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The UAE Foreign Direct Investment (FDI) Law

uae

The UAE Foreign Direct Investment (FDI) Law

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.

foreign investment

New Foreign Investment Restriction Regulations Cement CFIUS Reform

One of the emerging focal points of the U.S.-China trade war involves the implementation of updated foreign investment restrictions in key U.S. industries. 

On September 17, 2019, the Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), legislation that sought to reform and expand the scope of foreign investment reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). CFIUS, an inter-agency committee chaired by the Treasury Department with the authority to review, modify and potentially reject certain types of foreign investment that could adversely affect U.S. national security, has undergone a significant overhaul during the past year in the wake of FIRRMA becoming law in August 2018. It is now more vital than ever that companies understand how their business can be affected by the updated CFIUS regulations when they are seeking or negotiating a merger, acquisition, real estate investment or even a non-controlling investment from a foreign investor.

Typically, CFIUS reviews are voluntary and are conducted for merger or acquisition transactions where a non-U.S. company or a foreign government-controlled entity obtain a controlling interest in a U.S. company. If CFIUS determines that a covered transaction presents a national security risk, it has the authority to impose certain mitigating conditions before allowing the deal to proceed and can refer the transaction to the President for an ultimate decision. 

However, FIRRMA updated and expanded the scope of CFIUS jurisdiction to authorize reviews of additional types of non-controlling foreign investments based on the type of U.S. company involved. The implementing regulations proposed in September 2019 are set to take effect February 13, 2020, and while the CFIUS reform regulations are motivated by concerns directly related to China, the impact of FIRRMA will be felt globally and the new rules will not be tied to or affected by impending trade negotiations. U.S. businesses, particularly those involved in critical technologies, real estate, infrastructure and data collection or maintenance, must take heed of how the updated rules will affect their global business decisions moving forward.

New Regulations for TID Companies Effective February 2020

Effective February 13, 2020, CFIUS will be authorized to review “covered control transactions,” (all foreign acquisitions resulting in direct control in a U.S. business, which CFIUS already had jurisdiction over), as well as non-controlling “covered investments” by a foreign person in a U.S. critical technology, critical infrastructure or sensitive personal data company. The new rules refer to these as “TID U.S. Businesses” (Technology, Infrastructure and Data), or to be more specific, a company that engages in one of the following categories of activity: 

-produces, designs, tests, manufactures, fabricates or develops one or more critical technologies;

-owns, operates, manufactures, supplies or services critical infrastructure; or

-maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

“Critical technologies” include defense articles or defense services under the International Traffic in Arms Regulations, certain nuclear-related products regulated by the Nuclear Regulatory Commission Controls and certain technologies on the Commerce Control List under the Export Administration Regulations. In addition, “critical technologies” will include certain “emerging technologies” that are yet to be defined, and the Commerce Department’s Bureau of Industry and Security is currently reviewing at least 17 technology areas that are anticipated to result in new controls (including bio-tech, artificial intelligence, microprocessors, positional navigation and timing technology, quantum computing and additive manufacturing (3D printing)). 

“Critical infrastructure” includes key industry subsectors such as telecommunications, utilities, energy and transportation. “Sensitive personal data” is defined to include ten categories of data maintained or collected by U.S. businesses that (i) target products or services to sensitive populations (including U.S. military members and federal national security employees); (ii) collect or maintain such data on at least one million individuals; or (iii) have a business objective to collect such data on greater than 1 million individuals and such data is an integrated part of the U.S. business’s primary product or service. The categories of data include types of financial, geolocation and health data. 

Non-Controlling Covered Investments

Under the new regulations, CFIUS will be authorized to review non-controlling covered investment in TID U.S. Businesses. A “covered investment” includes scenarios where a foreign investor obtains:

-access to material non-public technical information;

-membership or observer rights on the board of directors or an equivalent governing body of the business or the right to nominate an individual to a position on that body; or

-any involvement, other than through voting of shares, in substantive decision making regarding sensitive personal data of U.S. citizens, critical technologies, or critical infrastructure.

