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An Opportunity for Existing Limited Liability Companies (LLCs) to Transform & Amend its Legal Status into a Private Joint Stock Company (PSC)
Pushpakaran Parambath, Senior Partner - Kreston Menon Corporate Services
In the first chapter of this communiqué, Raju Menon, Chairman and Managing Partner of Kreston Menon elaborated on the new update on the UAE Federal Law on Foreign Direct Investment, granting foreign investors an ownership up to 100% in the mainland.
The new Federal Direct Investment (FDI) Law could not have been come into force at a more appropriate time. This long-awaited reform will progressively transform the economic and business atmosphere locally and regionally, and attract large scale investments. With governance gaining focus, the landmark FDI Law could just provide the right impetus for promoters and investors who consider enhancing their stakes and benefiting from the virtues of a corporate structure.
To begin with, there lies an immediate opportunity for aspiring limited liability companies where governance procedures are already in place, to convert the legal status into a Private Joint Stock Company (PSC) and thus transform their corporate image and enjoy the associated benefits. Though the Commercial Companies Law states the “holder of capital of a limited liability company shall not be liable for the obligations of the company other than to the extent of the capital as set out in its Memorandum of Association”, the practical applicability of this clause is often arbitrary. In case of PSC, the liability of the shareholder is limited to the extent of the value of the shares subscribed by a shareholder. In true sense, PSC is a limited liability corporation.
Prior to the implementation of the FDI Law, Article 10 of Law No. 2 of 2015 on Commercial Companies required the shareholding structure of a PSC to have 51% minimum national equity participation, just like the LLCs. Article (7) clause (5) of the Federal Law by Decree No. (19) of 2018 Regarding Foreign Direct Investment states that foreign investors can invest up to 100% in mainland companies in UAE as long as the activity is in the Positive List.
The resolution of the Council of Ministers may exclude Foreign Investment Companies from certain provisions of the Companies Law and the federal laws of the State as shall be consistent with the nature of Foreign Direct Investment Projects.
Salient features of Private Joint Stock Companies
- A Private Joint Stock Company is a company where the number of shareholders is at least 2, but not exceeding 200.
- The capital of the company shall be divided into shares of the same nominal value, to be paid in full.
- The nominal value of the share shall not exceed AED 100 and shall not be less than AED 1.00
- It is not permitted to offer the shares for public subscription.
- A shareholder shall be liable only to the extent of his share in the capital of the company.
- The issued capital of the company shall not be less than AED 5,000,000 (AED five million) and shall be paid in full either in cash or in kind.
- The founders shall choose from amongst them a committee consisting of at least 2 members to complete the incorporation procedures and to register the Company with the relevant authorities.
- The Founders Committee shall be fully liable for the accuracy, validity and completion of all the documents, studies and reports provided to the relevant authorities in connection with the incorporation, licensing and registration process of the company.
Merits of a Private Joint Stock Company
The FDI Law requires a minimum capital investment between AED 7.5-10 Million for the Agricultural and between AED 2-100 Million for the Manufacturing Sectors, while the capital requirement for the Services Sector will be in accordance with the legislation in force. It should be noted, however, that the Resolution relies on the general minimal capital requirements for some commercial activities.
Kreston Menon Corporate Services has a FDI advisory team which can help you with corporate structuring and related services. If you have any queries related to converting the legal status of your LLC into a Private Joint Stock Company (PSC) or have general questions about the Positive List Resolution you may contact the Author.
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FDI Law Update on 100% Foreign Ownership – Manufacturing Sector to be the Biggest Beneficiary
Kreston Menon
In the previous two articles, my colleagues elaborated on the recent FDI Law update allowing 100% foreign ownership in mainland companies. We are overwhelmed by the great response and we are excited that it has led to meaningful deliberations on how our clients can benefit from the new change in the Law.
