By Fatima Alsebai.
Arab countries seek to attract Foreign Direct Investment (FDI) to finance comprehensive and sustainable developments, which has become a major goal pursued by these countries. So they are keen to encourage the participation of foreign investors in product and service investment projects. Thus, many Arab countries revamped their legal frameworks regulating investment e.g., Egypt, Qatar, UAE, Oman.
Egypt works hard to establish itself as a leading destination for FDI. These efforts spearheaded by the promulgation of a new investment law in 2017 which is considered a landmark invest-ment law. The law is replacing a 20-year-old law on investment guarantees and incentives, that promotes domestic and foreign invest-ments by establishing several new guarantees for private companies, such as Equal treatment for foreign and national investors, the granting of residence rights for the duration of projects, and protection against nationalization or seizure of funds without a court order, along with the right to transfer profits abroad.
As well as many gulf countries changed their investment laws by increasing the percentage of the foreign ownership in the company’s capital by a percentage up to (100%), instead of the old laws which were restricted ownership by 51% owned by nationals. e.g., new Qatari Law No. 1 of 2019 on Regulation of Foreign Capital Investment in the Economic Activity and the UAE new Federal Decree No. (19) Of 2018 Regarding FID. Certain companies in both countries can be fully foreign-owned in different economic sectors.
This movement is intended to improve the confidence of international investors in the economy, stimulate private-sector activity, and encourage more investors to invest directly in the region. In this context, I’ll analyze the most common forms of business used by foreign investors and the most important points of the FDI laws in Egypt, UAE, and Qatar.
Forms of the business that can be 100% foreign ownership
1. Forming a new Company
Qatar
Under the new law as mentioned before, the projects can be 100% foreign-owned, by submitting an application to approve the increase of foreign shares above 49% in the company’s capital to the competent Department. (After paying the prescribed fees and submitting the supporting documents specified by the Department.)
Projects can be instated in all legal entities except the joint-stock companies listed on Qatar Exchange, which may be owned only with a percentage of 49% (at most), by the foreign investors.
However, the most common form of corporate business used by foreign investors is the Limited Liability Company (LLC).
UAE
The Federal Law by decree No. 19 of 2018 (FDI Law) introduced the possibility to obtain a majority of the shares by a foreign owner in the UAE companies. Where up to 100% foreign ownership would be allowed by special permission from the local licensing authority.
Under this law, projects may take any of the following legal entities:
• Limited Liability Company, including a one-person company (Sole Proprietorship)
• A private joint-stock company, including a one-person company.
Egypt
The foreign investors in Egypt can establish a legal entity or new Company by different forms of companies, 100% foreign-owned, namely:
a. Limited Liability Company: Is a common entity to set up a small business that required at least one manager who must be an Egyptian.
b. Joint Stock Company: Whether it is a closed company or a listed company.
c. Partnership Limited by Shares.
The entities mentioned above can be 100% foreign-owned, except the companies that are doing business in exclusive sectors or required a minimum range of their contribution. For instance, the importing activity, as well as the investment in the Sinai area that required approval from the relevant Egyptian Authorities.
2. Foreign branch office and representative office.
The other common form of business include establishing branches of a foreign company
Qatar
Under Article 5 of the Foreign Investment Law, a foreign company can establish a branch or obtain temporary registration. I.e. a foreign company wins a bid or engages in executing business contracts in Qatar, and may need to have legal representation in Qatar to execute these projects.
This means, they need to set up locally, or they can get a special exemption from the Ministry of Industry and Commerce that allows them to set up a branch office of the foreign company that will undertake the designated project. This would only be valid if the contract has been entered with one of the ministries, government bodies, public authorities/institutions, or companies in which the State participates. The bid will be granted by one of these organizations if they fulfill all requirements of the competent authorities in the State, register in the Commercial Register, and obtained a commercial license for the company’s branch. Such branches can be 100% foreign-owned and do not need any 51% local shareholding to operate.
UAE
A branch of a foreign company must have a
sponsor who is a UAE national or a company fully owned by UAE nationals. Whereas certain sole partnerships and professional partnerships can be entirely foreign-owned in exceptional cases, by obtaining special permission from the local licensing authority.
In each case, the branch or company must obtain a license from the federal and/or municipal authorities to carry on its proposed activities.
Egypt
Foreign companies may set up a branch office if the company has a contract with an Egyptian party, and it’s permitted to set up a representative office which can be 100% foreign-owned. However, it is not allowed to conduct direct sales according to Egyptian Companies Law.
3. Free Zone Companies
Qatar
Law No. 34 of 2005 regulates investments in the free zones, 'which are geographic zones within the territory of the State which are treated as being separate areas have special and distinctive rules of regulatory and customs aim to attract and encourage the investments '. In 2018, Qatar has created an independent authority called the Qatar Free Zones Authority (QFZA).
