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The UAE Foreign Direct Investment (FDI) Law

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Archives, Foreign Trade Zones, Global Trade Daily

The UAE Foreign Direct Investment (FDI) Law

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For a great many years, global businesses have viewed the United Arab Emirates as an attractive global investment market. With a strong presence of high-net-worth consumers and a geographically strategic location from which to distribute throughout the Middle East and North Africa, the UAE is rife with opportunity.

Yet, many international corporations could not own companies outright in the UAE and were restricted to a maximum ownership of 49%. Ownership laws, however, are now being revisited to diversify the country’s economy beyond the energy sector, which has been the source of UAE wealth for decades. But precisely the degree to which economic liberalization is taking place is very much based on one’s perspective.

Background

The United Arab Emirates (UAE), a federation of seven Emirates (member states), has served as a global centre for trade for centuries. However, most global businesses had often expressed discomfort with the country’s investment laws which, despite allowing 100 percent foreign ownership of businesses in the country’s Free Trade Zones (FTZs), stipulated that at least 51 percent of a company established  within the UAE, and outside a Free Trade Zone, must be owned by UAE citizens, or companies wholly owned by UAE citizens.

In addition, agency and distributor laws require that only a local commercial agent could sell products in the UAE market; and only UAE citizens or companies wholly owned by UAE citizens could register with the Ministry of Economy as commercial agents. Regulations also prevent the termination, or non-renewal, of a commercial agency contract unless the principal has a material reason to justify the termination or non-renewal; and the principal must often approach a court to terminate a contract.

Legislating Economic Diversification

The most recent Trade Policy Statement issued by the UAE through the World Trade Organization’s Trade Policy Review mechanism in 2016 stated the country aims to drive towards economic diversification by being less reliant on the oil sector and to increase its attractiveness to foreign investment.

The UAE enacted Federal Law No. 19, the Foreign Direct Investment Law (FDI Law) in November 2018. To promote and develop the investment environment and attract foreign direct investment in line with the developmental policies of the country, the Law established a framework for the country’s Cabinet to mandate which sectors and activities of the economy would be eligible for 100 percent foreign ownership. However, a list of eligible economic sectors and activities was not published by the UAE Cabinet until July 2019.

The list comprised of 122 economic activities across 13 sectors that would be eligible for up to 100 percent foreign ownership. The decision simultaneously conveyed that each emirate (member state of the UAE) could determine the percentage of foreign ownership under each activity suggesting that foreign ownership levels could vary from emirate to emirate. It was also clarified that oil & gas production and exploration sectors, air transport, and security and military sectors would be excluded from the purview of the FDI Law.

A Method of Recourse

It is also of interest that news reports indicate that for activities that are not included in the list of activities/sectors eligible for 100 percent foreign ownership, companies could approach the government for permission for a higher level of ownership; and that approvals may be granted on a case-by-case basis. The sectors that would allow 100 percent foreign ownership include:

-Space

-Renewable Energy

-Agriculture

–Manufacturing

-Road Transport & Storage

-Hospitality and Food Services

-Information and Communication Services

-Professional, Scientific and Technical activities

-Administration and Support Services

-Education

-Healthcare

-Art & Entertainment; and

-Construction

For those businesses that do qualify under the FDI law, their products will be treated as being of UAE origin and therefore, eligible for such treatment under international agreements to which the UAE is a party. This is a privilege that is not available to goods manufactured by foreign-owned companies based in UAE Free Trade Zones. In addition, they can transfer abroad operating profits and proceeds from sale of investment or other assets.

Measuring Success

The Emirate of Dubai has reported that it has attracted US $12.7 billion in foreign direct investment (FDI) in the first half of 2019 thereby ranking the emirate third globally in FDI capital flows into Greenfield Projects. Also, in October 2019, Dubai assumed the presidency of the World Association of Investment Promotion Agencies (WAIPA), a global entity that works for the smooth flow of cross-border investments.

Although it is still too early to gauge the impact of the FDI Law and other developments, the consensus is that the UAE has taken steps to accelerate foreign direct investment into the country. It remains to be seen whether further steps such as changes to the agency and distributor laws, and changes to regulations related to the termination of agency contracts will be implemented to enhance the attractiveness of the UAE to foreign investors.