The UAE has strategized to raise the industrial sector’s contribution to GDP and boost economic growth by building a diversified and sustainable economy. The country has set its goals to equip the economy for the Fourth Industrial Revolution post oil era through the UAE Vision of 2021 and UAE Centennial 2071 – the Five-Decade Government Plan. The reformed FDI regulations and the associated cabinet resolutions shall act as precursor to the sector.
Despite recent fluctuations in oil prices and the global slowdown caused by the Covid-19 pandemic, UAE’s economy is moving towards greater diversification and a future-based on leadership in non-oil sectors.
UAE understands that the advanced technology outputs are radically transforming the business models and investment climate across the globe even as companies struggle to address supply chain and additional manufacturing location issues. Strategically located, UAE ranks high in all the five key dimensions of manufacturing environment namely policies and regulations; energy and transportation; workforce quality; infrastructure and innovation; and unrestricted adaption to automation and AI facilitates. Increased productivity that results from such economic environment helps develop transformative technologies which are envisaged in the UAE national strategies created to guide development during the next phase in the fields of Advanced Innovation, Artificial Intelligence (AI), Fourth Industrial Revolution and so on.
While there are uncertainties on the prospects of growth in the near future, UAE is now focusing on completing the strategic and infrastructure projects which were on hold due to various reasons making UAE the preferred destination for new investment. Enough weightage is given to the manufacturing segments which complement these projects in all economic sectors such as renewable and nuclear energy, aluminium, military, food, engineering, plastics, medicine, aviation, space, robotics, artificial intelligence, self-propelled vehicles, biotechnology etc.
Current Contribution of Various Sectors to the GDP of UAE
Sectors and General Conditions
The positive list available to the foreign investor at 100% ownership
The Foreign Investors have to meet the general conditions which are applicable for all the three sectors:
- Use of advanced technology;
- Adding value to the UAE economy;
- Contributing to Research and Development; and
- Meeting the requirements of the licensed activities.
Status of National Industrial License
It is worth to be noted that “the Article (8) of the FDI Law clearly states Foreign Investment Companies licensed pursuant to the provisions of this Law shall be treated as national companies to the extent permitted by legislation in force in the State and international agreements to which the State is a party”. ccordingly, the Foreign Investment Companies are also eligible to be treated as an industrial unit having National Industrial License and thus benefitted with:
- Duty exemption to import raw materials and machines
- Privilege to use “Made in UAE” mark on final product
- Duty exemption to export products to GCC countries
- Duty exemption to export products to member countries of Great Arab Free Trade Agreement
Current Contribution of Various Sectors to the GDP of UAE
The investors will still need clarity on certain requirements specified in the Law, such as:
- How do you demonstrate high added value?
- How will the contribution to research and development be measured?
- What is the magnitude of Emiratization requirements?
- What are the criteria to assess if the technology can be considered “modern”?
It is noteworthy that the Cabinet Resolution clearly mentions the mode of exit of UAE national partner enabling the foreign investor to acquire the entire shares and thus transforming the entity as a FDI Company. My advice to the existing manufacturing entities in UAE would be to explore this opportunity to strengthen and protect their investment.
Kreston Menon Corporate Services team will be happy to address your queries regarding the new FDI Law.
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FDI Law Update on 100% Foreign Ownership – Services Sector
Sudhir Kumar, Senior Partner & Head of Corporate Communications - Kreston Menon and Director - Kreston Global Board
In the previous article, my colleague explained on FDI Law Update on 100% ownership in the Manufacturing Sector. Here I will take on the Services Sector in UAE. Services Sector forms the highest percentage in the GDP of UAE and also contributes the highest percentage in employment in UAE.