A company launched in the Qatari free zones can be 100% foreign-owned provided it meets the criteria of the relevant governmental organizations. Moreover, the free zone users are eligible for several incentives such as;
Exemption of export and import duties, freely transfer the profits outside the State without any restrictions, waiver of restrictions on the origin of capital, the freedom to choose the project’s legal form, and several other perks for logistics and communication, besides, providing the highest possible advantages to both Qataris and foreign investors.
UAE
In general, the free zones have their own regulations which are regulated by the relevant free zone authority. Free zones are generally subject to their own corporate law, independent of general corporate law and the UAE foreign investment law. Therefore, some investors may choose to set up their business in free zones to avoid any complications or restrictions. Some laws are not applicable to free zone companies, such as the tax law — provided that the company's activities do not exceed the border of the free zone. Note that the main UAE federal laws do apply to these companies, such as the Federal Penal Law (once a crime takes place in the free zone).
The Free zones focus on different business areas, including shipping, commodities, financial services, and telecommunication.
Projects in a free zone can be 100% foreign-owned and no UAE national agent, UAE partner, or shareholder is required. Noteworthy, UAE has more than 40 free zones.
Egypt
Free zones in Egypt are considered a special investment system governed by the provisions of Investment Law No. 72 of 2017 and its Executive Regulations. Its enforcement is overseen by the General Authority for Investment and Free Zones.
Free zones are governed by special provisions on taxation, customs, and finance. Such zones have special advantages, guarantees, and exemptions Granted to Projects. Under the policy set by GAFI all types of investment activities are allowed to be exercised inside free zones, with the exception of the following:
Weapons, ammunition, explosives, and any industry relating to national security.
Wine and alcoholic beverages.
Fertilizers.
Manufacturing of iron and steel.
Petroleum refining.
Liquefaction, manufacture, and transport of natural gas
Energy-intensive industries.
The Permitted economic sectors for the FDI
Qatar
The foreign investor may invest in all the economic sectors with a percentage of (100%) of the capital except the following sectors:
a. Banks and insurance companies, unless otherwise excluded by a decision from the Council of Ministers.
b. Commercial agencies.
c. Any other fields for which a decision from the Council of Ministers is issued.
UAE
Under Article 6 of the new FDI Law, The UAE Cabinet classifies business activities into two categories known as the Negative list and the Positive list.
Negative list:
Foreign ownership above 49% is not permitted in sectors of the economy, as stated in the “negative list”. These include the following activities:
Exploration and production of petroleum materials investigations,
security,
military sectors,
manufacturing of arms, explosives and military equipment, devices and clothing, banking and financing activities,
payment systems and dealing with cash, insurance services, and other activities mentioned in article 7 of the FDI law.
The Positive list:
Foreign ownership up to 100% may be permitted in sectors as stated in the “positive List“. Currently 122 sectors are specified in the “positive list”. In this list, there are 3 categories in which an investor can launch its business:
a. Agricultural sector
b. Manufacturing sector
c. Services sector.
Egypt
The new investment law targets and focuses on many sectors for the investment projects include 13 sectors shall be part of the activities governed by the provisions of the Investment Law, namely:
The Industry Sector
The Agriculture, Livestock, poultry, and the fish production sector
The Trade Sector
The Education Sector regardless of type and level
The Health Sector
The Transportation Sector
The Tourism Sector
The Housing, Construction, and Building Sector
The Sports Sector
The Electricity and Energy Sector
The Petrol & Natural Resources Sector
The Water sector
Communication and Technology sector
While, Sectors where Investment chances are fewer, The Monopolistic Sectors (The banking system is exclusively held by the State and the telecommunications sector, as the state operator Telecom Egypt had a monopoly and now it is also operating mobile phone lines. But both sectors are open to competition).
Incentives & Privileges for the foreign investor
Qatar
Providing the needed lands to the foreign Investor to establish their investment project through either leasing or usufruct.
Freedom to import whatever they need for setting up, operating, or extending the project.
Exemption from income tax in accordance with the provisions of Income Tax law.
Exemption from custom taxes with respect to imported machinery and equipment needed for setting up the projects.
The industrial projects shall be exempted from customs on imported raw and half manufactured materials that are needed for production and which are not available in domestic markets.
The benefit of transfer all amounts relevant to their investment from and to any external destination without any delay.
The right to transfer the investment ownership to any other investor or assign ownership to their local partner.
UAE
No expropriation ensuring the property is not expropriated except for public benefit in exchange for fair compensation.
Not to seize or confiscate project funds unless by a court hearing.
The right to use real estate.
Make financial transfers for project returns outside the country.
The licensed foreign investment companies are treated like national companies.
• Ensuring the confidentiality of technical, economic, and financial information.
Transfer the ownership to a new investor and amending the article of association.
Change the legal form of the company, merger, acquisition, or liquidation.
Additionally, the UAE launched a permanent residency system for certain foreign nationals. Called the 'Golden Card' will be handed to "investors and exceptional competencies.
Egypt
Equality of investment opportunities regardless of the size and location of the Project.
Under a decree issued by the Cabinet of Ministers, an exception can be made granting the foreign investors a preferential treatment in the application of the principle of reciprocity.