Filing a CFIUS declaration for a non-controlling covered investment will remain a largely voluntary process, and parties will be able to file a notice or submit a short-form declaration notifying CFIUS of a covered investment in order to receive a potential “safe harbor” letter (after which CFIUS in most scenarios will not initiate a review of a transaction). 

However, if a foreign government holds a “substantial interest” in the foreign investor that obtains a “substantial interest” in a TID U.S. Business, a CFIUS filing will be mandatory. The updated regulations provide that a foreign government is considered to have a substantial interest in the foreign investor if it holds a 49% direct or indirect interest, whereas a foreign person will obtain a substantial interest in a TID U.S. Business if it obtains at least a 25% direct or indirect interest. CFIUS is also authorized to mandate declarations for transactions involving certain types of critical technology companies. 

The proposed rules also include a “white list” provision providing CFIUS the authority to designate certain “excepted investors” and “excepted foreign states” that may be eligible for an exclusion in connection with non-controlling covered investments. 

Global Impact: How Does This Affect My Business? 

The most important practical effect of the updated regulations is the breadth of U.S. companies standing to be impacted or affected by new foreign investment restrictions. U.S. businesses and industries that have previously never had to consider filing a CFIUS declaration, including healthcare companies, tech start-ups, related infrastructure industries, venture capital funds, emerging technology companies and manufacturers, and any company with access to sensitive consumer data, will now have to contemplate the implications of a CFIUS review when considering even passive foreign investment. Robust due diligence on potential investors will be more important than ever to ensure compliance with both mandatory and voluntary CFIUS declaration filings. Cross-border deals will be a costlier and more time-consuming process that will require acute attention to detail when drafting the contractual rights afforded to foreign investors. 

If you have any questions about the impact of the updated CFIUS regulations or how they may affect your company, please contact a member of Baker Donelson’s Global Business Team for additional information.

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Joe D. Whitley is a shareholder at Baker Donelson, chair of the Firm’s Government Enforcement and Investigations Group and former General Counsel at the Department of Homeland Security. He can be reached at jwhitley@bakerdonelson.com

Alan Enslen is a shareholder with Baker Donelson and leads the International Trade and National Security Practice and is a member of the Global Business Team. He can be reached at aenslen@bakerdonelson.com

Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues. He can be reached at jbodie@bakerdonelson.com

 

2019 China-California Business Forum Focuses on Sub-National Cooperation

California’s trade and investment involvement with Chinese provinces will take the spotlight at the third annual 2019 China-California Business Forum scheduled for June 5th in Los Angeles. An estimated 150 top Chinese business leaders are expected to attend with the goal of developing
business opportunities between California and Chinese business leaders.

“As the Chinese Secretariat of the China Provinces and U.S. California Joint Working Group on Trade and Investment Cooperation, CCCME together the seven member provinces all attach great importance to the China-California Business Forum and will actively participate in it as always. Over the past few years, as it has become an important platform of facilitating more exchanges and cooperation between Chinese and Californian businesses, the Forum has been fully recognized by Chinese enterprises and has become an annual focus of China-U.S. sub-national cooperation,” said Liu Chun, Vice President of CCCME.

The forum will take place in downtown at the Millennium Biltmore Hotel and dedicate a full day of various sessions discussing trade and investment, clean-tech, cross-border e-commerce, advanced manufacturing, and more.

“Sub-national cooperation is the foundation of China-U.S. economic and trade relations. The China-California Business Forum plays an important role in promoting this cooperation. The Forum is a joint effort by both sides. It not only brings business opportunities, but also enhances China-U.S. sub-national exchanges and cooperation. I look forward to welcoming more Chinese and California business leaders at the event,” said Amb. Zhang Ping, Chinese Consul General in Los Angeles.

Despite previous trade tensions between the two economy’s, business executives are displaying optimism for both sides to reach an agreement through bilateral trade discussions. This year’s Business Forum will ultimately support efforts to strengthen ties and develop mutually beneficial business initiatives.

“California was the number one recipient of foreign direct investment from China, totaling more than $16 Billion in 2017. We are also home to a vibrant Chinese American community. This forum will build on our strong business and cultural ties, strengthen our international partnerships, and grow our economy.” Said Lt. Governor Eleni Kounalakis.


