c) Banking and financing activities, payment systems and dealing with cash; (d) Insurance services; (e) Hajj (pilgrimage) and Umrah services, providing employment and recruitment services for staff and servants; (f) Water and electricity services; (g) Services related to fisheries; (h) Postal services, telecommunications services and audio and video services; (i) Land and air transport services; (j)Printing and publishing services; (k) Commercial agents’ services; (l) Medical retail such as private pharmacies; (m) Blood banks, venom and quarantine centers.
As per the FDI Law, the Foreign Capital shall include the following: (a) Funds transferred to the State through banks and financial companies which are used in FDI Projects; (b) profits and returns of a foreign direct investment. In addition to this Foreign Capital shall also include, fixed assets, intangible rights, such as patents, concession rights, trademarks and trade names owned or registered in accordance with the laws and regulations in force in UAE.
Investment Unit and Investment Committee
Article 5 and Article 6 lay down the provision for setting up FDI Unit and FDI Committee for exercising their jurisdiction in accordance with the aforementioned articles.
Incentives to FDI Projects
Under Article 8, a Foreign Investment Company (a company which carries out FDI Projects) shall be provided with the following incentives: (a) shall be treated as national companies to the extent permissible; (b) repatriate, outside the UAE the annual profit proceeds of liquidation of investment and proceeds of dispute settlements; (c) right to repatriation of salaries for their employees; (d) confidentiality of technical, economic, financial and investment information;
Approval for Change of Ownership
In addition to above a Foreign Investment Company may add partners, transfer ownership to new investor, amend the MOA and AOA to change the legal form or merge or acquire with any other entities. In case of such a situation however, a prior approval of Licensing Authority, Competent Authority and the Investment Unit shall be required.
The Licensing Authority and the Competent Authority, each within its jurisdiction, shall specify the conditions and procedures required to establish and license FDI Projects listed in the Positive List and the documents required in accordance with the provisions of the FDI Law. In accordance with Article 10 of the FDI Law, following an approval from the Licensing Authority an application must be submitted to Competent Authority.
With these two regulations coming into effect in 2019, the year looks promising. The two regulations are likely to open up multiple opportunities of investments and avenues for investors, which were previously unavailable in the conventional mainland and free-zone systems.
We at Karm are hopeful of a brighter and better 2019. Wishing you all the same!
Authored by Akshata Namjoshi (Senior Associate) with inputs from Aileen Amaranto (Business Set-Up Advisor) and Kokila Alagh (Founder).
DISCLAIMER: This newsletter is for general guidance and is not intended to be a substitute for specific legal advice. Legal advice should be sought for specific circumstances. If you would like further information please contact: