REALWorld Law

Corporate vehicles

Permanent establishment

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?

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

Yes. The cost depends on the type of permanent establishment being set up. The decision as to what type of corporate vehicle to use for holding a real estate asset in Abu Dhabi will be determined largely by the nationality of the shareholders.

Real estate outside of the investment areas in Abu Dhabi can only be owned by UAE nationals, companies wholly owned by them or public joint-stock companies (PJSC) - provided there is no foreign ownership. 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 Abu Dhabi Economic Department.

Foreigners (ie nationals of countries other than the UAE) can use an LLC, a PJSC or a Private JSC where the real estate is in an investment area but, under current laws governing the ownership of these vehicles, at least 51% of the shares in these vehicles must be held by a UAE national (or company owned by UAE nationals).

On 30 October 2018 the UAE Government issued the UAE Federal Law No. 19 of 2018 on Foreign Direct Investment (FDI Law) which provides a regulatory framework that allows 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 in the negative list. The sectors of the economy currently listed in the negative list include petroleum-related exploration and production, banking and finance, road and air transport and recruitment.

The FDI Law refers to a positive list of sectors of the economy in which higher levels of foreign ownership will be permitted. The first positive list available for foreign investors with 100% ownership lists a total of 122 commercial activities, including 19 activities in the sector of agriculture, 51 in the manufacturing sector and 52 in the service sector. The list also details the minimum share capital and other requirements and conditions which need to be followed in order to apply for 100% foreign ownership. At the time of writing the positive list does not include any activities relating to owning real estate.

There are also a number of 'free zones' in the UAE. The most prominent in Abu Dhabi is the Abu Dhabi Global Market financial free zone. 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.

Whatever type of establishment is used, there will be additional costs, such as taking legal and possibly tax advice on the most appropriate vehicle and structure to use. There will also be costs associated with drafting the constitutional documents for the company to regulate the rights and obligations of each shareholder. This is particularly important in the case of a LLC being owned by a local and a foreigner because a detailed shareholders agreement will be required. The profit share of the shareholders in a LLC might be different from the percentage of shareholding.

An LLC in Abu Dhabi usually takes six to eight weeks to become operational from the date that the required documents are received in Abu Dhabi in case one or more of the shareholders is a non-GCC national. If all the shareholders are UAE or GCC nationals the process is likely to be quicker.

The corporate governance requirements of an LLC 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.