Does the concept of a 'permanent establishment' apply when a foreign person invests in real estate and, if so, how much does it cost to set up such a permanent establishment, how long does it take and what corporate governance requirements apply?
From a corporate licensing perspective, the concept of a 'permanent establishment' applies when a legal entity is established in the UAE and is inherently subjected to obtaining a registered office address in the said Emirate and/or specific zone. The concept of permanent establishment would then apply when the entity invests in the real estate asset, which is recorded as its fixed place of business. That said, there is no inherent concept of a permanent establishment from a corporate licensing standpoint by merely investing in real estate without operating via a UAE established corporate vehicle. The costs of establishing a corporate vehicle will depend on the type of vehicle and its location.
Real estate which is not designated for foreign ownership can only be owned by GCC nationals or companies wholly owned by them or public joint-stock companies (PJSC). Therefore, such nationals may use a local limited liability company (LLC), a Private Joint-stock Company (Private JSC), or in some cases a PJSC, if they wish to hold the real estate asset through a company. It is essential to include 'real estate' in the 'permitted activities' of the company authorized by the Dubai Economic Department.
Onshore LLCs established in the UAE (outside the free zones) have historically been subject to foreign investment laws which required at least 51% equity participation by a UAE national. The UAE’s new Commercial Companies Law which came into force on 2 January 2022, contains no general requirement for equity participation by a UAE national, however certain activities have been designated as having strategic impact (for example in the security and defence sector) and continue to require prescribed levels of local ownership. An offshore/free zone company can be 100% foreign owned. If the asset is to be wholly owned by foreigners (and therefore in a designated area), a Dubai land Department (DLD) Direction in 2011 confirmed that the shareholders are permitted by the law to use a 'JAFZA' offshore company only to purchase and register the land interest (regulated by the Jebel Ali Free Zone Authority in Dubai and 'accepted' by the DLD), and foreign companies in other jurisdictions are no longer permitted to register land ownership interests. The issue becomes more complicated if the intention is for the company to develop the land and sell units/villas etc. Specific advice must be sought in such circumstances.
On 1 June 2021, the UAE Commercial Companies Law was amended to allow foreign shareholders to own up to 100% of UAE companies incorporated outside of the UAE's designated free zones (ie the onshore UAE companies) in certain sectors of the economy if such sectors do not appear on a list of strategic activities. The sectors of the economy currently listed as strategic include (i) security, defence and military activities; (ii) banks, exchange houses and finance companies; (iii) insurance; (iv) currency printing; (v) communications; (vi) Haj and Omra services; (vii) Quran centres and (viii) fisheries.
Pursuant to this amendment, the respective licensing authority of each Emirate has been empowered to create its own list of activities that permit 100% foreign ownership. These lists currently include the majority of activities available but there remain certain activities (other than strategic ones) which still limit foreign ownership to 49%. Furthermore, certain activities that are regulated by other competent authorities are still subject to foreign ownership limitations. Since the start of 2022, we have seen more activities added to the permitted list of each respective Emirate and anticipate further additions to be made.
There are also a number of 'free zones' in the UAE. These are authorities under which companies can be established with a 100% foreign shareholding. Free zone companies can own property in the free zone they are incorporated in, subject to the laws of the particular free zone but, with regard to property outside the free zones, free zone companies are generally not permitted to hold real estate assets in such areas. Specific advice should be sought regarding free zones because each one is different in terms of its rules, regulations and practices.
The corporate governance requirements of an LLC in onshore Dubai are minimal but do include the appointment of a UAE licensed auditor and a general manager. The shareholders of the LLC can choose whether to have a board of directors or not.