The UAE government has recently confirmed that long-awaited changes removing the requirements for certain onshore companies to have a local UAE partner would be implemented 1 June 2021.
The impact of this is potentially far reaching in terms of increasing the UAE’s attractiveness for foreign direct investment but how significant is this for startups looking to setup in the UAE or investors looking to invest in UAE companies? In particular – should the venture capital ecosystem be looking to move away from the free-zones where they enjoy relative ease of transacting and look to setup, relocate or investment onshore. Our three takeaways on the impact of this change of law on the startup and venture capital ecosystem of the country are as follows:
Not all types of businesses will qualify for 100 percent foreign ownership and each Emirate will issue specific guidelines. At this stage we understand there will be minimum share capital requirements attached to 100 percent foreign owned companies and in the recently published Abu Dhabi guidance we have seen minimum share capital requirements for certain businesses as high as $4 million.
The same guidance also states that certain businesses are required to employ at least 5 sector specialists – technology businesses in particular are subject to this requirement including computer system and software designing. The rules are still ambiguous for some activities such as ecommerce or online marketplaces. So it would take some time before early stage companies in these sectors can take advantage of the change in law until the requirements are clarified.
Particularly from a setup perspective, high minimum share capital and specialist employee requirements create hurdles especially for early stage businesses – as even if the high minimum share capital and hiring costs were affordable its cash burn rate could make the long-term operation unsustainable.
2) Ease of doing business
For onshore startups, the change of rules could mean that their current local ownership arrangements put in place to comply with the previous foreign ownership rules (i.e. a local UAE entity or individual being required to hold 51 percent of their business) could be terminated. These arrangements can be costly and create complexities in executing transactions where nominees are required to appear at notarial appointments or sign investment documentation. Therefore the onshore venture ecosystem is likely to greatly benefit from a lowering of their cost of business and increase in their ease of transacting.
That said, we still expect the freezones to continue to dominate the venture capital ecosystem in the UAE particularly for early-stage startups and VC investors. The ease of doing business in the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) is far closer to other technology hubs such as London and Silicon Valley than onshore UAE. Onshore UAE setups and investment transactions will still be relatively cumbersome with a number of administrative hurdles to jump through to complete deals (e.g. notarial visits) which, for VCs and startups is clearly not practical given the speed at which transactions need to be executed and the dynamic nature of deals of this nature.
3) Venture FDI
For startups already operating onshore a move to 100% foreign ownership is likely to make external fundraising easier. At present it is a difficult cognitive leap to give comfort to investors in more developed venture ecosystems that they will need to share ownership in their investment target with a UAE national entity or individual who will (usually) have no involvement with the running of the business. By removing this hurdle onshore UAE investments will be more attractive to foreign investors who will be comforted by the cleaner ownership structures the change in rules will afford.
To summarize, it is unlikely that these changes will make setting up or investing onshore more attractive unless the relevant business is required to setup onshore because of its intention to provide goods or services outside of the free-zones. However, for existing early stage or developing companies onshore without free-zone holding entities we expect these changes in law to have a significant and positive impact on their ability to scale and fundraise.