Granting a residence permit to foreign investors throughout the term of their investment projects in Egypt;
The Investment Projects may not be nationalized.
The right to repatriate profits and/or receive
international finance without any restrictions;
reduction up to 80% of the paid-in capital in the date of starting investment projects in Egypt for seven (7) years;
Accelerating the liquidation process by no later than (120) days from the date of submitting the relevant liquidation request;
The right to export the investment projects’ products, whether directly or indirectly, without requiring the registration with the Exporters Registry;
Application of a unified custom duty at a flat rate of only 2% of the value of any equipment, machinery, and devices that are necessary for the establishment of investment projects or continue any infrastructure projects;
The Prime Minister may grant additional incentives.
Dispute settlement
Qatar
The foreign Investors may agree to settle any dispute between them and others through arbitration or any other means of settling disputes following the law, but there is an exception:
Labor dispute: shall be settled by the Qatari Labor Disputes Settlement Committee according to Qatar's Law No. 14 of 2004 (Labor Law) and the provisions of the entry, exit, and residence of expatriates in Qatar.
The investor-state’ Agreement to Arbitration which is considered as administrative contracts shall be subject to the approval of the Prime minister or the person to whom he delegates. Furthermore, I'd like to point out that the Council is in the process of the launch of the Court of Investment and Trade, which aims to accelerate the pace of conflict settlement and a reassuring message to investors wishing to work in Qatar.
UAE
Under article 12 of FDI Law, any disputes that may arise related to the FDI project may be settled through all alternative means of dispute resolution. A foreign investor has the alternative of resorting to the UAE’s local courts. In case the investor chooses to continue to prosecute its dispute in the local courts; it shall be done in an expedited way.
Any federal government department entering into a contract that includes an arbitration clause shall obtain the prior approval of The UAE Cabinet.
Egypt
Under the Articles, 82 to 91 of The Egyptian investment law provided for multitier mechanisms for the settlement of investment disputes, including litigation, amicable settlement, and alternative dispute resolution (ADR). And they stated that three specialized committees shall be established by the General Authority for Investment.
The Grievances Committee: To examine complaints filed against the resolutions issued by the authorities concerned with the issuance of the approvals, permits, and licenses, such complaints shall be submitted to the Committee within 15 days from the date of notice of the decision petitioned against.
The Ministerial Committee for Investment
Dispute resolution: to look into applications, complaints, or disputes between investors themselves or between the investor and one of the state bodies, and it shall settle the matters within 30 days from the date of closing of hearings and submissions.
The Ministerial Committee on Investment Contracts Dispute resolution: To settle disputes arising from investment contracts to which the state or one of its bodies, authorities, or companies is a party.
In addition to those committees, the said law establishes an independent center—the Egyptian Arbitration and Mediation Centre—for the settlement of disputes between investors or with governmental entities. The law allows settling investor-State disputes through domestic or international ad hoc or institutional arbitration.
Conclusion
We see that the efforts made to encourage foreign investment in the Arab & Gulf Countries have a positive effect on the entrepreneurial spirit.Where the GCC was placing substantial restrictions on the foreign ownership of the companies by at most 49% of the capital, now, that's been changed and a landmark step was taken to encourage the foreign investments.
Noteworthy, Egypt already was more flexible as it's not adopted the sponsorship system. On the other hand, although the full foreign ownership is restricted to specific sectors - to varying degrees in the three described countries- there is some flexibility in the new framework which allows the Cabinet to change the list (see UAE) or grant an exception (see Qatar).
Another important point is investment arbitration. Foreign investors prefer to settle disputes through arbitration, instead of resorting to the domestic Courts in the host country. The related laws, allow foreign investors to resort to international arbitration for any disputes arising out of their investment.
Though the issue may only appear in investor-state disputes, if the dispute relates to a contract with a government entity, several FDI legislations explicitly require the consent of the State to resolve it. Also the government will probably prefer to settle the dispute via the domestic courts under the local laws, although a local arbitration mechanism may be an alternative. We believe it should be more flexible and stipulated in specific articles in the investment laws, in which its conditions are regulated precisely. Nevertheless, those countries have attached great importance to the ADR in the past years. Looking at the current climate it is interesting to note that the vast majority of the private sector disputes with the foreign investor are now resolved through the arbitration.
On balance, it may be submitted that the strengths and safeguards of these country laws substantially outweigh any risks; in any case, time will tell whether these facilities & strengths will attract the confidence of the foreign investors.
About the Author:
Fatima holds an LL.B degree and an LLM in International Commercial and Investment Law from the University of Cairo. She is preparing a Ph.D. in the International Arbitration Law and International Commercial law. Fatima is working as Legal Counsel at AHB trading and contracting LLW in Qatar. Before joining AHB, Fatima practiced Corporate, Litigation, and Arbitration areas at the top-tier law firms in Egypt and Qatar. Fatima has a great interest in Legaltech, as well as the comparative legal research of different foreign and international laws.