Businesses focused on the services sector are expected to flourish compared to other sectors in the UAE’s trade growth post-Covid-19. The UAE has been one of the most successful countries in the region for its diversification efforts and due to this economic diversity, UAE’s service sector will drive the rate of UAE’s trade growth till 2050. Expo 2020 postponement to 2021 and Abu Dhabi’s Surface Transport Master Plan are anticipated to accelerate growth in services. Healthcare and Pharmaceutical sector, Construction and Architectural sectors, Food and Beverage sector and Packaging sector are expected to drive the services growth. R&D labs for health and food industries will create lots of connected businesses in the services sector. Travel, Tourism, Hospitality, Real Estate, Aviation and Hydrocarbon sector services are expected to take a while to lead due to the current global challenges.
Cloud services, Data Centres, IOT, AI, Cybersecurity, Cloud Computing, Data Science & Data Analytics services are expected to grow multifold now post-Covid-19. The pace of digital transformation will increase rapidly with UAE businesses and service providers transforming in a technology-driven new world. UAE is already ranked second globally in the ICT sector with the milestone announcements like-Dubai Future Foundation, Ghadan 21, Hub 71, DTec Ventures, Mubadala’s USD 250 million Tech Fund, Microsoft opening its Middle East data Centres in Dubai and Abu Dhabi and UAE launching the World’s first AI University. Many UAE companies will be deploying machine learning to make more informed decisions on evolving market conditions and strategies and optimize their scale and operations, with focus on procurement, marketing, customer communication and support. The focus will be on digitization and creating the foundations for AI, including infrastructure, Cloud Computing, applications platforms and quality data. More Data Centres are expected to open up in UAE supporting local storage and processing of data and more companies are likely to migrate to Cloud to save on IT infrastructure costs, boost operational efficiencies, increase revenue and for attracting foreign investments for local and regional multifold growth.
The crux for AI projects to be successful locally, is that they need to be ideated, curated and developed locally and so all the related services will be preferred locally post-Covid-19. Hence, major investments by international investors to build huge IT set ups with 100% ownership and PSC advantage will happen in future. Foreign investors can accommodate from 2 to 200 shareholders in the PSC format and that will enable them to large capital accumulation. This will bring in major collaborations in the industry and will trigger investments in the ICT sector with many related services becoming very active. All these will lead to many new ICT giants with large capital base being born in the UAE in future.
Also this focus and the initiatives on new Technologies will create lasting societal impact, boost R&D, accelerate foreign investments in start-ups, SME growth and collaborations and spur innovation in many sectors including healthcare and agricultural services. Distance learning, upskilling the workforce to gear up, equipping and training to use digital tools, innovating educational content, regular communication with parents and well-being programs will boost educational services sector. A new way of learning and learning systems will develop and investments on the ICT sector will be the core of smart investments on educational services. Huge investments are expected in this sector due to the 100% foreign ownership.
Post Covid-19, Digital Infrastructure is key to ensuring business continuity for companies in UAE and the Arab World. Dubai has put in place platforms such as UAE pass, the national digital identity and digital signature solution for the UAE, for all digital transactions. The complete digitalization of public and private sector systems is expected to take lead and the future of business will move into such services. Automation and new Technology services will become the prime requirement in Trade, Manufacturing, Healthcare, Education and in all other sectors. Foreign Investments will play a major role in collaborations and partnerships in these areas.
FDI in Services Sectors – Capital Requirement
The combination of all these services will have a positive effect on business and economic growth. Overall the services sector will move in a new trajectory and will be the key contributor to the UAE economy. The services sector will undergo lot of creativity, innovation, diversification, M&A and collaboration as never before due to the 100% foreign ownership and emerge as the strongest pillar to fortify the future of UAE economy.
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FDI LAW & CABINET RESOLUTIONS (CR) Commonly Asked Questions
Kreston Menon
This booklet is a compilation of a series of communique aimed to update you on the new FDI Law Update. We encapsulated the provisions of the Law and resolutions in the flyers to give insights on how these changes will cement UAE’s position as the most preferred investment destination in the region. We have compiled some of the major queries from our clients and contacts and attempt here to clarify them.
QUERY
Are the provisions of the new Law update applicable for trading entities?