PORT OF VANCOUVER USA’S BOARD GREENLIGHTS 2018 STRATEGIC PLAN

The Port of Vancouver USA Board of Commissioners on Sept. 11 unanimously approved the port’s 2018 Strategic Plan, which includes a new vision statement and outlines 20 goals and 66 strategies to guide the port’s activities and budget for the next decade.

The plan was developed over 11 months with broad public and stakeholder input, including advisory panels, public open houses, commission meetings, public workshops and hundreds of public comments.

“We appreciate all the time and energy our community has put in as we’ve created our new strategic plan,” says CEO Julianna Marler. “We heard from hundreds of people, both within the port and across our community. Their perspectives helped us develop a balanced plan so we can continue to advance as an organization while achieving our state-directed purpose and our mission of creating economic benefit through leadership, stewardship and partnership in marine, industrial and waterfront development.”

The port first developed a strategic plan in the early 2000s and updated it each year as necessary. By 2017, the port needed a new plan to address organizational change, including completion of many key initiatives; marine and industrial business growth; identification of new projects; and changes in staff and elected leadership.

The 2018 Strategic Plan is available at www.portvanusa.com/key-projects/strategic-plan.

 

 

 

 

How US tax overhaul has led to increased international investment and M&A activity

The limit on interest deductibility is impacting the way that firms finance domestic mergers and acquisitions which is fueling the existing trend for US companies to pursue foreign M&A.

Why invest in foreign companies?

Growing a business internationally has always been attractive to US companies. Businesses are still structuring for tax purposes, however the main reasons for going abroad are now; the desire to find new markets with more customers, access fresh talent and technology and optimize international supply chains. Foreign markets can be an attractive destination for leading US brands given that if you can succeed in the world’s most competitive consumer market you may find you thrive in less developed economies.

 

Deduction changes

With the recent tax reforms in the US, there have been some changes in the way deductions can be applied affecting the financing of domestic mergers and acquisitions. Often mergers are at least partially funded with debt which would be paid off in the form of a dividend. The dividend would be deductible making it a tax efficient way of financing the acquisition.

This deduction has been reduced greatly in the 2018 US tax reform. Companies were previously unrestricted in the amount of interest they could deduct before tax, but now there is a cap deduction of 30% of their 12-month earnings before interest, taxes, depreciation, and amortization (EBITDA). After 2021, the limitation becomes even more constraining by switching to 30% of EBIT only – that is, the deductions for depreciation and amortization are removed from the calculation, lowering the cap even further.

The deduction applies only when acquiring domestically, so not when buying a foreign company. You can still get the full deduction on dividends for a foreign owned corporation. Based on the current interpretation of the legislation, if you are looking to finance via debt, buying a foreign company will still allow you to benefit from this type of funding mechanism.

Why foreign M&A is more attractive

For insights and an introduction to M&A and carve-outs, take a look at the “M&A and Carve Outs from A to Z” eBook.

Other elements of the tax reform are also likely to drive further M&A and make it more likely that US firms look abroad for these acquisitions:

  1. The tax reform was structured to incentivise businesses to bring money back to the US if they are holding historic earnings off-shore. This windfall of foreign held monies will enable some companies to invest more, with a portion of this spending likely to fuel M&A.
  2. Related incentives to bring money back to the US have also reduced the tax on repatriation of future foreign earnings. Meaning that the return of investment for these foreign assets is improved.

What we are hearing from our clients is that US companies will continue to look to the global market as a way of leveraging faster growth and diversifying their business.

TMF Group

TMF USA are experts when it comes to M&A and international expansion, supported by a strong global presence in more than 80 countries worldwide. While there are always challenges when it comes to foreign investment the recent tax reform has introduced a whole new set of considerations. Please get in touch to find out how we can support your business achieve its global ambitions.

Find out how our services allow our international clients to maintain focus on what matters most to them.

Senators Urge FTA Investment Protections Purged

Washington, D.C. – Five Democratic members of the House Ways and Means Committee have written to the White House urging President Barack Obama to exclude foreign investment protections from major free trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP).