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JC Pachakkil is a senior consultant in Global Trade Management at trade services firm Livingston International.

Archives, Global Trade Daily, News

Understanding Saudi Arabia’s New Import Certification Scheme

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Global businesses exporting to the Kingdom of Saudi Arabia will soon have some relief from the burdensome export documentation required by the country’s customs agency, and will soon be able to lean more on their import partners to acquire and complete mandatory certificates. 

Saudi Arabia is in the process of implementing changes to the decades-old process for certifying consumer goods imported into the country.

The Saudi Standards, Metrology and Quality Organization (SASO) oversees the system for the development of standards applicable within Saudi Arabia. All imported consumer goods must be accompanied by a Certificate of Conformity establishing compliance with SASO standards and specifications, or the consignment is subjected to laboratory testing to verify conformity with SASO standards before clearing customs at import.

This means that businesses intending to export goods to Saudi Arabia must obtain a Certificate of Conformity for each shipment bound for Saudi Arabia. The certificates are usually issued by bodies accredited by SASO or an accredited laboratory. Accreditation bodies certified by members of the International Accreditation Forum (IAF) are also eligible to issue conformity certificates.

Most exporters to Saudi Arabia as well as traders in Saudi Arabia have long lived with the pain of the time-consuming process of obtaining a certificate of conformity for each shipment bound for Saudi Arabia. Once goods were ready for export, and invoices raised, exporters had to engage the services of an approved body to obtain a certificate of conformity before the shipment could leave for Saudi Arabia. This requirement, when combined with the requirements of attestation and legalisation of invoices and certificates of origin, led to a situation where considerable levels of inventory were being held immobile within the supply chain even after goods were ready for shipping with resulting undesirable increases to business in working capital requirements. Businesses have not shied away from referring to these process bottle necks as non-tariff barriers to trade.

The system is now bound for changes, albeit of an incremental nature.

SALEEM, the new certification scheme is expected to replace the Saudi Conformity Assessment program. It will operate through SASO’s newly implemented electronic, online service called SABER which has been created to streamline certification for imports into Saudi Arabia.

The scheme provides two types of certification. The first type is a certificate of conformity called the Product Certificate of Conformity (Product CoC). This certificate will be issued by registered certification bodies upon successful completion of tests and verifications of a product and will be valid for three years. The certificate confirms that a product complies with the technical standards and specifications issued by SASO.

The second type of certificate of conformity is called the Shipment Certificate of Conformity (Shipment CoC). This will be issued for each shipment, is valid only for that shipment, and is very much like the current certification scheme. This certificate confirms that all products within a shipment hold a valid Product Certificate of Conformity. Both the Product CoC and the Shipment CoC are mandatory before a shipment can be cleared for import into Saudi Arabia.

The main difference between the certification systems is that the certification required prior to import can be obtained online by the importer based inside the country. Importers will be connected through the SABER system to conformity assessment bodies and will be able to request and obtain Product CoCs through the system. 

Once shipments are ready for export, importers can use the system to request and obtain Shipment CoCs online from certifying bodies. It is expected that Shipment CoCs will be issued within a very short time for products that hold a Product CoC. Online availability of Product and Shipment CoCs is therefore expected to shorten the time lines required for import clearance.

Although it was announced that conformity certification through the SABER system would be mandatory for the import of all consumer products after its introduction in January 2019, news reports suggest implementation has only been partially successful. Use of the system for obtaining conformity certificates is currently voluntary for most products, and conformity certificates under the old regime continue to be issued and used for import into Saudi Arabia. 

Only a few product groups such as gas appliances and accessories, toys, low-voltage electrical equipment, and lubricating oils currently require mandatory certification through SABER. 

Authorities are encouraging the use of the system by prioritizing the clearance of those imports holding conformity certificates issued through the SABER system. There have also been reports of linking the SABER system to FASAH, an Electronic Data Interchange (EDI) System that will be used to exchange data electronically between Saudi Customs, ports, airports and private and public operators. Such a linkage can further enhance the efficiency of processing of imports into Saudi Arabia.

Businesses are hopeful that although it has been a slow start for the SALEEM certification scheme and the SABER system, a full implementation will eventually reduce the timelines required to import goods into Saudi Arabia, and consequently, the working capital requirements for businesses trading with, and within Saudi Arabia.  