The positive list released as per the CR does not include trading entities for enhanced foreign ownership. However, Retail Trade (non-specialized stores) with an investment of AED 100 million is permitted.
QUERY
What is the minimum amount of physical investment that has to be evidenced immediately for getting approval for a FDI Company?
As per the guidelines issued by Dubai FDI, 20% of the proposed investment must be evidenced in the form of physical capital.
QUERY
Currently most of the professional/consultancy firms are registered as per the provisions of UAE Civil Code and with unlimited liability on the investors. Does the Cabinet Resolution provide a procedure for converting the civil partnership firm to a Limited Liability Company or PSC to be eligible as a FDI Company?
As per the guidelines on FDI issued by the Ministry of Economy, if the legal form of the existing entity is different from the form specified for the FDI Companies, the change of the legal status to any legal form specified for FDI Companies shall be processed according to the procedures provided for in the UAE Commercial Companies Law -2015.
QUERY
Is the Positive List published as per the CR conclusive?
Foreign Investor may still submit to FDI Committee or the Competent Authority, a request for approval to license a project not listed in the Positive List.
QUERY
Are FDI Companies with agricultural or manufacturing activity allowed freehold ownership of property and land?
As per Article 9 of the FDI Law, the right to benefit from any real estate allocated to the Foreign Direct Investment project may not be cancelled, suspended, or restricted except in the event of a violation of the license conditions. Thus, it ensures non-cancellation, non-cessation or limitation of usufruct right of properties allocated for the FDI Project
QUERY
Does ‘pharmacy’ include the category ‘other human health activities’?
Other human health category includes laboratories, diagnostic and therapeutic centers and the minimum investment requirement is AED 70 million. However, pharmacy has not been included in the list. As per Article 16 of the FDI Law, the activity of Medical retail such as private pharmacies is on the Negative List.
QUERY
Are construction of buildings and civil contracting eligible?
Permitted only for large-scale infrastructure projects like airports, roads, sports facilities and projects worth more than AED 450 Million
QUERY
What is the percentage of Emiratization applicable for FDI Company?
Membership in ‘Tawteen Partners Club' of the Ministry of Human Resources & Emiratization is mandatory for an FDI Company. More clarity is awaited on the number of UAE Nationals to be employed by FDI Companies.
QUERY
Are the relevant provisions of the Federal Law No: 2 of 2015 on Commercial Companies amended to adjust with the provisions of the Federal Law No. 19 of 2018 on Foreign Direct Investments?
The legal form of the existing company shall be one of the forms specified for FDI Comp
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FINTECH: Changing the way you think
Raju Menon, Chairman and Managing Partner - Kreston Menon
Mankind has always found solutions to the problems at hand or have invented ways to make their life easier. Be it from the primitive age when fire was invented or rather discovered, or the invention of the wheel which revolutionized the world.
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Changing the Landscape of Internal Audit
Kreston Menon
Background
The inadequacy of system to cater to business needs, issues regarding integrity and robustness of data generation (MIS), the absence of management strategy for monitoring risks, lack of control over the operational process, ambiguity over policy and procedures and issues so galore.
The above situations appear familiar? Indeed, these are common challenges that plague many businesses regionally and globally. Conventional belief laid emphasis on achieving business results and cash inflows, relegating the need to address pressing issues. Mounting challenges of varied nature posed by new economic order have made compelling reasons for businesses to introspect, to improve efficiencies, identify and manage risks, control leakages, rationalize costs etc. With matters of risks, control and governance gaining priority, many businesses are viewing internal audit as an important tool to achieve its dynamic objectives.
This article is an effort to shed light on the new approach used in internal audits that has led to increasing acceptance of internal audit activity as an investment that provides a return to an entity and not just reflect as a cost on the income statement.