The five argue that such protections “might undermine buffers against future financial crises” and damage public support for future free trade deals.

The House Ways & means Committee has Congressional jurisdiction over trade issues.

Foreign investment protection is hot-button topic in the TTIP trade deal, prompting the European Union to call a halt to talks on the investment-related components of the proposed pact while the bloc’s 28 members consult “more widely.”

The letter follows a similar letter sent last week by three U.S. senators to U.S. Trade Representative (USTR) Michael Froman asking him not to include investment protection rules in the proposed 12-nation Trans-Pacific Partnership (TPP).

“The consequence would be to strip our regulators of the tools they need to prevent the next crisis,” said the letter, which also cautioned against rules “limiting the use of capital controls or allowing open access for risky financial products.”

Among the letter’s signatories was 2016 presidential hopeful Senator Elizabeth Warren (D-MA), who said such rules would expose “critical” U.S. financial regulations to challenge and dissuade policymakers from writing rules that impact foreign banks.

In response, a spokesman for the USTR said the TPP “would in no way limit the ability of governments to put in place strong consumer protections or to regulate financial markets” and would include “specific provisions protecting regulation.”

12/29/2014

EU Proposes Regional Strategic Investment Fund

Los Angeles, CA – Responding to an increasingly sluggish regional economy, the European Union will create a strategic investment fund that could generate up to $386 billion in private- and public-sector money to upgrade infrastructure, jumpstart the EU’s sluggish economies and ignite job growth.

“The EU must stimulate and modernize its economy, or risk falling farther behind global competitors like the U.S. and China,” said European Parliament President Martin Schulz.

The plan, approved by leaders of the 28-nation EU at their one-day summit meeting in Brussels earlier this week, calls for use of EU seed money to leverage up to 15 times more in private funds for the new European Fund for Strategic Investments with plans to have  it in operation and approving new investment projects by mid-2015.

German Chancellor Angela Merkel said investments fostered by the strategic fund “must go into projects for the future, particularly, for example, in the digital economy or where we aren’t so good on the world market as we should be.”

Investment in areas like schools, universities, green energy and infrastructure is key “if we want Europe to be an economic champion in the future,” she said.

The plan is not without its critics, however, with some EU leaders warning that despite its multi-billion dollar price tag, the proposed investment fund “may not be big enough” to win over wary investors.

“This package looks like creative accounting for the moment,” said Lithuanian President Dalia Grybauskaite, who helped draft a summit communiqué  noting that the strategic fund will accept contributions from EU member states. For the fund to launch, it would also require approval by European legislators.

12/19/2014

China Proposes Three New Foreign Trade Zones

Los Angeles, CA – Beijing has announced its given the go-ahead to the construction of three new foreign trade zones in Guangdong, Fujian and Tianjin, all modeled on the zone set-up in Shanghai last year.

Officials said the new FTZ will apply “replicable” practice from Shanghai in investment, trade and financial services to the rest of the country and shorten the “negative list” – the sectors where foreign investment is banned or restricted, the cabinet said.

Announcement of the new FTZs comes on the heels of Beijing’s proposed cutting from 79 to 35 the number of sectors restricted or off limits to foreign investors.

After one month for soliciting opinions, the new guidelines will be submitted to the State Council and are expected to come into force by the end of the year.

Sectors with reduced restrictions include steel, ethylene, refining, papermaking, coal chemical equipment, automotive electronics, lifting appliances, electric transmission and transformation equipment, branch railway lines, subways, international ocean shipping, e-commerce, finance companies and chain stores, according to government sources in Beijing.

In addition, the number of sectors currently limited to joint ventures and partnerships has been cut from 43 to 11, while those requiring a majority Chinese investment have been cut from 44 to 22.

Agriculture, high technology, advanced manufacturing, energy efficiency and environmental protection, new energy and modern service industries are encouraged, the sources said.

From January to September of this year, the value of China’s foreign direct investment decreased by 1.4 per cent to $87.3 billion from the same period the year before.