 

JC Pachakkil is a senior consultant in Global Trade Management at customs broker and trade services firm Livingston International.

Archives, Global Trade Daily, International Trade

How global traders in UAE Free Zones can avoid the new Value Added Tax

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The recent imposition of a value-added tax (VAT) by the UAE raised concerns amongst global traders that the Gulf country was moving away from its traditional role of drawing in multinational investors, particularly those who use the region as a transfer hub for goods being re-exported to other destinations in the Middle East and beyond. The VAT would, after all, increase landed costs and in turn, generate a price spike for the end consumer, making products less competitive.

To ease investors’ fears, the UAE’s government has established a new, albeit complex, regime to allow global traders to continue to take advantage of the UAE’s traditional Free Trade Zones or FTZs where imports have not been traditionally subject to duties and taxes.

A Critical Region

The United Arab Emirates (UAE), by its location, has served as a centre for trade for centuries. In recent times, Free Trade Zones (FTZs) in the UAE have helped global enterprises to serve a market size of approximately two billion people who live within a four-hour flying distance from the UAE. The UAE’s considerable investments in FTZ infrastructure that support imports and re-exports through air, land and sea modes, have contributed in making the country a global logistics hub.

As with most FTZs, imported goods are not subject to import or export duties. Thus, goods meant for regional markets are imported in bulk into UAE FTZs from production facilities around the world and then redistributed after additional processing, packaging or having been broken down to market-determined transaction quantities. According to the UAE Central Bank, a total of $61.2 billion was exported from UAE FTZs in 2017, accounting for nearly 20 percent of the country’s exports that year.

Designated Free Zones

The new VAT regime implemented in 2018 applies a consumption tax on the supply of goods and services which take place within the territory of the UAE. Historically, FTZs have been considered outside the UAE territory for the application of import duty. However, for the purposes of VAT, the UAE has not extended a similar treatment to FTZs and they are deemed a part of the UAE territory for the purposes of VAT.

The UAE Cabinet has identified certain free trade zones, called Designated Zones, in which certain transactions are considered as being completed outside the UAE and, in turn, not subject to the VAT. However, businesses registered in Designated Zones have the same VAT obligations as non-Designated Zone businesses and must register, report and account for VAT under the VAT rules.

The Rules
Following are the main scenarios and the VAT treatment that applies to them from Designated Zones

Services rendered from within a Designated Zone to a UAE or Gulf Cooperation Council (GCC) consumer will have the VAT applied, while all services rendered to a consumer outside the GCC will not.

Goods sold within the Designated Zones are subject to VAT only if the goods are consumed within the same Designated Zone. If they are being purchased for the purposes of producing, modifying or forming a part of another good located in the same Designated Zone, they are not subject to the VAT.

Goods from outside the UAE to a Designated Zone are not subject to the VAT. However, it is expected that once VATs are applied by other GCC countries, goods entering UAE Designated Zones from those GCC countries will be subject to VAT.

Goods from within the UAE into Designated Zones are treated as being made in UAE territory and are not considered as an export from the UAE and, therefore, will be subject to the VAT.

A sale or movement of goods between Designated Zones will not have the VAT applied. However, the goods being transferred must not be released in whole or in part into domestic circulation during the transfer, and must not be used or altered in any way during the transfer between Designated Zones. The goods must also comply with the rules of Customs duty suspension (Goods in Transit) as per the Gulf Cooperation Council Common Customs Law.

Goods from Designated Zones to a buyer onshore in the UAE are subject to the VAT, because they are treated as an import into the UAE. It must also be noted that VAT could be charged again on a subsequent sale of the goods within the mainland if it is being made by a person subject to the VAT.

Goods in a Designated Zone on which VAT has not been paid and consumed by the owner of the goods will be treated as having been imported into the UAE and VAT will be applied accordingly.

The table below provides a high-level picture of the applicability of VAT on different types of transactions.

In short, with the introduction of Designated Zones, the UAE government has aimed to ensure that businesses based in these zones are not subject to VAT if the goods being traded are meant for markets outside the Gulf Cooperation Council countries.

JC Pachakkil is a senior consultant in Global Trade Management at trade services firm Livingston International.