Internal Audit
Internal Audit as a concept is exhaustive, but broadly refers to an activity carried out by independent professionals to assess whether an entity’s process and controls are adequately designed and are operating effectively, business risks are effectively identified and managed, whether resources are efficiently utilized etc. Based on the observations and findings, solutions and suggestions for improvements are provided in the form of a report to the team entrusted with governance.
The process areas covered under internal audit activity can be extensive but generally includes inter-alia, review of operational and financial functions of an entity (Operations, Procurement, Finance and Accounts, Human Resources, Information Technology etc.). Depending on the size of the entity, complexity of operations and the objectives to be achieved, approach to internal audit could assume the form of review, by covering different functions over a period. Alternatively, it may involve review of the design of all the functions at a time, backed by follow-up reviews. Dividing the scope into various functions, covered over a period, facilitates specialized focus on the department’s efficiency in achieving functional objectives as well as entity’s objectives.
Evolving Internal Audit Approach
There has been a paradigm shift in the expectations of businesses from the internal audit activity. Growing business competition, disruptions caused by advancement in technology and the desire and vision to be the industry leader by clients have brought to the fore, key questions regarding value creation, effectiveness and relevance of internal audit. This entailed an objective response by the internal audit fraternity, transforming the activity from a typical checklist-based conventional approach to a more sophisticated, comprehensive and risk-based audit.
Erstwhile Approach
Traditional internal audit approach involved an overall review of process and controls for compliance to established procedures from financial accounting/ treatment perspective. Also, the earlier approaches had greater focus on transactional accuracy and compliance with approved procedures.
This, to a large degree, ignored any significant impact of risks arising from operational, market and regulatory factors of the business. As a result, the traditional approach educed the internal audit to a mere fault-finding activity drawing lesser participation from the client management.
New Approach to Internal Audit
With the advent of the renowned concept of Enterprise Risk Management (ERM) Framework, a model developed by Committee of Sponsoring Organization of the Treadway Commission (COSO) for evaluating the risk management practice of an entity, coverage under internal audit has evolved into a more holistic and objective-based approach.
One of the components of ERM framework calls for risk assessment at all levels of the business organization setup including Entity Level, Division, Operating Unit and Function. Risk Assessment is a process of identifying and appropriately managing any adverse event (risk) that may impede or pose a challenge to an entity in achieving its goals or objectives (long term or short term).
The relevance and importance of timely risk assessment were greatly felt by corporates across the globe when market leaders faced an overnight catastrophe or near business closure event. Famous examples are Yahoo not assessing risk related to consumer preferences and eventually losing out on user experience and search engine business (market risk), BlackBerry losing out its relevance as they did not focus on bigger touchscreen displays (product technology obsolescence risk). More recent example is when Imagination Technologies Group suffered a major setback when Apple, its single largest customer (customer concentration risk), discontinued using their product. This concept of risk assessment was adopted by internal auditors to develop a risk-based audit approach to help businesses achieve operational, reporting and compliance objectives by becoming agile, transparent and resource efficient.
A risk-based audit approach requires a complete understanding of the entity’s business, industry, market segments, customers, suppliers, operations and expectations of the stakeholders. This understanding is transformed into objective statements at all organizational levels of the entity and risks (events having an adverse impact) impeding achievement of such objectives are identified, assessed for their risk levels and mitigation strategy is implemented.
Outcome/Benefits of Risk Based Audit Approach
Some of the major benefits arising from risk-based internal audit approach are listed below:
Conclusion
The above internal audit approach and outcomes/benefits derived in recent times, has made internal audit activity pivotal to corporates looking to unlock their potential and be prepared to face any adversity.
Further, the advancement in data analytics has led the internal auditors to employ advanced technologies to effectively orrelate the performance of the controls over risk, which an organization might encounter.
Kreston M E Consulting (formerly Morison (UAE) Consulting) has been providing internal audit accounting services Dubai including, systems review, business process review, drafting of policy and procedure manuals etc., for many years creating considerable value to its clients from varied industries.
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