12/15/2014

Report: Confidence in Asia-Pacific Economy Growing

Los Angeles, CA – Confidence in the economic potential of the Asia-Pacific region continues to get stronger amongst CEOs there, says a new report issued by PricewaterhouseCoopers (PwC).

According to the New Vision for Asia Pacific report, forty-six percent of executives in the region now say they are “very confident” of growth in the next 12 months, up 10 points from 2012 and four points from last year, despite slowing growth in China.

The survey found that 67 percent of the 600 senior business executives surveyed plan to increase investment in the APEC region over the next 12 months. Their plans are spread over each of the 21 APEC member economies, with China, the U.S., Indonesia, Hong Kong, and Singapore the most popular destinations for investment.

More than half of respondents said they are either building or expanding facilities in APEC economies and increase their organizations’ global headcount by at least 5 percent annually over the next 3-5 years.

A healthy, skilled workforce remains a priority, the report says, as 75 percent of respondents already have employee training/retraining programs and 17 percent stated they will implement one.

Supporting this confidence is a vision of an Asia Pacific region that is more connected, both physically and virtually, and an outlook for more balanced regional growth, the report says.

For example, nearly 60 percent of executives say they are now more willing to share insights and resources with business partners in order to speed product development and gain market access. In addition, more than 40 percent say their company will likely enter a business combination outside of their core industry.

“Asia Pacific today stands at a turning point as advancing technologies move beyond national boundaries and create new demands and even new industries,” said Dennis Nally, chairman of PricewaterhouseCoopers International Ltd.

Chief executives, he says, “see the need to be bold in breaking down the barriers to growth. They want to finalize the Trans-Pacific Partnership, address intellectual property issues and encourage regulatory harmony in the region.”

Domestic competition, the survey found, is intensifying, while compliance and tax uncertainties continue. Twenty percent of respondents say they are less confident in their ability to increase profit margins on their domestic operations than they were a year ago. Fifteen percent said their confidence in forecasting compliance and tax liabilities declined over the year.

The survey found that data-driven changes are having an impact in the region; 57 percent of executives say they are more confident of their ability to respond to changes in the marketplace, and half say they are more skilful at forecasting demand. These executives are more likely to be “very confident” of growth than their peers.

PwC released the new report at a meeting of the Asia Pacific Economic Cooperation (APEC) in Beijing.

The New Vision for Asia Pacific report also found that many APEC businesses are not ready to fully participate in the digital economy.

Less than half of Asia Pacific executives are confident they are profiting from their investments in social networks with only between 12 percent and 22 percent of APEC businesses “very confident” across a range of social network capabilities.

11/11/2014

Waldorf Astoria Hotel Sold to Chinese Investors

New York, NY – China’s Anbang Insurance Group Co. has agreed to pay $1.95 billion for New York City’s iconic Waldorf Astoria hotel, the most ever paid for a standing building in the US by a Chinese buyer.

The purchase of the 1,232-room Art Deco tower on Park Avenue is the biggest real estate deal for a single existing hotel in the entire country and marks the high-water mark of a surge in the acquisition of big-ticket New York City properties by Chinese investors.

Earlier this year, Shanghai-based Greenland Holding Group Inc. purchased this year of a 70 percent interest in the Atlantic Yards project in Brooklyn. The project, recently renamed Pacific Park, includes 14 buildings that are yet to be built.

China’s Fosun International Ltd. paid $725 million in late 2013 for lower Manhattan’s 1 Chase Manhattan Plaza, the former headquarters of Chase Manhattan Bank. The building’s main tenant, JPMorgan Chase & Co., has said it will vacate most of its space in the 60-story tower.

Earlier last year, a group including the co-founder of Shanghai’s Soho China Ltd., put $1.4 billion on the table to acquire a 40 percent stake in midtown Manhattan’s General Motors Building, one of New York’s most-valuable office towers.

According to press sources, including Anbang’s purchase of the Waldorf from Hilton Worldwide Holdings Inc., Chinese investors will have bought $2.7 billion of New York-area real estate in 2014, topping last year’s $2.6 billion.

Anbang is reportedly planning a major renovation of the Waldorf, which could include the conversion of some of the hotel’s upper floors into high-end condominiums.

10/07/2014