Just a few weeks ago, the legal and business communities received exciting news of an upcoming revamp of commercial company law with Federal Law Decree No. 26/2020, which will radically alter the foreign ownership regime in the UAE.
But how will it shake up the investment landscape for foreign companies in the luxury retail sector?
While the recent trend has been for foreign companies to incorporate JV companies, in the form of an onshore limited liability company (LLCs), with experienced local retailers, the share capital of onshore LLCs was required to be at least 51 percent owned by UAE nationals (or companies wholly owned by UAE nationals).
Accordingly, JVs have normally been structured with a 51/49 percent shareholding split between the local partner and the foreign company.
The new law could have significant ramifications for the luxury retail sector, with the most groundbreaking introduction being the annulment of the 51 percent minimum UAE shareholding requirement for LLCs, enabling foreign companies to fully own onshore LLCs (even as the sole shareholder).
However, the new law entitles the UAE Cabinet to keep the UAE shareholding mandatory for certain businesses of strategic importance and local authorities in each emirate will have the power to set minimum UAE shareholding levels and any other licensing requirements for non-strategic activities.
Assuming that luxury retail will not constitute a strategic activity (and subject to any shareholding thresholds imposed by local emirates), a number of options will open up for foreign companies depending on the nature of the relationship with their local partner.
Foreign companies in JVs with a silent local partner as shareholder will be able to acquire 100 percent of the shares if entitled to do so under side agreements.
But more interesting might be the effect on JVs in which the local partner actively contributes. Indeed, the new law could mark a shift in the role of the active local partner from shareholder to consultant or service provider.
Existing LLCs will be able to transfer ownership of the JV to the foreign company and then execute a service agreement between the local partner (now as a non-shareholder) and the JV, thereby continuing to leverage the local partner’s expertise and consumer retail networks in the region.
Foreign companies will also be able to incorporate a single-owner LLC and thus not have a local partner at all. That said, we believe that in JVs whose local partner is a key retail luxury player in the UAE – eg Al Tayer, Chalhoub and Alshaya – foreign companies (the brand owners) will always want/need such a partner because they will continue to provide a fundamental contribution to the development of the luxury sector in the region.
For example, unlike single brand owners, the mentioned players rent a large portfolio of units from the landlords of malls (eg The Dubai Mall) – because they act as franchisee or JV partner for many brands – and are thus able to negotiate better terms than single brand owners.
Furthermore, foreign companies have traditionally relied heavily on local retail players because brand owners do not have their own retail locations in the region (generally because of the cost). Brand owners have also always relied on local retail players’ extensive knowledge of the local market, and we believe this knowledge will continue to be a key asset for JVs going forward.
The new law will enter into force on January 2, but the removal of the 51 percent UAE shareholding requirement will enter into force on March 30. While we have seen luxury retailers in the UAE enjoy fruitful relationships with their local partners, it will be interesting to observe the industry’s reaction in the long and medium term. The benefits for luxury retailers outlined above constitute why international brands traditionally welcomed the UAE ownership structure, but we may see more independent luxury brands, that were previously reluctant to enter the market, enticed to set up their business on their own.
Marco De Leo is a partner, Riccardo Denaro, a senior associate, and Sami Moacdieh, a trainee in Dubai at BonelliErede
by Staff Writer
More of this topic
How will new company ownership rules impact the UAE’s luxury retail sector?
How luxury retailers might react to changes in commercial company law in the long and medium term
L-R: Riccardo Denaro, a senior associate, Marco De Leo is a partner and Sami Moacdieh, a trainee in Dubai at BonelliErede
Just a few weeks ago, the legal and business communities received exciting news of an upcoming revamp of commercial company law with Federal Law Decree No. 26/2020, which will radically alter the foreign ownership regime in the UAE.
But how will it shake up the investment landscape for foreign companies in the luxury retail sector?
While the recent trend has been for foreign companies to incorporate JV companies, in the form of an onshore limited liability company (LLCs), with experienced local retailers, the share capital of onshore LLCs was required to be at least 51 percent owned by UAE nationals (or companies wholly owned by UAE nationals).
Accordingly, JVs have normally been structured with a 51/49 percent shareholding split between the local partner and the foreign company.
The new law could have significant ramifications for the luxury retail sector, with the most groundbreaking introduction being the annulment of the 51 percent minimum UAE shareholding requirement for LLCs, enabling foreign companies to fully own onshore LLCs (even as the sole shareholder).
However, the new law entitles the UAE Cabinet to keep the UAE shareholding mandatory for certain businesses of strategic importance and local authorities in each emirate will have the power to set minimum UAE shareholding levels and any other licensing requirements for non-strategic activities.
Assuming that luxury retail will not constitute a strategic activity (and subject to any shareholding thresholds imposed by local emirates), a number of options will open up for foreign companies depending on the nature of the relationship with their local partner.
Foreign companies in JVs with a silent local partner as shareholder will be able to acquire 100 percent of the shares if entitled to do so under side agreements.
But more interesting might be the effect on JVs in which the local partner actively contributes. Indeed, the new law could mark a shift in the role of the active local partner from shareholder to consultant or service provider.
Existing LLCs will be able to transfer ownership of the JV to the foreign company and then execute a service agreement between the local partner (now as a non-shareholder) and the JV, thereby continuing to leverage the local partner’s expertise and consumer retail networks in the region.
Foreign companies will also be able to incorporate a single-owner LLC and thus not have a local partner at all. That said, we believe that in JVs whose local partner is a key retail luxury player in the UAE – eg Al Tayer, Chalhoub and Alshaya – foreign companies (the brand owners) will always want/need such a partner because they will continue to provide a fundamental contribution to the development of the luxury sector in the region.
For example, unlike single brand owners, the mentioned players rent a large portfolio of units from the landlords of malls (eg The Dubai Mall) – because they act as franchisee or JV partner for many brands – and are thus able to negotiate better terms than single brand owners.
Furthermore, foreign companies have traditionally relied heavily on local retail players because brand owners do not have their own retail locations in the region (generally because of the cost). Brand owners have also always relied on local retail players’ extensive knowledge of the local market, and we believe this knowledge will continue to be a key asset for JVs going forward.
The new law will enter into force on January 2, but the removal of the 51 percent UAE shareholding requirement will enter into force on March 30. While we have seen luxury retailers in the UAE enjoy fruitful relationships with their local partners, it will be interesting to observe the industry’s reaction in the long and medium term. The benefits for luxury retailers outlined above constitute why international brands traditionally welcomed the UAE ownership structure, but we may see more independent luxury brands, that were previously reluctant to enter the market, enticed to set up their business on their own.
Marco De Leo is a partner, Riccardo Denaro, a senior associate, and Sami Moacdieh, a trainee in Dubai at BonelliErede
Follow us on
Latest News